Impact of different CO2 price paths on the development of the European electricity system

Abstract

In energy system transformation studies, the assumption of linearly rising CO₂ prices is common and based on the decreasing issued European allowances (EUA). The actual auction price for allowances is influenced by market dynamics, resulting in non-linear variations in CO₂ prices due to the possibility of banking allowances. This study explores the impact of non-linear CO₂ price trajectories on the European electricity market. Various scenarios, such as increasing prices with the market interest rate, early price peaks, collapse, or fluctuations, are examined until 2030. The study quantifies the effects on power plant investments, profitability, consumer costs, and government revenues. The findings reveal that early and high price signals lead to an earlier transition with 7 % more wind power plants but at 4 % higher costs. Conversely, lower initial prices delay power plant investments in wind power plants by 6 % and result in 21 % higher emissions. Compensation for climate impact costs can yield a positive cost-benefit analysis in scenarios with early and high price signals when emissions are avoided through mechanisms like the Market Stability Reserve (MSR).