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Safeguarding the energy transition against political backlash to carbon markets

Abstract

Substantial renewable energy (RE) cost reductions have raised the prospect of a subsidy-free RE era of the energy transition. The envisaged policy cornerstones of this era are carbon markets, which create economic incentives for sustaining further RE deployment. However, this overlooks that exposing RE to market risks and increasing interest rates would result in substantially higher financing cost, which in turn would lead to much steeper carbon price paths. The resulting political pressure may provoke a price-depressing regulatory intervention, disrupting further RE expansion. Here we conceptualize this feedback and infer indicators for the risk of such an intervention. By quantifying these indicators for the European Union, we find that increased financing cost could double carbon prices in the long term, halve the rate of renewable capacity deployment in the next 15 years and considerably increase the profits of fossil fuel plants. This implies a substantial risk of pushback that policymakers should safeguard against.

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Fig. 1: Dynamic policy feedback from allowance prices to politics.
Fig. 2: ETS allowance price paths in the two scenarios.
Fig. 3: RE capacity deployment in both scenarios.
Fig. 4: Short-run profits of fossil technologies in both scenarios.

Data availability

Raw data for Figs. 2–4 are available from Zenodo48. Data for core model assumptions (investment costs, fuel costs, etc.) are provided in the LIMES-EU documentation (Methods).

Code availability

The LIMES-EU model code is available upon request from the authors. Moreover, a process has been started to make the model available under an open-source licence. When this process will be completed, the code will be available for download from the PIK webpage http://pik-potsdam.de/limes.

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Acknowledgements

This research was conducted as part of the EU’s Horizon 2020 research and innovation programme, project INNOPATHS (grant agreement number 730403, M.P., O.T.), project GREENFIN (European Research Council, grant agreement number 948220, B.S.) and project FFF (German Federal Ministry of Education and Research, grant agreement 01LA1810C, M.P., S.O.). As part of the INNOPATHS project, it was partly supported by the Swiss State Secretariat for Education, Research and Innovation (SERI) under contract number 16.0222 (F.E., B.S., T.S.S.). The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Swiss Government.

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Contributions

M.P., S.O., O.T., T.S.S., B.S., F.E. and O.E. developed the research idea and the conceptualization. S.O., together with M.P. and O.T., conducted the model analysis. M.P., S.O., O.T., T.S.S., B.S. and F.E. interpreted the results. M.P., together with O.T., B.S., F.E. and T.S.S., wrote the paper. M.P. and T.S.S. secured project funding.

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Correspondence to M. Pahle.

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Nature Energy thanks Jan Abrell, Jean-Francois Mercure and the other, anonymous, reviewer(s) for their contribution to the peer review of this work.

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Supplementary Notes 1 and 2, Figs. 1 and 2, and Tables 1 and 2.

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Pahle, M., Tietjen, O., Osorio, S. et al. Safeguarding the energy transition against political backlash to carbon markets. Nat Energy 7, 290–296 (2022). https://doi.org/10.1038/s41560-022-00984-0

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