To accelerate the reduction of CO2 emissions from the electricity sector and coal phase-out in Europe, the idea of setting a minimum price for carbon emissions from electricity production emerged in the public debate. Since electricity producers are already participating in the European Emissions Trading Scheme (EU ETS), this involves completing the scheme with a measure or set of measures so that the CO2 price faced by producers does not fall to levels too low to have an impact as was the case between 2012 and 2018. Faced with the difficulty of reaching agreement among all the countries of the European Union, an ambitious coalition of states could implement in a coordinated manner a CO2 tax contribution complementary to the ETS through enhanced cooperation. This Issue Brief analyses the legal implications of setting a carbon price floor by a coalition of EU Member States.

Key Messages

  • A carbon price floor for the EU electricity industry would improve long-term investment incentives for low-carbon electricity generation. Revenue raised could be used for financing actions to accelerate the energy transition: refinancing renewable energy support schemes or compensation measures for sectors and consumers adversely affected by the energy transition.
  • Enhanced cooperation is legally feasible and requires the participation of at least nine Member States to be launched. Such an approach requires a close coordination among Member States to avoid extended and time-consuming negotiations.
  • A carbon price floor could lead to an increase in the wholesale market electricity price which, however, represents only part of the final electricity price for EU consumers. A higher market price would also reduce the difference between revenues guaranteed to renewable producers and the electricity market price, and thus the levies on the consumer bill that often finance it in the EU.
  • A cancellation of European Emissions allowances (EUA) would reduce the so-called “waterbed effect” where additional emission reductions in the electricity sector depress the CO2 market price and thus the incentive to reduce emissions for other industries. By contrast, any intra-European measures on electricity production from Member States not implementing the CPF would violate the free movement of goods under the Treaty on the Functioning of the European Union.
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