Interactions Between Climate Policies in the Power Sector - Green Energy and Efficiency: An Economic Perspective - page 268

Third, the existence of high price volatility could have discouraged investment in
low carbon technologies and undermined carbon reduction objectives. High vola-
tility has been present in the market since its creation. For instance, prices remained
around 26

€ from January until the end of April 2006, but dropped to around 10 € as

ed data for 2005. 7
Fourth, the ambitious renewables target and the generosity of some national
schemes have had a negative impact on the price of carbon, reducing the effec-
tiveness of the ETS.
Finally, the economic crisis has reduced the economic activity and thus the
demand for carbon permits which has resulted in important reductions on the
permit

response to the publication of veri

s price. Prices decreased to 10.15 in 2009 compared to 30 in July 2008. 8
Recently, prices have been consistently around 5

'

€ . In response to this, the European

Union recently approved a “ back-loading ” plan that aimed to boost the agging

price of carbon by removing carbon permits from the market.
The lack of effectiveness of the European carbon market has taken some authors
to claim for the use of additional instruments. However, in some cases, like in the
case of RES-E support mechanisms, such instruments have contributed negatively
to the effectiveness of carbon markets.
The next section reviews some empirical evidence on the interaction of climate
policies and the impact on carbon prices, power prices and the cost of policies. The
object is to illustrate how a wrong policy mix can distort carbon and power markets
and reduce welfare.

3 Interaction Between Policy Instruments: Empirical
Evidence

The quantitative evaluation of the impact of the interaction between policies
requires the simulation of the power industry under different policy scenarios. The
exercise is not absent of complexity given the combination of supranational and
domestic policies, the long term-nature of climate policies and the complex inter-
action between the different policies makes the exercise rather complex. The current
section reviews some of the existing evidence on the quanti cation of policy

interactions. Such evaluation is made through sophisticated partial equilibrium
models of the power sector 9 or through he simulation of stylized models. 10

7 Betz [ 3 ].
8 Morris and Worthington [ 23 ].
9

tz et al. [ 15 ] which is based on the model
generator TIMES, which has been developed in the scope of the Energy Technology Systems
Analysis Programme (ETSAP) of the International Energy Agency (IEA), or the MARKAL model
used by Unger and Ahlgren [ 24 ].
10

For example, the TIMES-D model used by G ö

For example, Fischer and Newell [ 11 ].