E3M-led study identifies cost-efficient and sustainable carbon pricing mechanism for the Energy Community

A result of close collaboration between E3-Modelling, the Energy Community Secretariat and key stakeholders from the Contracting Parties, the study looks at five main policy scenarios for the introduction of carbon pricing in the Energy Community and the role of power and gas market integration in that respect. The analysis includes a Baseline scenario that foresees no carbon pricing and a variant of the Baseline scenario that assumes carbon pricing takes the form of a cross-border adjustment carbon tax on electricity exports, depending on (their) carbon intensity. Options for recycling carbon pricing revenues are also assessed for each Contracting Party.

The key findings of the study are summarised below:

• The gradual introduction of carbon pricing in the form of a Cap-and-Trade system in the power and district heating sectors of each Contracting Party accompanied by the integration of the power and gas markets in the region is the optimal policy option.

• Market integration stands out as the key enabling condition for the cost-effective and sustainable roll-out of carbon pricing in the Energy Community, since it allows Contracting Parties to alleviate the adverse effects of carbon pricing, accelerate investment in renewables, avoid stranded costs while maintaining system reliability and mitigating the rise in consumer prices. Persisting market fragmentation is detrimental both for consumer costs and the pace of adaptation towards low emissions.

• Contracting Parties are invited to introduce carbon pricing without delay and in a coordinated manner, starting from the adoption of internal carbon pricing and nationally traded allowances; then engaging in cross-border trading amongst themselves and adhering to the EU ETS under a transitional regime, before ultimately joining the EU ETS as full members.

• Different auctioning rates and timeframes should apply to accommodate the varying levels of resilience to carbon pricing; this is meant to help coal-intensive Contracting Parties adapt more easily and protect consumers from high electricity and gas prices.

• Carbon pricing would positively affect the economy and employment of the Contracting Parties.