Europe’s climate goals and the electricity sector

EUʹs objective of attaining 20% reductions in greenhouse gas emissions by 2020 is analysed with a general equilibrium model detailing electricity generation technologies and capital vintaging. Consistent with theory and other analysts we find that the nonuniform treatment of emitting sectors in EU raises abatement costs – by a factor of two to three. Under cost effective emission reductions – a more comprehensive tradable cap—electricity generation abates more than its proportional share in emissions. The European economy abates by substitution towards natural gas, by energy efficiency improvements, and by reductions in emission intensive manufactures. Applied policies such as renewable support – and responses such as carbon leakage – hold down the prices for emission and electricity, thus also holds down incentives for energy efficiency and technological change. This leads to little preparation for the future and global mitigation.