The role of complementary policies in powering the European decarbonisation of the EU ETS & post-2020

The report argues that a "carbon market only" approach is insufficient for the cost-effective decarbonisation of the European power sector. While the EU ETS is an effective tool for driving fuel switching in the residual thermal generation mix, it cannot alone drive necessary investments in low-carbon technologies due to high capital costs, revenue risks, and the 'merit order effect'. The authors recommend a policy mix where the EU ETS is complemented by tailored national investment supports—such as feed-in tariffs or contracts for difference—to reduce the cost of capital. To ensure coherence, the report proposes an ex-ante cap adjustment process for the ETS based on Member State National Energy and Climate Plans and the development of long-term decarbonisation strategies back-casted from 2050.

• A carbon market alone cannot drive cost-effective investment in low-carbon technologies because these assets are highly capital-intensive and sensitive to the cost of capital, whereas conventional thermal plants have lower capital shares in their total cost structure.
• Low-carbon technologies face higher financial risk because current power market designs lack long-term price-hedging opportunities, forcing investors to require higher rates of return, which increases the levelised cost of electricity (LCOE).
• The 'merit order effect' occurs when low-marginal-cost renewable energy is pushed into the market, lowering wholesale prices and potentially undermining the incentives for further low-carbon investment if infra-marginal generation is not simultaneously removed.
• Tailored investment support schemes, such as feed-in tariffs, can reduce capital costs for investors by 10% to 30% by mitigating revenue risk, making them more cost-effective than purely market-based instruments like tradable green certificates.
• The EU ETS is an effective instrument for driving fuel switching in the residual thermal mix; analysis of seven Member States shows substantial potential to switch from coal to gas at carbon prices between 20 €/tCO2 and 40 €/tCO2.
• Some Member States, particularly Poland, have very limited domestic fuel-switching capacity due to a lack of natural gas infrastructure, meaning they may struggle to phase out coal by 2050 without policies beyond the carbon price.
• To coordinate the EU ETS with complementary policies, the report proposes an ex-ante cap adjustment process where the ETS cap is recalibrated based on the expected abatement from non-ETS investment supports.
• The report recommends that Member States develop decarbonisation strategies to 2050 using a back-casting approach to ensure coherence between short-term 2030 goals and long-term climate targets.

APA

Sartor, O., Gonzalez, M. R., Gonzalez, P. D. R., Graichen, V., & Healy, S. (2015). The role of complementary policies in powering the European decarbonisation of the EU ETS & post-2020. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2015/06/CS-2030-Role-of-the-EU-ETS-and-Complementary-tools-for-power-market-decarbonisation-FINAL.pdf

Chicago

Sartor, Oliver, Matthieu Rio Gonzalez, Pablo del Rio Gonzalez, Verena Graichen, and Sean Healy. The role of complementary policies in powering the European decarbonisation of the EU ETS & post-2020. Climate Strategies, 2015. https://climatestrategies.org/wp-content/uploads/2015/06/CS-2030-Role-of-the-EU-ETS-and-Complementary-tools-for-power-market-decarbonisation-FINAL.pdf.

Wikipedia

{{cite report |last1=Sartor |first1=Oliver |last2=Gonzalez |first2=Matthieu Rio |last3=Gonzalez |first3=Pablo del Rio |last4=Graichen |first4=Verena |last5=Healy |first5=Sean |title=The role of complementary policies in powering the European decarbonisation of the EU ETS & post-2020 |publisher=Climate Strategies |date=July 2015 |url=https://climatestrategies.org/wp-content/uploads/2015/06/CS-2030-Role-of-the-EU-ETS-and-Complementary-tools-for-power-market-decarbonisation-FINAL.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{sartor2015role, author = {Sartor, Oliver and Gonzalez, Matthieu Rio and Gonzalez, Pablo del Rio and Graichen, Verena and Healy, Sean}, title = {{The role of complementary policies in powering the European decarbonisation of the EU ETS \& post-2020}}, institution = {Climate Strategies}, year = {2015}, month = jul, url = {https://climatestrategies.org/wp-content/uploads/2015/06/CS-2030-Role-of-the-EU-ETS-and-Complementary-tools-for-power-market-decarbonisation-FINAL.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }