Accelerating de-carbonation: implementing a minimum CO₂ price for electricity in Western Europe

In order to comply with its contribution to the Paris Agreement, the European Union has to limit the emissions of industries running on fossil fuels as soon as possible. Among them, the European electricity sector has the largest potential for emission reduction, and its decarbonization costs are among the lowest: the sector faces a situation of overcapacity, and it is necessary for both utilities and climate change mitigation to reduce power generation capacities, starting with the most polluting ones. However, there is a risk that current market conditions will lead to continue exploiting coal-fired power plants, while gas-fired power plants will remain under-used or mothballed, and will then be decommissioned. The reform of the European Union Emission Trading Scheme (EU ETS) currently under discussion will not be sufficient to invert the trend on the short term. In order to reduce the use of coal in electricity generation, Member States are therefore considering administrative measures, such as imposing emission standards and/or closing the most polluting power plants. Such a solution, already partially implemented in Germany, is however costly for the public finances, due to the compensations to be paid to utilities, and less efficient from an economic and environmental point of view. We are proposing an alternative, which is to implement by 2020 in Western Europe a carbon price floor for the electricity sector of 20 to 30 Euros per ton of CO₂. To be efficient, such measure should be implemented jointly by European countries: France and Germany in the first place, ideally alongside Italy and Spain as well as Benelux countries (and the United-Kingdom, where the measure is already in place). Such mechanism could indeed be initiated gradually by several countries, before being extended to a larger group: such a decision-making process would be far easier than the one needed for a reform of the EU ETS. Implementation conditions will however be crucial: - A carbon price floor would lead to significant financial transfers between electricity producers, suppliers, consumers and across Member States, notably due to the increase of wholesale electricity prices. In order to limit the negative impacts on electricity-intensive industries facing international competition, the existing compensation mechanisms could be extended. - The additional revenues for public finances generated by the carbon price floor should be used to finance job transitions in the coal industry in concerned countries, in particular in Germany. - The measure would increase the surplus of carbon allowances on the European market: until an ambitious and holistic reform of the EU ETS is carried out - which is still a necessity - Member States should buy back this additional amount of allowances or withdraw them from the auctions, in order not to aggravate the surplus issue and to have an actual impact on the overall EU emissions. Under these conditions, a carbon price floor for the electricity sector is the quickest and most efficient way to target the highest, and among the cheapest, potential for greenhouse gas emission reduction in Europe