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Safeguarding the energy transition against political backlash to carbon markets

Author

Listed:
  • M. Pahle

    (Potsdam Institute for Climate Impact Research)

  • O. Tietjen

    (Potsdam Institute for Climate Impact Research
    Technical University Berlin)

  • S. Osorio

    (Potsdam Institute for Climate Impact Research)

  • F. Egli

    (ETH Zurich
    University College London)

  • B. Steffen

    (ETH Zurich
    ETH Zurich)

  • T. S. Schmidt

    (ETH Zurich
    ETH Zurich)

  • O. Edenhofer

    (Potsdam Institute for Climate Impact Research
    Technical University Berlin
    Mercator Research Institute on Global Commons and Climate Change)

Abstract

Substantial renewable energy (RE) cost reductions have raised the prospect of a subsidy-free RE era of the energy transition. The envisaged policy cornerstones of this era are carbon markets, which create economic incentives for sustaining further RE deployment. However, this overlooks that exposing RE to market risks and increasing interest rates would result in substantially higher financing cost, which in turn would lead to much steeper carbon price paths. The resulting political pressure may provoke a price-depressing regulatory intervention, disrupting further RE expansion. Here we conceptualize this feedback and infer indicators for the risk of such an intervention. By quantifying these indicators for the European Union, we find that increased financing cost could double carbon prices in the long term, halve the rate of renewable capacity deployment in the next 15 years and considerably increase the profits of fossil fuel plants. This implies a substantial risk of pushback that policymakers should safeguard against.

Suggested Citation

  • M. Pahle & O. Tietjen & S. Osorio & F. Egli & B. Steffen & T. S. Schmidt & O. Edenhofer, 2022. "Safeguarding the energy transition against political backlash to carbon markets," Nature Energy, Nature, vol. 7(3), pages 290-296, March.
    • Handle: RePEc:nat:natene:v:7:y:2022:i:3:d:10.1038_s41560-022-00984-0
    DOI: 10.1038/s41560-022-00984-0
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    Citations

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    Cited by:

    1. Réka Juhász & Nathan Lane, 2024. "The Political Economy of Industrial Policy," CESifo Working Paper Series 11143, CESifo.
    2. Kamila Svobodova & John R. Owen & Deanna Kemp & Vítězslav Moudrý & Éléonore Lèbre & Martin Stringer & Benjamin K. Sovacool, 2022. "Decarbonization, population disruption and resource inventories in the global energy transition," Nature Communications, Nature, vol. 13(1), pages 1-16, December.
    3. Dolphin, Geoffroy & Pahle, Michael & Burtraw, Dallas & Kosch, Mirjam, 2022. "A Net-Zero Target Compels a Backwards Induction Approach to Climate Policy," RFF Working Paper Series 22-18, Resources for the Future.
    4. Best, Rohan & Marrone, Mauricio & Linnenluecke, Martina, 2023. "Meta-analysis of the role of equity dimensions in household solar panel adoption," Ecological Economics, Elsevier, vol. 206(C).
    5. Sitarz, Joanna & Pahle, Michael & Osorio, Sebastian & Luderer, Gunnar & Pietzcker, Robert, 2023. "EU carbon prices signal high policy credibility and farsighted actors," EconStor Preprints 280455, ZBW - Leibniz Information Centre for Economics.
    6. Croon, T.M. & Hoekstra, J.S.C.M. & Elsinga, M.G. & Dalla Longa, F. & Mulder, P., 2023. "Beyond headcount statistics: Exploring the utility of energy poverty gap indices in policy design," Energy Policy, Elsevier, vol. 177(C).
    7. Joanna Sitarz & Michael Pahle & Sebastian Osorio & Gunnar Luderer & Robert Pietzcker, 2024. "EU carbon prices signal high policy credibility and farsighted actors," Nature Energy, Nature, vol. 9(6), pages 691-702, June.
    8. Bolat, C. Kaan & Soytas, Ugur & Akinoglu, Bulent & Nazlioglu, Saban, 2023. "Is there a macroeconomic carbon rebound effect in EU ETS?," Energy Economics, Elsevier, vol. 125(C).

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