European Carbon Prices: What impact on Electricity Prices in France

The anthropogenic nature of GHG emissions is now accepted. Standards, taxes and markets: economists put forward a variety of instruments to fight against climate warming. In 1997, the Kyoto Protocol institutionalized market instruments to tackle climate change. A market for emissions permits would offer several advantages. It would provide a price signal to economic agents, which would be the best way to ensure effective decentralized decision-making for the energy transition. In a quantitatively constrained system of quotas, it would also enable pollution control efforts to be shared out, minimizing the collective costs of reducing emissions (Crocker 1966, Dales 1968, Montgomerry 1972). In 2005, the European Commission created the first binding carbon market (De Perthuis 2008). The European Emission Trading System (EU-ETS) is a market for tradable emissions permits that sets national caps on CO2 emissions (Gollier & Tirole, 2015), divided between different installations. For each, carbon quota holders must arbitrate between investing in clean production modes, buying quotas on the EU ETS to ensure compliance, or holding them for a later period. From the outset, the power generation sector received the majority of allocations (Cartel et al. 2017). This production emits a significant amount of CO2, which varies according to the quantity produced and the fuel used. We also note that electricity prices now include European capacities, which are part of the interconnected grid. In this context, European prices are still largely dependent on the price of fossil fuels, which play a major role in national power mixes, but also on the price of carbon. French electricity prices are linked to the European electricity market, and therefore to the electricity mixes of the other countries in the zone. This is why, despite a highly decarbonized energy mix, the question of its potential sensitivity to the EU ETS price signal is open. With European interconnection, the price of allowances on the EU-ETS market could be reflected in the price of French electricity, and in its expectations on futures markets. If this were the case, then the highly institutional nature of the electricity and carbon markets would have enabled price formation, capable of supporting the decarbonization of European electricity mixes, wherever the electrons are consumed.