Impact of a CO2 levy in the power sector

Proposal for an instrument that would strengthen the EU ETS and the price signal for clean technology

Published: 22/02/2016

Commissioned by ENECO, Ecofys studied an additional levy for the power sector that would strengthen the CO2 price. The revenues generated with the levy would then be used to buy emission allowances and cancel them. The study shows that under the assumption of 2014 gas and coal prices, a levy of 45 Euro/tCO2 for emissions above 450 gCO2/kWh would result in changes in the merit order that would make the marginal costs of the most expensive coal fired power plant higher than those of the cheapest gas fired power plant. Only with a levy of 130 Euro/tCO2, the marginal costs of all coal fired power plants would be higher than all gas fired power plants. The advantage of such a levy is that as long as there are power plants that emit above the norm set, the EU ETS will be strengthened via the cancellation of allowances. More research is needed on the details of such a levy, but this study aims to add to the debate about strengthening the price signal for CO2 reduction in the power sector.

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(Update June 2016: The study had originally been published in Dutch, but is now available in English.)

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Maarten Neelis
Climate Strategies and Policies
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