Liberalizing European Energy Markets

Liberalizing European Energy Markets

An Economic Analysis

Finn Roar Aune, Rolf Golombek, Sverre A.C. Kittelsen and Knut Einar Rosendahl

This book presents an economic analysis of the main effects of liberalizing the electricity and natural gas markets across Western Europe. It is based on a state-of-the art detailed numerical simulation model that takes account of the interlinkages between different energy markets. Short-run and long-run effects are identified and the robustness of results is tested. Separate chapters discuss climate policy, renewable energy and the role of Russia. A key finding is that liberalization lowers energy prices and increases consumption, particularly in the electricity markets where prices fall by 25 per cent on average in the short run. Effects are somewhat stronger in the long run, as investment options are utilized. The welfare benefits of liberalization are considerable in the long run. However, liberalization increases emissions of CO2. The welfare costs of fulfilling Western Europe’s Kyoto obligations depend highly on the policies implemented, but are at least as large as the benefits of liberalization.

Chapter 6: Policies for Clean and Renewable Energy Production

Finn Roar Aune, Rolf Golombek, Sverre A.C. Kittelsen and Knut Einar Rosendahl

Subjects: economics and finance, energy economics, public sector economics, environment, environmental economics


In this chapter, we discuss the effects of introducing climate policies or renewable energy policies in Western Europe. All countries in Western Europe are currently committed by the Kyoto Protocol to curb their emissions of greenhouse gases over the period 2008–2012. Moreover, the European Union (EU) aims to increase the share of renewable energy in total energy use, particularly in the power sector, as a means of both reducing CO2 emissions and reducing the dependence on energy imports. The main policy instruments that we consider are carbon taxes and green certificate markets. In Sections 6.1 and 6.2, we discuss whether these instruments are cost-effective policy tools for dealing with climate and renewable energy issues. In Section 6.3, we briefly present current policies in Western Europe (mainly EU) in these areas. In Section 6.4, we present four different climate policy scenarios, and in Section 6.5, we present three different renewable energy policy scenarios. Sections 6.4 and 6.5 focus on the effects on energy markets in Western Europe and, in particular, the welfare effects of the different policies. 6.1 CARBON TAXES Standard economic theory suggests that a cost-efficient reduction in emissions of greenhouse gases (GHG) can be obtained through, e.g., a uniform tax on GHG emissions. That is, all polluting sources should face that same tax per unit of emission. The argument runs as follows. Assume the economy uses n inputs. Assume that ( n − 2) of these inputs do not lead to emissions of GHG, whereas increased use of the last...

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