Impact of CO2 prices on the design of a highly decarbonised coupled electricity and heating system in Europe

TL;DR

This study models Europe's coupled electricity and heating systems to analyze how CO2 prices influence decarbonization, showing high taxes are necessary to significantly reduce emissions despite high renewable energy penetration.

Contribution

It provides a comprehensive, hourly dispatch model of European energy systems demonstrating the critical role of CO2 taxes alongside renewable targets for effective decarbonization.

Findings

A CO2 tax over 100 euro/tCO2 is needed to reduce emissions below 5% of 1990 levels.

High CO2 taxes promote efficient use of VRES via heat pumps and storage.

Renewable energy targets alone are insufficient for deep decarbonization.

Abstract

Ambitious targets for renewable energy and CO2 taxation both represent political instruments for decarbonisation of the energy system. We model a high number of coupled electricity and heating systems, where the primary sources of CO2 neutral energy are from variable renewable energy sources (VRES), i.e., wind and solar generators. The model includes hourly dispatch of all technologies for a full year for every country in Europe. In each model run, the amount of renewable energy and the level of CO2 tax are fixed exogenously, while the cost-optimal composition of energy generation, conversion, transmission and storage technologies and the corresponding CO2 emissions are calculated. We show that even for high penetrations of VRES, a significant CO2 tax of more than 100 euro/tCO2 is required to limit the combined CO2 emissions from the sectors to less than 5% of 1990 levels, because curtailment of VRES, combustion of fossil fuels and inefficient conversion technologies are economically favoured despite the presence of abundant VRES. A sufficiently high CO2 tax results in the more efficient use of VRES by means of heat pumps and hot water storage, in particular. We conclude that a renewable energy target on its own is not sufficient; in addition, a CO2 tax is required to decarbonise the electricity and heating sectors and incentivise the least cost combination of flexible and efficient energy conversion and storage.