The effect of inhomogeneous carbon prices on the cost-optimal design of a simplified European power system

TL;DR

This paper examines how regionally varying carbon prices in Europe influence power system design and carbon leakage, revealing that inhomogeneous prices can undermine emission reduction efforts.

Contribution

It introduces a model analyzing the impact of GDP-based regional carbon prices on European power system emissions and reveals leakage issues caused by inhomogeneous pricing.

Findings

Inhomogeneous carbon prices cause significant carbon leakage.

Coal remains a major power source in Eastern Europe despite pricing.

Regional price differences impact emission reduction effectiveness.

Abstract

Carbon prices are one of the most prominent methods to reduce global greenhouse gas emissions and have been adopted by several countries around the world. However, regionally different carbon prices can lead to carbon leakage. We investigate a simplified European power system where carbon prices are varied with respect to GDP per capita and find that inhomogeneous carbon prices lead to significant carbon leakage due to coal-fired generation remaining a major source of power in Eastern Europe.