The dynamic impact of carbon reduction and renewable support policies on the electricity sector

• Both carbon reduction and renewable energy support policies are necessary.
• Renewable energy policy has a strong impact on a carbon market.
• Temporary low carbon prices may lead to a pathway of higher future emissions.

Carbon reduction and renewable energy policies are implemented in Europe to improve the sustainability of the electricity sector while achieving security of supply. We investigate the interactions between these policies using a dynamic investment model. Our analysis indicates that both policies are necessary to achieve a sustainable power sector. However, renewable energy generation significantly affects carbon markets and could lead to very low prices. These would attract investments in carbon intensive technologies, locking the sector into future higher emissions. To contrast this effect, policy makers may introduce a floor price in the carbon market or adjust the emissions quota periodically.