Safeguarding the energy transition against political backlash to carbon markets

As renewable energy technology costs fall, there are increasing calls to remove policy support. Pahle et al. examine the impacts of such a move combined with higher interest rates in the European Union, and find that resulting higher financing could double long-term carbon prices and halve the rate of capacity deployment in the next 15 years. Substantial renewable energy (RE) cost reductions have raised the prospect of a subsidy-free RE era of the energy transition. The envisaged policy cornerstones of this era are carbon markets, which create economic incentives for sustaining further RE deployment. However, this overlooks that exposing RE to market risks and increasing interest rates would result in substantially higher financing cost, which in turn would lead to much steeper carbon price paths. The resulting political pressure may provoke a price-depressing regulatory intervention, disrupting further RE expansion. Here we conceptualize this feedback and infer indicators for the risk of such an intervention. By quantifying these indicators for the European Union, we find that increased financing cost could double carbon prices in the long term, halve the rate of renewable capacity deployment in the next 15 years and considerably increase the profits of fossil fuel plants. This implies a substantial risk of pushback that policymakers should safeguard against.

Automated summary

As renewable energy technology costs decrease, there is a growing demand to eliminate policy support. However, removing support policies could lead to higher financing costs, slower deployment of renewable energy capacity, and increased carbon prices. Policymakers should be aware of this risk and take necessary measures.