The European electricity and climate policy—complement or substitute?

The European electricity policy is intended to increase market competitiveness and liberalisation. The European climate policy is directed toward substantial reductions in greenhouse-gas emission and a significant increase in the use of renewable energy for electricity production. Both policies affect European utilities considerably. As a consequence, only those utilities that can produce electricity with cost-efficient and environment-friendly technologies will gain a comparative market advantage. The author investigates the impacts of the European energy and climate policy initiatives on the electricity market. It emerges that emissions trading leads to higher electricity prices and triggers a substitution process—from the use of coal to the use of gas and renewable technologies. Both policies have complementary effects, but only because the electricity market is not yet fully competitive.