Regional carbon price floor in EU ETS – Case studies in the Nordic and Baltic energy markets

The CO2 emission allowances price level in EU ETS has fluctuated since the implementation of the scheme. The allowance price level influences short-term fuel switch decisions and profitability of investments and due to this, the fluctuation can slow down the implementation of low-carbon solutions. To give the markets a more stable signal of the development of the CO2 price, carbon price floor (CPF) has been discussed as a potential measure to complement the ETS. The CPF could be implemented in national, regional or EU level. In this report, the impact of regional CPF implemented either on Nordic or Nordic and Baltic level is analysed concentrating on electricity and heating sector perspectives. In case of electricity markets, the analysis is based on European-wide electricity market simulation with various scenarios. The aim in the analysis is to quantify the potential effects of CPF on electricity generation, electricity flows, CO2 emissions and wholesale prices. In case of heating sector, the aim is to analyse how CPF could potentially impact on the replacement of fossil fuels both in the short- and long-term. In the electricity sector, it could be argued that CPF would have only minor cost impacts in the Nordic region due to production mix being to large extent already mostly based on CO2-free technologies. On the other hand, due to the same fact, the impact of CPF on the electricity generation is likely to be less relevant as in many other regions, for example in Central Europe. Based on the analysis, Nordic CPF could under certain market conditions result in decrease in electricity production with fossil fuels and peat, with only a small impact on average wholesale prices. However, the electricity generation in the Nordics would slightly decrease, being replaced with generation in other market areas. In the heating sector, the implementation of CPF could also decrease the use of fossil fuels and peat, being replaced by biomass. However, the utilisation of fossil fuels could be expected to decrease with current market conditions and the potential achievable benefits could be further limited by technical constraints in production units