Study unveils the most cost-effective and sustainable way to price carbon emissions in the Energy Community

20 January 2021

Today, the Energy Community Secretariat released the study “Carbon Pricing Design for the Energy Community” prepared by Kantor and E3Modelling consultancies. The objective of the study was to assess and propose the design of an effective carbon pricing mechanism conducive to decarbonisation of the Contracting Parties’ electricity sector, while avoiding and minimizing adverse social and economic impacts.

The study follows up on the Contracting Parties’ own decarbonisation commitments in frameworks such as the UNFCCC and the Berlin Process, which call for giving carbon emissions a price. The EU accession candidates in particular are expected to introduce the EU Emission Trading Scheme (ETS) Directive at some point. The study also took into account the introduction of a carbon border adjustment mechanism (CBAM), currently designed by the European Commission. The CBAM may affect electricity imports from the countries neighbouring the EU, including the Energy Community.

The five policy scenarios elaborated in the study show that the optimal policy option would be a gradual introduction of carbon pricing coupled with full market integration. According to the study, carbon pricing should be introduced as early as possible in a coordinated way and gradually decrease the share of free carbon allowances over a transitional period. Different auctioning rates and timeframes would apply based on a Contracting Party’s exposure to carbon pricing, namely to help coal intensive countries adapt more easily and protect consumers from high electricity and gas prices.

The recommended policy scenario envisages five stages for joining the EU ETS, from internal carbon pricing and nationally traded allowances at the outset, to cross-border trading within the Energy Community and adhering to the EU ETS under a transitional regime and finally becoming a full member of the EU ETS. The study presents options for the use and redistribution of carbon revenues and policy measures to manage social concerns and decarbonisation perspectives.

The study concludes that under the recommended policy option, carbon pricing would have a very positive overall impact on the economy and employment in the Contracting Parties.