Exploring the Relationship between the EU Emissions Trading System and Renewable Energy Development in the EU

Abstract

This research paper examines the impact of the EU Emissions Trading System (EU ETS) on the development of the renewable energy market in the European Union. Using regression analysis, the study investigates the relationship between the volume of emission permits, EU GDP, and the share of renewables in the overall energy balance. The results reveal that the EU ETS has a significant negative impact on the development of the renewable energy market in the EU, with an increase in the volume of emission permits corresponding to a decrease in the share of renewables. The study also finds that economic growth alone may not necessarily lead to an increase in the share of renewables; however, when combined with other policies and measures, economic growth may promote the development of renewable energy in the EU. The findings suggest that the EU ETS needs to be improved to encourage renewable energy development effectively, and policymakers should consider introducing additional policies and measures to promote the deployment of renewable energy. In addition to analysing the impact of the EU ETS on the renewable energy market, this paper provides an overview of the EU ETS and its challenges. As a cap-and-trade system covering over 11,000 installations across the European Economic Area, the EU ETS has faced challenges from the beginning due to an oversupply of emission allowances. This resulted in a low carbon price insufficient for driving climate change mitigation. To address these issues, the EU ETS Market Stability Reserve (MSR) was established to absorb excess allowances from the market and manage past surpluses. However, the MSR cannot handle sudden shocks or future surpluses. The paper also presents data on the distribution of emission allowances by country and sector. Germany has the most significant emissions under the EU ETS, followed by Italy, Poland, and the United Kingdom. The stationary installations sector, encompassing power plants and other large industrial emitters, received the most allowances, followed by the fuel combustion sector. The data indicates that energy and industry are the largest emitters and thus receive the most ETS allowances. This research contributes to the understanding of the EU ETS and its impact on the development of the renewable energy market in the EU. The results emphasise the need to improve the EU ETS to promote the deployment of renewable energy and suggest that policymakers should consider introducing additional policies and measures to facilitate the transition to a low-carbon economy.