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Climate policy, interconnection and carbon leakage: The effect of unilateral UK policy on electricity and GHG emissions in Ireland

This paper examines the effect of the UK's unilateral policy to implement a carbon price floor in Great Britain for fossil-fuel based electricity generation on the adjoining electricity market in Ireland. We find that, subject to efficient use of interconnectors between the two markets and constant imports from France and the Netherlands, a carbon price floor will lead to carbon leakage, with associated emissions in the Republic of Ireland increasing by 8% and electricity prices increasing by 2.4%. However, across the combined Irish and British electricity markets total emissions decline: high carbon prices drive decarbonisation in electricity generation. The UK's now implemented policy, which is a mechanism to directly manage carbon prices, substantially differs with the yet to be agreed EU policy response to postpone auctions of Emissions Trading Scheme allowances with the intention of indirectly increasing the price of carbon. The analysis suggests that the EU proposal will have only negligible additional effect on emissions from the combined Irish and UK electricity sectors.
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JEL Codes:H23: Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies, L51: Economics of Regulation, O54: Economywide Country Studies: Latin America; Caribbean

Keywords: Carbon leakage, Carbon price floor, Electricity markets, Interconnection

DOI: 10.5547/2160-5890.3.2.jcur

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Published in Volume 3, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.