Effective Climate Policy Doesn’t Have to be Expensive

We compare the effectiveness of different climate policies in terms of emissions abatement and costs in the British and German electricity markets. The two countries follow different climate policies, allowing us to compare the effectiveness of a relatively low EU ETS carbon price in Germany with a significantly higher carbon price due to a unilateral top-up tax (the Carbon Price Support) in the UK. We first estimate the emissions offsetting effects of carbon pricing and of subsidized wind and solar feed-in, and then derive the abatement costs of one tonne of CO2 for the different policies. We find that a reasonably high price for emissions is the most cost-effective climate policy, while subsidizing wind is preferable to subsidizing solar power. A carbon price of around € 35 is enough in the UK to induce vast short-run fuel switching between coal- and gas-fired power plants, leading to significant emissions abatement at low costs.