Implementing a CO2 price floor in the electricity sector: analysis of two interconnected markets

Published on 24 June 2021

By Corinne Chaton and Anna Creti.

The debate on the possible reforms of the EU ETS market is still underway. One of the measures actually considered is an eventual price floor that would avoid the price to hit very low values. This regulation instrument is implemented in other market for permits, as in California.  We contribute to the recent literature on the carbon price floor (CPF) by analyzing its effect on the electricity sector in two interconnected countries. We characterize production and carbon market equilibria under symmetric and asymmetric regulation and simulate our results for the French and German electricity markets. The simulation allows to illustrate and calculate the likely impact of CPF measures, which can have counterintuitive effects on the carbon price.

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