This report (34pp) and accompanying brief (8pp) investigate the extent to which current policies and institutional arrangements are fit for purpose for the new decarbonisation phase into which the EU is entering. They summarise the main findings from the Statkraft research programme, ‘“Fit-for-purpose” energy and climate change mitigation policies for the European Union’, completed in December 2017.

Headline issues

  • The existing imbalance between carbon pricing (embedded in the EU ETS) and subsidies for the decarbonisation of electricity is costly, and does not create a level playing field between current and future power generation assets.
  • Successful decarbonisation of the power sector requires trust in a credible policy and institutional framework. Credibility has many dimensions, some of which take time to influence. However, fast improvements are possible in several areas.
  • The EU’s climate targets cannot be met through power sector decarbonisation alone. Introducing carbon pricing instruments through domestic carbon taxes is an effective way to incentivise emissions reductions outside the EU ETS and make all polluters pay. There are design options to make carbon taxes more acceptable to the public.

Report content

The report explores three aspects of EU climate policy in particular, before highlighting key conclusions:

  • Chapter 2 explores the issue of the ‘distributional impacts’ associated with policies for reducing emissions in the power sector. We explore how different policies vary in the way their costs and benefits are distributed among the government, consumers and electricity producers, focusing particularly on the supply-side of the power market.
  • Chapter 3 discusses the credibility of member states’ efforts to decarbonise electricity. We investigate whether or not the current institutional arrangements are sufficient to enable member states to translate their commitments to decarbonise electricity into action or, in other words, how credible their low-carbon commitments are. We identify countries’ strengths and weaknesses and suggest areas for improvement.
  • Chapter 4 focuses on the issue of public acceptability of carbon taxes on sectors outside the EU ETS. We identify challenges, policy design options and communication strategies that could help make such taxes more acceptable.


  • Carbon pricing is the most cost-effective policy instrument for reducing emissions. Measures to raise the EU ETS price should feature more prominently in the EU policy mix.
  • Technology-specific subsidies to mature low-carbon technologies should not be the instrument of choice to reduce emissions because they are unnecessarily costly to society and have adverse impacts on the profitability of those who do not receive the subsidy.
  • Carbon pricing works better if accompanied by complementary policies that target additional market failures, such as innovation and network externalities, and capital market imperfections.
  • Technology-specific subsidies for the next generation of low-carbon technologies should be financed by the proceeds from carbon pricing, rather than through electricity taxes or general taxation.
  • Legislative frameworks should be strengthened, both at EU and member state level, to include a clear long-term vision, statutory interim targets, and a commitment to key policy reforms, such as a stronger carbon price (through strengthening the EU ETS), the removal of fossil fuel subsidies and support for low-carbon innovation.
  • Strengthened joined-up thinking is needed on climate change and energy in public bodies and the enabling of independent scrutiny of their work through the parliamentary process, public debate and dedicated expert committees.
  • Sudden policy reversals that destabilise investor confidence should be avoided, through commitment devices and clearly articulated, transparent processes for the review of policies.
  • Phasing in carbon taxes over time allows people to become familiar with the tax and can overcome initial resistance.
  • Earmarking tax revenues to finance mitigation projects enhances acceptability by signalling a public commitment to reducing emissions.
  • Alternatively, and preferably, tax proceeds may be used to address the regressive effects of carbon taxes or to achieve revenue neutrality.
  • For all design options, information-sharing and clear communication are essential, both before and after the introduction of carbon taxes, in order to foster acceptance.

This report draws on the findings of three research papers, carried out as part of the Statkraft research programme. They are:

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