Environmental policy is shaping the EU’s energy market

Subject

The EU's single market for energy.

Significance

Climate change targets, the EU's Emissions Trading Scheme (ETS) and direct emissions controls increasingly define the end-destination of the EU’s energy transition towards a single market, while the precise path of travel is determined largely by national-level policies. Differences in national approaches create distortions that hamper the increase in cross-border trade required to make the EU single energy market a reality.

Impacts

• The EU will continue to resist capacity markets and strategic-reserve mechanisms, which create significant market distortions.
• Cross-border electricity trade requires significant new investment, but it is not clear that the financial incentives exist to support it.
• The long-term future of gas-fired generation is in doubt owing to increasing competition from low-carbon technologies.