Report on assessment and interaction of policy instrument and policy mixes

The climate and energy policy in EU and its Member States is characterized by multiple targets and a myriad of instruments. All these targets interact with each other through the energy system and most interactions lead to distortions and increase the costs of reducing GHG emissions. However, there are market failures additional to the climate externality that make an adjustment of distorted incentives necessary and provide a rationale for a policy mix. This report synthesizes the work conducted in the ENTRACTE research project with regard to its lessons on climate and energy policy interactions. It shows that there is indeed a rationale for a policy portfolio where its different components address different market failures. But it also shows that in in order to be cost-efficient, those additional policies need to be calibrated very well. And it also explains that the most important intervention is to price GHG emissions correctly. Adding new policy instruments has therefore to be done with the utmost reservation. Otherwise the policy mix risks becoming a policy mess.

Authors: Andreas Löschel, Oliver Schenker