The Impact of Electricity Market Integration on the Cost of CO ₂ Emissions Abatement Through Renewable Energy Promotion

The integration of electricity markets is widely promoted for enhancing competition and energy security. However, its impact on emissions and renewable energy deployment remains unclear. This paper exploits the expansion of the Spanish-French electricity interconnector to estimate the effect of integration on the quantity and location of CO ₂ emissions avoided by Spanish wind production and on electricity prices of both countries. I find that integration has increased the amount of emissions avoided in France but decreased that in Spain for each additional megawatt-hour of Spanish wind. Since the gain in France is smaller than the loss in Spain, the net marginal CO ₂ abatement effect of Spanish wind has declined. On prices, the previously non-significant impact on French prices before the expansion becomes significant afterwards, highlighting cross-border merit order effect. I then calculate the cost of reducing 1 ton of CO ₂ through the Spanish wind subsidy program. Before the expansion, Spanish consumers gained 29.6€/tCO ₂ avoided. After the expansion, the merit order effect no longer offsets the subsidy cost, resulting in a net cost of 6.3€/tCO ₂ . Meanwhile, French consumers benefit for free from the abatement of 2.5 megatonnes of CO ₂ annually, financed at a cost of 150€/tCO ₂ by the Spanish consumer post-expansion. Finally, I assess the marginal welfare effect of wind power, accounting for both emissions abatement and the price-induced reduction in producer surplus. The subsidy policy is welfare-improving if the social cost of carbon exceeds 67€/tCO ₂ before the expansion and 72€/tCO ₂ afterwards.

JEL Classification : D61, Allocative Efficiency; Cost-Benefit Analysis; Q40, Energy: General; Q42, Alternative Energy Sources; Q52, Pollution Control Adoption and Costs; Distributional Effects; Employment Effects