Environmental Regulation for the Liberalised European Electricity Sector, towards a Numerical Approach

The European electricity sector is facing substantial structural changes. An issue of primary interest in this regard is the interaction of environmental problems and liberalisation. This paper will illustrate the most relevant issues that compound the task of providing a reliable framework for environmental policy applied to the European electricity sector. In particular, we take into account that: (1) The new European market for electricity is becoming a complex institution that most probably will not be characterised by perfect competition; (2) Imperfect competition matters for environmental regulation; (3) The present regulatory situation in Europe is complex and not homogeneous, as far as environment is concerned. Thus, only very limited policy lessons can be drawn from economic theory. We present a simple numerical model of the environmental regulation of the European electricity sector. We compare the use of environmental taxes in a perfect competition benchmark with their use under imperfect competition. This allows us to illustrate the incentives for environmental policy distortions for national governments that imperfect competition may bring about.