Linking Carbon Markets and Technology Support Mechanisms: Making Sense of the EU Climate Change Package

The EU is currently at a hectic stage in the development of its internal climate change policies. Having proposed a package of measures in January 2008, the European Commission aims to finalise a deal by the end of the year. The key elements include proposals to improve and extend the EU emissions trading scheme (Europe's flagship carbon market), an allocation of effort between member states on reducing emissions, and an ambitious Directive to meet 20% of the EU's total energy demand from renewable sources. There is also ongoing debate over the support for the demonstration of carbon capture and storage (CCS) technology. Added into this mix are the international climate change negotiations which are supposed to reach a global deal by the end of 2009.

This paper introduces a novel way of looking at the interaction between carbon markets and technology support mechanisms with the hope that an intuitive picture of the fundamentals will promote a clearer and more productive policy dialogue.