Electricity and emission-permits trade as a means of curbing CO2 emissions in the Nordic countries

Abstract

The four Nordic countries Sweden, Denmark, Finland and Norway have fully integrated electricity grids, implying that electricity trade hitherto has accounted for a crucial part of each country’s power balance. Electricity trade also provides cost-efficient opportunities for the Nordic countries to either jointly or separately fulfil their CO2 obligations. Assuming the targets that were agreed upon in (the aftermath of) the Kyoto negotiations in 1997, and establishing scenarios where CO2-emission-permits trade among the Nordic countries is allowed, it is shown that the value of emission trading is somewhat larger than the corresponding value of electricity trade. Furthermore, if both electricity and emission permits can be traded on a common Nordic market this can lead to amplified economic benefits yielding a gain that exceeds the sum of the separate values of electricity and emission permits trade. It is also shown that the additional costs of fulfilling the Kyoto protocol are small compared to the total costs of the Nordic energy system.