Costs and Benefits of Political and Physical Collaboration in the European Power Market

We conduct a hybrid scenario exercise to analyze decarbonization pathways and related distributional effects within the European power market. The cross-impact balance analysis reveals narratives that differ in the level of political (stringency of climate policy) and physical collaboration (expansion of interconnectors). Applying a CGE model and two power market models, we quantify the impact of the two dimensions on CO2 emissions, abatement cost, and electricity prices. The most collaborative future (176 EUR/t CO2 in 2050, unrestricted expansion) delivers highest CO2 emissions cutbacks, lowest abatement costs, and moderate prices. The least collaborative one (44 EUR/t CO2 in 2050, no expansion) leads to stagnating emissions, highest costs, and lowest prices. In all narratives, countries at the periphery of the European market experience lower prices and abate more, whereas prices are higher and abatement lower in central and Southeast Europe. Price dynamics across narratives vanish when normalizing prices with country-specific GDP per capita, opening interesting insights when evaluating distributional effects of Europe's decarbonization efforts.