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While emissions trading schemes are developed by nations to mitigate their greenhouse gases emissions, behavioral studies have shown that the political and public acceptability of these market-based instruments depends on the way the associated revenues are used. One option that is well considered by the general public is to use them to support renewable energy. We examine the economic consequences of such a recycling method in the case of the European Union. While the EU ETS Directive requires Member States to use at least 50% of the carbon auctions revenues for climate and energy related purposes, the Impact Assessment of the 2030 Climate and Energy Framework suggests one way can be to support electricity generation from renewable energy. With a modeling approach including a detailed disaggregation of EU sectors, we find that using ETS auctions revenues to support electricity generation from renewable sources results in a rise in electricity demand in the whole economy due to the reduced electricity levy that electricity consumers have to pay to support renewable energy in the power sector. This results in a rise of the ETS carbon price. The carbon constraint for the non-ETS sectors is looser as a consequence of the possibility for these sectors to use cheaper abatement opportunities, including through a larger use of electricity. While the ETS sectors generally benefit from electricity levy exemptions, we observe that the combination of these exemptions and of the use of carbon auctions revenues to support RES make them worse off than if carbon revenues are transferred to households. The reason is the rise in electricity and carbon prices as a consequence of the higher electricity demand in the rest of the economy. In aggregate the recycling option analysed here results in a GDP gain due to its impacts on the non-ETS sectors, the reduction of the electricity levy and associated distortionary effects.
