This paper develops a multi-country multi-sector general equilibrium model, integrating high-frequency electricity dispatch and trade decisions, to study the effects of electricity transmission infrastructure (TI) expansion and renewable energy (RE) penetration in Europe for gains from trade and carbon dioxide emissions in the power sector. TI can benefit or degrade environmental outcomes, depending on RE penetration: it complements emissions abatement by mitigating dispatch problems associated with volatile and spatially dispersed RE but also promotes higher average generation from low-cost coal if RE production is too low. Against the backdrop of European decarbonization and planned TI expansion, we find that emissions increase for current and targeted year-2020 levels of RE production and decrease for year-2030 targets. Enhanced TI yields sizeable gains from trade that depend positively on RE penetration, without creating large adverse impacts on regional equity.

Keywords

Cross-country electricity trade; Transmission infrastructure policy; Renewable energy; Market integration; Carbon dioxide emissions; General equilibrium modeling