Conference Agenda

We investigate the optimal design of CO$_2$ taxation policies along with renewable energy de-risking instruments in the context of decarbonizing power sectors that are subject to investment risk. We develop a multi-stage stochastic equilibrium model that captures endogenous investment decisions regarding production and storage assets. Some market fundamentals, such as demand, prices, and production profiles, are risky. Furthermore, investors are risk-averse and the financial market is incomplete inasmuch as it lacks sufficient risk-sharing instruments. The model integrates economic and environmental incentives through a multi-objective framework based on social welfare and emissions, allowing for the characterization of the \textit{Pareto-optimal frontier} for de-risking/emissions-taxation policies. We apply the model to the French power system, considering a diverse mix of generation and storage technologies. Our results show that de-risking instruments and CO$_2$ taxes are imperfect substitutes and must be optimized \textit{jointly} to avoid suboptimal outcomes\textemdash such as over-investment in renewable production, market distortions induced by excessive de-risking, or insufficient emissions reductions. Furthermore, we demonstrate that commonly used de-risking instruments in Europe may lead to spot-market inefficiencies and welfare losses. Our findings provide actionable policy guidance by identifying optimal de-risking/emissions-taxation combinations and quantifying the performance gap in current European policies relative to the Pareto frontier.