23
Sep 2008 - Brussels, Belgium – Contrary
to some claims, electricity prices will
not be driven up by the full auctioning
of emissions allowances under the European
Emissions Trading Scheme (EU ETS), according
to a study carried out by New Carbon Finance
for WWF.
“The impact of 100%
auctioning on European wholesale electricity
prices post-2012” examined likely trends
in wholesale electricity prices in the Czech
Republic, Germany, Hungary and Poland, finding
that while having an emissions trading system
influenced prices, the method of allocating
emissions allowances generally didn't.
The report addresses
crucial elements of a debate around EU proposals
to move to full auctioning of all allowances
for the power industry, from 2013 – after
disastrous experiences with over-allocation
of free allowances and rampant criticism
of windfall profits flowing to some of the
most polluting of power generators.
The report finds that
in liberalised, competitive markets such
as Germany power producers integrated both
fuel costs and the value of carbon allowances
into power prices, regardless of whether
the allowances were allocated for free,
auctioned or bought on the market.
When allowances are
handed out for free, as was the case in
phase 1 (2005-2007) and is still the case
for the majority of allowances in phase
2 (2008-2012) of the system, free allocation
results in massive windfall profits for
electric utilities. In Germany this leads
to additional profits of up to 34 billion
euros for German electricity suppliers until
2012, a recent WWF showed.
Power prices in Poland,
where the protected electricity market was
abandoned in 2007 under pressure from the
European Commission, now similarly reflect
the passing of carbon value through to consumers
despite power producers receiving allocations
for free.
The study anticipated
that like Poland, the liberalizing Hungarian
and Czech power markets were “likely to
be sufficiently competitive by 2013 to allow
wholesale electricity prices to fully reflect
short run marginal costs” including the
value of carbon even if it was not a cost
to producers.
Maintenance of current
regulatory structures – in effect a halt
to the prevailing trend to competitive markets
– would see some price increases associated
with auctioning permits, but these were
“significantly less than the price increases
predicted by some industry and government
studies”.
“Free allocation or
auction in the end will rather be a question
of channelling the money either into the
coffers of the power companies or into climate
change policies both in Europe and developing
countries,” said Sanjeev Kumar, Emissions
Trading Scheme Coordinator at WWF.
The study found other
benefits from auctions besides curbing windfall
profits to utilities and opening up the
possibility of an income stream for efforts
to fight climate change. These included
doing away with the time, effort, legal
challenges and market distortions resulting
from intense lobbying for free allocations
and the administrative complexities and
potential errors of governments making allocations.
Giving businesses free allocations of emission
permits also dramatically reduced the incentives
for them to invest in reducing their carbon
emissions.
EU emissions from coal
still account for over 20 percent of greenhouse
gas emissions in Europe, and the studied
nations have some of the highest proportions
of electricity generated from coal. “Auctioning
allowances will fill in the missing link
between giving a price to carbon emissions
through an Emissions Trading System and
having the producer of emissions face a
cost they need to act on,” Kumar said.
“Countries like
the United States and Australia, where emissions
trading systems are being actively considered,
should disregard the self-interested clamour
from industry and learn from Europe's sorry
experiences with free allocations of carbon
polluting allowances to large scale carbon
polluters.”
Sanjeev Kumar, Emissions Trading Scheme
Coordinator
Notes to the editors:
- New Carbon Finance is a leading provider
of high quality research and analysis across
the global carbon markets
