Free emission allowances passed through to the electricity price

The EU system for CO2 emission allowance trading has been in operation since early 2005. These allowances are allocated freely to producers of electricity. A new study of the Energy research Centre of the Netherlands ECN shows that electricity producers in four European countries (Germany, Belgium, France and the Netherlands) pass through these allowances to their costs, resulting in higher energy bills for large and small consumers.

The main conclusions of the study, which was publishedlast week, are:

• Producers of electricity pass on the costs of free emission allowances fully in their production and trading decisions.
• The extent to which the costs of emission allowances eventually affect the electricity price depends on a large number of factors. Based on a number of different methods, it has been estimated that, on average, 40 to 70 percent of the CO2 costs is passed through into higher power prices.
• As a result of passing through the costs of free emission allowances to the electricity price, the producers increase their profits, whereas  consumers are facing higher electricity prices. For some large industrial consumers it is difficult to pass through their higher electricity costs to  their sales prices.
• A major objection to the current system of free allocation of emission allowances is the fact that it stimulates polluting CO2 intensive investments in new production capacity, which conflicts with the ultimate target of the system.

Next year, there will be new rounds for the allocation of emission allowances for the period 2008-2012. ECN recommends replacing the current system of free allocation with an auction of emission allowances in the near future.

The report can be downloaded from the ECN website at <http://www.ecn.nl/library/reports/2005/c05081.html>.

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