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Title:
Options to address concerns regarding EU ETS induced increases in power prices and generators’ profits: the case of carbon cost pass-through in Germany and the Netherlands
 
Author(s):
 
Published by: Publication date:
ECN Policy Studies 13-2-2009
 
ECN report number: Document type:
ECN-B--09-002 Book
 
Number of pages: Full text:
46  Not available.

Published in: In: Gulli, F. (ed.), Markets for Carbon and Power Pricing in Europe - Theoretica, 101, 144, 978 1 84720 809 5, Edward Elgar Publishing.

Abstract:
Power prices in EU countries have increased significantly since the European Emissions Trading Scheme (EU ETS) became effective on 1 January 2005. This suggests that these increases in power prices are due to this scheme, in particular the pass-through of the costs of EU allowances (EUAs) to cover the CO2 emissions of eligible installations. In all sectors, however – including the power sector – eligible installations have usually received almost all of their needed allowances for free during the first phase of the EU ETS (2005–07). In several EU countries, the coincidence of the increases in power prices and the implementation of the EU ETS has raised questions, and sometimes fierce political debate, on whether power producers have indeed passed through the costs of freely allocated CO2 allowances to electricity prices, and to what extent the increase in these prices can be attributed to this pass-through or to other factors. In addition, it has raised discussions on whether – and to what extent – the supposed passing through of these costs has led to additional profits for power producers, that is, the so-called ‘windfall profits’ induced by the EU ETS. Finally, the supposed ETSinduced increases in power prices and generators’ profits has raised concerns affecting the legitimacy of the present EU ETS, including concerns regarding its impact on the international competitiveness of some powerintensive industries, the purchasing power of electricity end-users such as small households or, more generally, the distribution of social welfare among power producers and consumers. As a result, in several countries policy makers and stakeholders have suggested a variety of options to address these concerns, including changing the emissions trading allocation system, taxing windfall profits or controlling market prices of EU carbon allowances, electricity or both. Against this background, the objectives of this chapter include: ? To analyse empirically the trends in power prices during the 2004–06 period for two specific EU countries, that is, Germany and the Netherlands, and to assess whether and to what extent changes in these prices can be attributed to the pass-through of the costs of freely allocated EU carbon allowances or to other factors. ? To discuss the issue of windfall profits, in particular to make some qualifications to the definition and empirical estimation of windfall profits, including some rough estimates of EU ETS-induced windfall profits in the power sector of Germany and the Netherlands. ? To evaluate some policy options to address concerns regarding supposed EU ETS-induced increases in power prices and generators’ profits. The structure of the chapter is as follows. First, Section 5.2 presents some empirical analyses of price trends, cost drivers and pass-through rates (PTRs) on electricity markets in Germany and the Netherlands from 2004 to 2006. Subsequently, Section 5.3 discusses the issue of ETS-induced windfall profits in general, while providing some rough estimates of such profits in Germany and the Netherlands in particular. Next, Section 5.4 evaluates some policy options to address concerns regarding supposed EU ETS-induced increases in power prices and generators’ profits. Finally, Section 5.5 gives a brief summary of the major findings, conclusions and policy implications.

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