Rents in the European power sector due to carbon trading
AbstractThe European Union Emissions Trading Scheme (EU ETS) has imposed a price on the allowances for CO2 emissions of electricity companies. Integrating this allowance price into the price of electricity earns a rent for companies who have received these allowances for free. During Phase I, 2005-2007, rents corresponding to the aggregate value of allocated allowances amounted to roughly [euro] 13 billion per year. However, due to the specific price-setting mechanism in electricity markets true rents were considerably higher. This is due to the fact that companies also that have not received any allowances gain additional infra-marginal rents to the extent that their variable costs are below the new market price after inclusion of the allowance price. Producers with low carbon emissions and low marginal costs thus also benefit substantially from carbon pricing. This paper develops a methodology to determine the specific interaction of the imposition of such a CO2 constraint and the price-setting mechanism in the electricity sector under the assumption of marginal cost pricing in a liberalized European electricity market. The article thus provides an empirical estimate of the true total rents of power producers during Phase I of the EU-ETS (2005-2007). The EU ETS generated in Phase I additional rents in excess of [euro] 19 billion per year for electricity producers. These transfers are distributed very unevenly between different electricity producers. In a second step, the paper assesses the impact of switching from free allocation to an auctioning of allowances in 2013. We show that such a switch to auctioning will continue to create additional infra-marginal rents for certain producers and will leave the electricity sector as a whole better off than before the introduction of the EU ETS.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Energy Policy.
Volume (Year): 38 (2010)
Issue (Month): 8 (August)
Contact details of provider:
Web page: http://www.elsevier.com/locate/enpol
EU ETS Electricity markets Rents;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Zachmann, Georg & von Hirschhausen, Christian, 2008.
"First evidence of asymmetric cost pass-through of EU emissions allowances: Examining wholesale electricity prices in Germany,"
Elsevier, vol. 99(3), pages 465-469, June.
- Georg Zachmann & Christian von Hirschhausen, 2007. "First Evidence of Asymmetric Cost Pass-through of EU Emissions Allowances: Examining Wholesale Electricity Prices in Germany," Discussion Papers of DIW Berlin 708, DIW Berlin, German Institute for Economic Research.
- Georg Zachmann & Christian von Hirschhausen, 2007. "First Evidence of Asymmetric Cost Pass-Through of EU Emissions Allowances: Examining Wholesale Electricity Prices in Germany," Working Papers 0710, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- Cameron Hepburn & John Quah & Robert Ritz, 2006. "Emissions Trading and Profit-Neutral Grandfathering," Economics Series Working Papers 295, University of Oxford, Department of Economics.
- Richard Green, 2007.
"Carbon Tax or Carbon Permits: The Impact on Generators' Risks,"
07-02, Department of Economics, University of Birmingham.
- Richard Green, 2008. "Carbon Tax or Carbon Permits: The Impact on Generators Risks," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 67-90.
- Reneses, Javier & Centeno, Efraim, 2008. "Impact of the Kyoto Protocol on the Iberian Electricity Market: A scenario analysis," Energy Policy, Elsevier, vol. 36(7), pages 2376-2384, July.
- Hepburn, C. & Grubb, M. & Neuhoff, K. & Matthes , F. & Tse, M., 2006. "Auctioning of EU ETS Phase II allowances: how and why?," Cambridge Working Papers in Economics 0644, Faculty of Economics, University of Cambridge.
- Bonacina, Monica & Gulli`, Francesco, 2007. "Electricity pricing under "carbon emissions trading": A dominant firm with competitive fringe model," Energy Policy, Elsevier, vol. 35(8), pages 4200-4220, August.
- Benz, Eva & Trück, Stefan, 2009. "Modeling the price dynamics of CO2 emission allowances," Energy Economics, Elsevier, vol. 31(1), pages 4-15, January.
- Sijm, J. & Neuhoff, K. & Chen, Y., 2006. "CO2 cost pass through and windfall profits in the power sector," Cambridge Working Papers in Economics 0639, Faculty of Economics, University of Cambridge.
- Dieter Helm & Cameron Hepburn & Richard Mash, 2003. "Credible Carbon Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 438-450.
- Bode, Sven, 2004. "Multi-Period Emissions Trading in the Electricity Sector : Winners and Losers," HWWA Discussion Papers 268, Hamburg Institute of International Economics (HWWA).
- Jouvet, Pierre-André & Solier, Boris, 2013. "An overview of CO2 cost pass-through to electricity prices in Europe," Economics Papers from University Paris Dauphine 123456789/7761, Paris Dauphine University.
- Lehmann, Paul & Gawel, Erik, 2013.
"Why should support schemes for renewable electricity complement the EU emissions trading scheme?,"
Elsevier, vol. 52(C), pages 597-607.
- Lehmann, Paul & Gawel, Erik, 2011. "Why should support schemes for renewable electricity complement the EU emissions trading scheme?," UFZ Discussion Papers 5/2011, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
- Pahle, Michael & Fan, Lin & Schill, Wolf-Peter, 2011. "How emission certificate allocations distort fossil investments: The German example," Energy Policy, Elsevier, vol. 39(4), pages 1975-1987, April.
- Boris Solier & Pierre-André Jouvet, 2011. "An overview of CO2 cost pass-through to electricity prices in Europe," Working Papers 1108, Chaire Economie du Climat.
- repec:ner:dauphi:urn:hdl:123456789/7761 is not listed on IDEAS
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wendy Shamier).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.