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Rents in the European power sector due to carbon trading

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  • Keppler, Jan Horst
  • Cruciani, Michel

Abstract

The 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.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 38 (2010)
Issue (Month): 8 (August)
Pages: 4280-4290

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Handle: RePEc:eee:enepol:v:38:y:2010:i:8:p:4280-4290

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Web page: http://www.elsevier.com/locate/enpol

Related research

Keywords: EU ETS Electricity markets Rents;

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References

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  1. Keppler, Jan Horst, 2007. "We Do not yet Have the Answers, but We Know the Right Questions : Lessons Learned from the 2005 - 2007 Trial Phase of the EU Emission Trading System," Economics Papers from University Paris Dauphine 123456789/155, Paris Dauphine University.
  2. Keppler, Jan Horst & Lesourne, Jacques, 2007. "Abatement of CO2 emissions in the European Union," Economics Papers from University Paris Dauphine 123456789/144, Paris Dauphine University.
  3. Bonacina, Monica & Gulli`, Francesco, 2007. "Electricity pricing under "carbon emissions trading": A dominant firm with competitive fringe model," Energy Policy, Elsevier, Elsevier, vol. 35(8), pages 4200-4220, August.
  4. Chernyavs'ka, Liliya & Gullì, Francesco, 2008. "Marginal CO2 cost pass-through under imperfect competition in power markets," Ecological Economics, Elsevier, vol. 68(1-2), pages 408-421, December.
  5. Dieter Helm & Cameron Hepburn & Richard Mash, 2003. "Credible Carbon Policy," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 19(3), pages 438-450.
  6. Zachmann, Georg & von Hirschhausen, Christian, 2008. "First evidence of asymmetric cost pass-through of EU emissions allowances: Examining wholesale electricity prices in Germany," Economics Letters, Elsevier, vol. 99(3), pages 465-469, June.
  7. Reneses, Javier & Centeno, Efraim, 2008. "Impact of the Kyoto Protocol on the Iberian Electricity Market: A scenario analysis," Energy Policy, Elsevier, Elsevier, vol. 36(7), pages 2376-2384, July.
  8. Richard Green, 2008. "Carbon Tax or Carbon Permits: The Impact on Generators Risks," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 3), pages 67-90.
  9. Cameron Hepburn & John Quah & Robert Ritz, 2006. "Emissions Trading and Profit-Neutral Grandfathering," Economics Series Working Papers 295, University of Oxford, Department of Economics.
  10. Ellerman,A. Denny & Convery,Frank J. & de Perthuis,Christian, 2010. "Pricing Carbon," Cambridge Books, Cambridge University Press, number 9780521196475, 9.
  11. 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.
  12. Benz, Eva & Trück, Stefan, 2009. "Modeling the price dynamics of CO2 emission allowances," Energy Economics, Elsevier, Elsevier, vol. 31(1), pages 4-15, January.
  13. 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.
  14. Bode, Sven, 2004. "Multi-Period Emissions Trading in the Electricity Sector : Winners and Losers," HWWA Discussion Papers 268, Hamburg Institute of International Economics (HWWA).
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Citations

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Cited by:
  1. Michael Pahle & Lin Fan & Wolf-Peter Schill, 2011. "How Emission Certificate Allocations Distort Fossil Investments: The German Example," Discussion Papers of DIW Berlin 1097, DIW Berlin, German Institute for Economic Research.
  2. 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.
  3. Liam Wagner & Lynette Molyneaux & John Foster, 2012. "Magnifying uncertainty: the impact of a shift to gas under a carbon price," Energy Economics and Management Group Working Papers 11-2012, School of Economics, University of Queensland, Australia.
  4. Lehmann, Paul & Gawel, Erik, 2013. "Why should support schemes for renewable electricity complement the EU emissions trading scheme?," Energy Policy, Elsevier, Elsevier, vol. 52(C), pages 597-607.
  5. Liam Wagner & Lynette Molyneaux & John Foster, 2013. "The magnitude of the impact of a shift from coal to gas under a Carbon Price," Energy Economics and Management Group Working Papers 9-2013, School of Economics, University of Queensland, Australia.

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