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Rents in the European power sector due to carbon trading

  • Keppler, Jan Horst
  • Cruciani, Michel

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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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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  1. Jos Sijm & Karsten Neuhoff & Yihsu Chen, 2006. "CO 2 cost pass-through and windfall profits in the power sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 49-72, January.
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  8. Cruciani, Michel & Kérébel, Cécile & Keppler, Jan Horst, 2008. "Le paquet énergie et climat du 23 janvier 2008 : un tournant pour l’Europe de l’énergie," Economics Papers from University Paris Dauphine 123456789/152, Paris Dauphine University.
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  10. 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.
  11. Cameron Hepburn & John Quah & Robert Ritz, 2006. "Emissions Trading and Profit-Neutral Grandfathering," Economics Series Working Papers 295, University of Oxford, Department of Economics.
  12. 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.
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