Markets for Carbon and Power Pricing in Europe

Markets for Carbon and Power Pricing in Europe

Theoretical Issues and Empirical Analyses

New Horizons in Environmental Economics series

Edited by Francesco Gullì

Why do power prices seem to be correlated with the carbon price in some markets and not in others? This crucial question is at the centre of Francesco Gullì’s enlightening book, through which the contributing authors investigate a number of related issues. In particular, they explore why power firms are not consistent in passing-through into power prices the opportunity cost of carbon. They also examine the relationship between the pass-through mechanism and the structure of the power market.

Chapter 4: From Electricity Prices to Electricity Costs: Impact of Emissions Trading on Industry’s Electricity Purchasing Strategies

Julia Reinaud

Subjects: economics and finance, energy economics, environmental economics, environment, environmental economics


1 Julia Reinaud INTRODUCTION 4.1 The European Union introduced the European Emissions Trading Scheme (EUETS) on 1 January 2005, which sets caps for the CO2 emissions of some 11,500 plants across the EU25. Installations have the flexibility to increase emissions above their caps provided that they acquire emission allowances to cover emissions above that level. Installations with emissions below caps are allowed to sell unused allowances. The EU ETS has sparked a vibrant EU allowance (EUA) market, with transactions totalling €28 billion in 2007 (PointCarbon, 2008), and created a visible price of CO2. This price is now another cost component of covered installations, including power generators, by far the largest emitter in the scheme. Other local or regional governments are at various stages of discussion or implementation of emissions trading schemes (Reinaud and Philibert, 2007). With the introduction of CO2 emission constraints on power generators in the EU, climate policy is starting to have notable effects on energy markets. The rise in electricity prices over the last few years has taken place in a context of high fossil-fuel prices, with an upward trend in oil and gas prices. Since 2005, electricity prices have been affected by two major fundamental changes: an increase in fossil-fuel prices and natural gas in particular, and the introduction of a CO2 price, itself boosted by gas prices.2 The two factors have been compounded into higher market prices – and costs – for energy-intensive users (see Figure 4.1). This chapter sheds light on the links...

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