Theoretical Issues and Empirical Analyses
New Horizons in Environmental Economics series
Edited by Francesco Gullì
Chapter 5: 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
5. 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 Jos Sijm, Sebastiaan Hers and Bas Wetzelaer INTRODUCTION 5.1 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...