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 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

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


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...

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