Theoretical Issues and Empirical Analyses
- New Horizons in Environmental Economics series
Edited by Francesco Gullì
Chapter 4: From Electricity Prices to Electricity Costs: Impact of Emissions Trading on Industry’s Electricity Purchasing Strategies
4. From electricity prices to electricity costs: impact of emissions trading on industry’s electricity purchasing strategies1 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...
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