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CO2 cost pass-through and windfall profits in the power sector

TLDR
In this article, the authors analyzed the implications of the EU ETS for the power sector, notably the impact of free allocation of CO2 emission allowances on the price of electricity and the profitability of power generation.
About
This article is published in Climate Policy.The article was published on 2006-01-01 and is currently open access. It has received 642 citations till now. The article focuses on the topics: Windfall gain & Marginal product.

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The ETS Reform and Carbon Leakage: Economic Analysis of the New ETS Directive

TL;DR: In this paper, the authors analyze the major provisions of the 2008 European Commission Proposal for a new ETS Directive and analyze if and how the ETS functioning will be improved during the post-Kyoto trading period (2013-2020).

Carbon price as renewable energy support ? Empirical analysis on wind power in denmark

Claire Gavard
TL;DR: In this article, the impact of electricity price and support policies on the observation of new turbine connections to the grid was investigated and the probability of new connections as a function of the support level and the policy type was used to give an indication of the carbon price level that would support similar renewable deployment.

"Monopolies in Two-Sided Markets: Comparative Statics and Identification" - eScholarship

E. Glen Weyl
TL;DR: In this article, the authors provide a full set of comparative statics for three models, one that generalizes that of Rochet and Tirole (2003), a second generalizes Armstrong (2006) and a third that fuses the two models.

Sustainability-oriented Future EU Funding : A European Nuclear Power Tax

TL;DR: Nuclear power plays an important role in Europe's energy mix today, considering the manifold environmental and health hazards related to all phases of nuclear power production which may cause consi... as mentioned in this paper.
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Effect of Perform-Achieve-Trade Policy on Energy Efficiency of Indian Industries: Evidence from Fertilizer Industry

Hena Oak, +1 more
TL;DR: In this article, the authors examined the effectiveness of the PAT scheme on inducing firms to reduce energy intensity of Cement, Fertilizer, and Pulp and Paper Industries.
References
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Journal ArticleDOI

Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector

TL;DR: In this paper, the authors provide a framework to assess the economic incentives and distortions that provisions in NAPs can have on market prices, operation and investment decisions, and use both analytic models to illustrate the effects of the incentives, and results from numerical simulation runs that estimate the magnitude of impacts from different allocation rules.

CO2 price dynamics. The implications of EU emissions trading for the price of electricity

TL;DR: In this paper, the authors analyzed the relationship between EU emissions trading and power prices, notably the implications of free allocation of emissions allowances for the price of electricity in countries of North-western Europe.
Posted Content

The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances

TL;DR: In this article, the authors show that owners of existing generation assets may be better off paying for carbon dioxide emission allowances than having them distributed for free, and that it takes just 7.5% of the revenue raised under an auction to preserve the asset values of existing generators.
Journal ArticleDOI

The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances

TL;DR: In this article, the authors show that owners of existing generation assets may be better off by paying for carbon dioxide emission allowances rather than having them distributed for free, and that it takes just 7.5 percent of the revenue raised under an auction to preserve the asset values of existing generators.
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Frequently Asked Questions (9)
Q1. What have the authors contributed in "Cp_61_47_sijm.pmd" ?

This article analyses the implications of the EU ETS for the power sector, notably the impact of free allocation of CO 2 emission allowances on the price of electricity and the profitability of power generation. As well as some theoretical reflections, the article presents empirical and model estimates of CO 2 cost pass-through for Germany and The Netherlands, indicating that pass-through rates vary between 60 and 100 % of CO 2 costs, depending on the carbon intensity of the marginal production unit and various other marketor technology-specific factors. 

A main purpose of the free allocation of emissions allowances under the US capand-trade programmes for SO2 and NO x , as well as under the EU ETS for CO 2 , is to obtain thepolitical support of large emitters. 

if the infra-marginal unit is more carbon-intensive than the marginal unit, it suffers from a loss, as the increase in power price is lower than the increase in its carbon costs per MWh; notably if allowances have to be bought on the market. 

The extent to which carbon costs are passed through to power prices also depends on changes in the merit order of the supply curve due to emissions trading. 

CO2costs of gas-generated power have also increased over this period, but less dramatically, i.e. from d4 to d11/MWh (partly due to the relatively low – but constant – emission factor of gas-generated electricity). 

As coal generators benefit from this gas cost-induced increase in power prices, this leads to an overestimation of the pass-through rate of CO2 costs for coal-generated power. 

Earthscanshows the costs of CO 2 allowances required to cover the emissions per MWh generated by a coalfired power plant (with an emission factor of 0.85 tCO 2 /MWh). 

in the latter case, some grandfathering to this inframarginal unit may be justified to break even, depending on the relative carbon intensity of this unit. 

While all generators profit from the higher prices, the effect of a smaller market dominates this effect and therefore slightly reduces their revenues.