IDEAS home Printed from https://ideas.repec.org/p/enp/wpaper/eprg0617.html
   My bibliography  Save this paper

CO2 cost pass through and windfall profits in the power sector

Author

Listed:
  • Jos Sijm

    (Energy research Centre of the Netherlands, Amsterdam)

  • Karsten Neuhoff

    (University of Cambridge, Faculty of Economics)

  • Yihsu Chen

    (The Johns Hopkins University, Department of Geography and Environmental Engineering, St. Baltimore, USA)

Abstract

This paper analyses 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. Besides some theoretical reflections, the paper presents empirical and model estimates of CO2 cost pass through, indicating that pass through rates vary between 40 and 100 percent of CO2 costs, or - in absolute terms - between 3 and 18 €/MWh, depending on the carbon intensity of the marginal production unit and other, market or technology specific factors concerned. As a result, power companies realise substantial windfall profits, indicated by empirical and model estimates presented in the paper. In order to avoid these windfall profits, the paper concludes that free allocation to power companies should be phased out in favour of auctioning.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jos Sijm & Karsten Neuhoff & Yihsu Chen, 2006. "CO2 cost pass through and windfall profits in the power sector," Working Papers EPRG 0617, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
  • Handle: RePEc:enp:wpaper:eprg0617
    as

    Download full text from publisher

    File URL: https://www.jbs.cam.ac.uk/wp-content/uploads/2023/12/eprg-wp0617.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Karsten Neuhoff & Kim Keats Martinez & Misato Sato, 2006. "Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 73-91, January.
    2. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2002. "The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances," The Electricity Journal, Elsevier, vol. 15(5), pages 51-62, June.
    3. Burtraw, Dallas & Palmer, Karen L. & Kahn, Danny, 2005. "Allocation of CO2 Emissions Allowances in the Regional Greenhouse Gas Cap-and-Trade Program," Discussion Papers 10650, Resources for the Future.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hammoudeh, Shawkat & Nguyen, Duc Khuong & Sousa, Ricardo M., 2014. "What explain the short-term dynamics of the prices of CO2 emissions?," Energy Economics, Elsevier, vol. 46(C), pages 122-135.
    2. Schleich, Joachim & Rogge, Karoline S. & Betz, Regina, 2008. "Incentives for energy efficiency in the EU Emissions Trading Scheme," Working Papers "Sustainability and Innovation" S2/2008, Fraunhofer Institute for Systems and Innovation Research (ISI).
    3. Karsten Neuhoff & Robert A. Ritz, 2019. "Carbon cost pass-through in industrial sectors," Working Papers EPRG1935, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    4. Karen Palmer & Dallas Burtraw & Danny Kahn, 2006. "Simple rules for targeting CO 2 allowance allocations to compensate firms," Climate Policy, Taylor & Francis Journals, vol. 6(4), pages 477-493, July.
    5. Burtraw, Dallas & Kahn, Danny & Palmer, Karen, 2006. "CO2 Allowance Allocation in the Regional Greenhouse Gas Initiative and the Effect on Electricity Investors," The Electricity Journal, Elsevier, vol. 19(2), pages 79-90, March.
    6. Bushnell, James & Chen, Yihsu, 2012. "Allocation and leakage in regional cap-and-trade markets for CO2," Resource and Energy Economics, Elsevier, vol. 34(4), pages 647-668.
    7. Karoline S. Rogge & Christian Linden, 2010. "Cross-Country Comparison of the Incentives of the EU Emission Trading Scheme for Replacing Existing Power Plants in 2008–12," Energy & Environment, , vol. 21(7), pages 757-783, November.
    8. Liu, Liwei & Sun, Xiaoru & Chen, Chuxiang & Zhao, Erdong, 2016. "How will auctioning impact on the carbon emission abatement cost of electric power generation sector in China?," Applied Energy, Elsevier, vol. 168(C), pages 594-609.
    9. Demailly, Damien & Quirion, Philippe, 2008. "Changing the Allocation Rules in the EU ETS: Impact on Competitiveness and Economic Efficiency," Climate Change Modelling and Policy Working Papers 46623, Fondazione Eni Enrico Mattei (FEEM).
    10. Yu-Jie Hu & Lishan Yang & Fali Duan & Honglei Wang & Chengjiang Li, 2022. "A Scientometric Analysis and Review of the Emissions Trading System," Energies, MDPI, vol. 15(12), pages 1-20, June.
    11. Hu, Hui & Qi, Shaozhou & Chen, Yuanzhi, 2023. "Using green technology for a better tomorrow: How enterprises and government utilize the carbon trading system and incentive policies," China Economic Review, Elsevier, vol. 78(C).
    12. Meunier, Guy & Ponssard, Jean-Pierre & Quirion, Philippe, 2014. "Carbon leakage and capacity-based allocations: Is the EU right?," Journal of Environmental Economics and Management, Elsevier, vol. 68(2), pages 262-279.
    13. Palmer, Karen & Paul, Anthony, 2015. "A Primer on Comprehensive Policy Options for States to Comply with the Clean Power Plan," RFF Working Paper Series dp-15-15, Resources for the Future.
    14. Sterner, Thomas & Muller, Adrian, 2006. "Output and Abatement Effects of Allocation Readjustment in Permit Trade," RFF Working Paper Series dp-06-49, Resources for the Future.
    15. Anger, Niels & Oberndorfer, Ulrich, 2008. "Firm performance and employment in the EU emissions trading scheme: An empirical assessment for Germany," Energy Policy, Elsevier, vol. 36(1), pages 12-22, January.
    16. Thereza RS de Aguiar, 2018. "Turning accounting for emissions rights inside out as well as upside down," Environment and Planning C, , vol. 36(1), pages 139-159, February.
    17. Bin Ye & Jingjing Jiang & Lixin Miao & Ji Li & Yang Peng, 2015. "Innovative Carbon Allowance Allocation Policy for the Shenzhen Emission Trading Scheme in China," Sustainability, MDPI, vol. 8(1), pages 1-23, December.
    18. Johan Eyckmans & Cathrine Hagem, 2009. "The European Union's Potential for Strategic Emissions Trading through Minimal Permit Sale Contracts," CESifo Working Paper Series 2809, CESifo.
    19. Anke, Carl-Philipp & Hobbie, Hannes & Schreiber, Steffi & Möst, Dominik, 2020. "Coal phase-outs and carbon prices: Interactions between EU emission trading and national carbon mitigation policies," Energy Policy, Elsevier, vol. 144(C).
    20. Hirth, Lion & Ueckerdt, Falko, 2013. "Redistribution effects of energy and climate policy: The electricity market," Energy Policy, Elsevier, vol. 62(C), pages 934-947.

    More about this item

    Keywords

    Emissions trading; allocation; CO2 cost pass through; windfall profits; power sector;
    All these keywords.

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:enp:wpaper:eprg0617. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ruth Newman (email available below). General contact details of provider: https://edirc.repec.org/data/jicamuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.