From: WWF
Published April 14, 2008 08:52 AM

EU carbon market sets up another round of windfall profits for dirtiest power generators

Polluting electricity generators in Europe are set to reap another round of extraordinary windfall profits from the carbon trading scheme meant to curb their carbon emissions, a new report revealed today.

The study, commissioned by WWF from world-leading carbon market analysts Point Carbon, estimates that the windfall to electricity generators in just the five states of UK, Germany, Spain, Italy and Poland over the current five year phase of the EU Emissions Trading System (ETS) could be between 23 and 71 billion Euros ($US 36 -111 billion ).

Windfall profits are generated when generators benefit from electricity prices reflecting the cost of carbon emissions while receiving the bulk of their carbon emission allowances (EU Allowances) for free under National Allocation Plans.

“Windfall profits are highest in countries that have a high level of pass-through of CO2 costs into wholesale power prices, countries with emissions intensive (coal) plant setting the price the majority of the time, and countries that allocate the highest percentage of free allowances to the power sector,” Point Carbon said in the report.

Coal fired power stations account for 20 percent of the EU's total carbon dioxide emissions, and its grip on the European power sector looks set to increase with plans to construct 40 major new coal fired power stations in Europe in the next five years.

WWF has always supported the EU ETS as a crucial mechanism to tackle emissions within the EU, but notes that careful implementation is required for such schemes to achieve their potential. “We have long been critical of the ETS design faults that provide cash for coal in the name of emissions reductions”, said Sanjeev Kumar, WWF Emissions Trading Scheme Coordinator at WWF. “But Europe’s experience should be a stark warning to the rest of the world on the danger of free allocations of pollution permits.”

Point Carbon identified the free handouts of EUAs as the central mechanism of the windfall profits, which on various carbon price and cost pass-through estimates are expected to be worth €14-34 billion ($US 22-53 billion) to Germany’s generators (70 per cent dependant on coal power), and €6-15 billion ($US 9.5-23.5 billion ) to UK generators where coal and gas thermal capacity is more evenly balanced.

The findings of the study are highly relevant to nations like the US, Japan and Australia, where the desirability and design of emissions trading schemes are being considered as key elements of national responses to the challenge of climate change. WWF is concerned that power generators in these areas will lobby for free allocations under “grandfathering” schemes where allowances are provided for free to power stations on the basis of historic or anticipated emissions or “benchmarking” where free allowances are allocated on the basis of industry or emission reduction plans.

Point Carbon notes that windfall profits for carbon intensive power generators fall towards zero where all permits are auctioned, the allocation method preferred by economists and environmentalists. European nations were entitled to auction up to 10 per cent of allowances in the second phase of the ETS (2008-2012), but in practice Member States overall have opted to auction only four per cent. “The free handouts of pollution permits to the power sector must not be allowed to continue beyond 2012,” said Kumar, noting that WWF commends current EU proposals that the power sector buy all required permits from 2013 on.

However, there are increasing concerns that the requirement will be reversed or weakened during political negotiations on the future design of the scheme. “WWF would like to see revenues from the auctioning of the pollution permits re-invested in climate protection measures in Europe and developing countries, in line with the financial commitments made at the Bali climate change conference at the end of last year” Kumar said. “We feel sure that European power consumers would prefer this over funding windfall profits for the most polluting of power generators.”

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