Tuesday, May 22, 2007

Power companies make a mint from the ETS

Europe’s power companies have made well over €1 billion profits from the EU ETS (Emissions Trading Scheme) to date and the sector will make net profits of €tens of billions during Phase II of the ETS, according to the Carbon Trust.

The EU-ETS needs reforming since it is perversely encouraging some signatories to increase carbon emissions.

Most National Allocation Plans (NAPs) offer free carbon allowances to new entrants. In around half of the NAPs, including the German plan, the new entrant rules actually give higher numbers of free allowances to more carbon intensive fuels, such as coal and lignite, which creates a perverse incentive to build new power facilities that emit high levels of CO2.

Professor Michael Grubb, Chief Economist at the Carbon Trust and Executive Director of Climate Strategies, says:
“Too many countries are using special provisions to try and protect carbon intensive investments. [Instead] policy, on a national and pan-EU level, should be focused on investing in low carbon alternatives.”

The Trust is arguing that Member States adopt a higher level of auctioning in Phase II.

They should also rapidly define a third Phase that addresses the problems surrounding new entrant rules and creates sufficient certainty to encourage long lived investments.

The Carbon Trust also found that:
• the EC last year turned a set of proposed allocation plans that represented a 5 per cent increase on CO2 emissions above verified 2005 levels, into a five per cent decrease below 2005 levels

• Carbon price remains uncertain

• if the carbon price remains positive, this will drive some abatement, particularly in power generation and cement manufacturing

• Power companies will still make big profits

• More auctioning will be important in Phase II and beyond - the current NAPs only propose a small amount of auctioning but governments retain the right to decide to auction more. This could be effective to improve incentives for low carbon investment by using auction revenues to support such investment; by reducing peverse incentives and by enabling a reserve auction price that would help to stabilise price expectations

• Attention to detail will be critical in Phase III – real focus needs to be placed on the details of scheme design that affect individual investment incentives, in particular new entrant and closure rules, in Phase III - going beyond the focus on volumes and prices that has dominated debate on Phase II allocations.

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