CO2 cost pass through and windfall profits in the power sector

Jos Sijm, Karsten Neuhoff () and Yihsu Chen

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

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.

Keywords: Emissions trading; allocation; CO2 cost pass through; windfall profits; power sector (search for similar items in EconPapers)
JEL-codes: C81 L11 L94 (search for similar items in EconPapers)
Pages: 30
Date: 2006-05
New Economics Papers: this item is included in nep-ene and nep-env
Note: IO
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (282)

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http://www.electricitypolicy.org.uk/pubs/wp/eprg0617.pdf (application/pdf)

Related works:
Journal Article: CO 2 cost pass-through and windfall profits in the power sector (2006)
Working Paper: CO2 cost pass through and windfall profits in the power sector (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0639

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