The report addresses crucial elements of a debate around EU proposals to move to full auctioning of all allowances for the power industry, from 2013 – after disastrous experiences with over-allocation of free allowances and rampant criticism of windfall profits flowing to some of the most polluting of power generators.
The report finds that in liberalised, competitive markets such as Germany power producers integrated both fuel costs and the value of carbon allowances into power prices, regardless of whether the allowances were allocated for free, auctioned or bought on the market.
When allowances are handed out for free, as was the case in phase 1 (2005-2007) and is still the case for the majority of allowances in phase 2 (2008-2012) of the system, free allocation results in massive windfall profits for electric utilities. In Germany this leads to additional profits of up to 34 billion euros for German electricity suppliers until 2012, a recent WWF showed.
Power prices in Poland, where the protected electricity market was abandoned in 2007 under pressure from the European Commission, now similarly reflect the passing of carbon value through to consumers despite power producers receiving allocations for free.
The study anticipated that like Poland, the liberalizing Hungarian and Czech power markets were “likely to be sufficiently competitive by 2013 to allow wholesale electricity prices to fully reflect short run marginal costs” including the value of carbon even if it was not a cost to producers.
Maintenance of current regulatory structures – in effect a halt to the prevailing trend to competitive markets – would see some price increases associated with auctioning permits, but these were “significantly less than the price increases predicted by some industry and government studies”.
“Free allocation or auction in the end will rather be a question of channelling the money either into the coffers of the power companies or into climate change policies both in Europe and developing countries,” said Sanjeev Kumar, Emissions Trading Scheme Coordinator at WWF.
The study found other benefits from auctions besides curbing windfall profits to utilities and opening up the possibility of an income stream for efforts to fight climate change. These included doing away with the time, effort, legal challenges and market distortions resulting from intense lobbying for free allocations and the administrative complexities and potential errors of governments making allocations. Giving businesses free allocations of emission permits also dramatically reduced the incentives for them to invest in reducing their carbon emissions.
EU emissions from coal still account for over 20 percent of greenhouse gas emissions in Europe, and the studied nations have some of the highest proportions of electricity generated from coal. “Auctioning allowances will fill in the missing link between giving a price to carbon emissions through an Emissions Trading System and having the producer of emissions face a cost they need to act on,” Kumar said.
“Countries like the United States and Australia, where emissions trading systems are being actively considered, should disregard the self-interested clamour from industry and learn from Europe's sorry experiences with free allocations of carbon polluting allowances to large scale carbon polluters.”