Emissions trading giving EU power companies huge windfall profits
07.04.08 @ 09:27
Power companies in five EU member states could realise windfall profits over the next four years of up to €71 billion as a result of the handing out of emissions allowances for free, according to a new report.
The power sector in Spain, Italy, Germany, the UK and Poland is set to benefit from profits equivalent to over double the GDP of Slovenia, during the second phase of the European emissions trading scheme (ETS) – the EU's flagship market-based mechanism for a progressive reduction of carbon emissions.
The five countries chosen by carbon market analysis firm Point Carbon in a study for the environmental organisation WWF were picked to provide coverage across different areas of Europe and to reflect different power market structures.
Under the ETS, companies face fines if they emit carbon in excess of certain levels. Companies can avoid these fines, however, if they purchase emissions permits. This increases the cost of energy produced by these firms, making renewable sources of energy – which do not emit carbon and so do not require the purchase of emissions permits – comparatively cheaper.
This is an important aspect of the scheme, as it delivers additional revenues to low-carbon forms of power generation such as wind energy, which benefit from the increase in the overall price of power without having to incur any additional costs themselves by having to purchase pollution allowances.
Moreover, the higher power price should reduce demand for power and also boost energy efficiency measures, thereby targeting sectors that are not part of the emissions trading scheme.
However, under the current, transitional system, many companies are issued the permits for free, allowing firms to benefit from passing on the cost of the pollution allowances into the price of power regardless of whether they have been allocated allowances for free or if they have had to buy them.
"Handing free pollution permits to power companies is like handing them a cash bonus," said Sanjeev Kumar, the WWF's ETS coordinator.
This 'cash bonus' rings in at between €6 and €15 billion for power generation companies in the UK, €14 and €34 for their counterparts in Germany, €1 and €4 billion in Spain, €6 and €9 billion in Italy and €2 and €9 billion in Poland - so long as the latter's energy market is liberalised and energy prices are no longer set by the government.
Recognising the problem, the EU is currently negotiating how the ETS will work from 2013 onwards and has proposed that the power sector should have to buy all of the pollution permits it needs to cover emissions – something many companies are strongly lobbying against.
German utilities would gain the highest profits per mega watt hour as a result of, among other reasons, the high carbon-intensity of power generation in the country – a sector that is dominated by coal.
Across Europe, burning coal to generate electricity already accounts for about 1 billion tonnes of CO2 emissions per year within - or about 20 percent of all EU's greenhouse gas emissions.
The WWF is concerned that the ETS is financially rewarding some of the worst carbon polluters in the EU.
The report comes out as James Hansen, one of the planet's leading climate scientists and head of the NASA Goddard Institute for Space Studies, warned that the EU's current emissions reductions target – the strictest in the world - is not strict enough.
Mr Hansen said that the EU target of 550 parts per million of CO2 should be cut to 350 parts per million.
At 550 ppm, global average temperatures would rise by six degrees Celsius. According to previous research, such a concentration of carbon in the atmosphere would only result in a rise of three degrees.