Wednesday, November 09, 2005

Polluter pays, or polluter gets paid?

'Polluter pays' is a basic principle in environmental policy, but this seems not what's happening in the EU Emission Trading Scheme (ETS). There are increasing evidence that utilities pass through to their customers the value of the carbon certificates that they have received free of charge, increasing electricity prices by up to 10 euro/MWh. According to the German Association of the chemical industry, this creates windfall profits of more than 5 billion euro per year for the German power sector.
The fact that power generators are apparently capable of passing through this charge in a market that is 100% liberalised was a surprise to many. The question therefore can be asked whether the electricity market operates as expected, and whether users can choose their supplier.
With this transfer of wealth between market actors taking place, there is little evidence so far of real investment in CO2 reduction taking place. This is a missed opportunity, since the European Climate Change Programme has identified back in 2001 over 700 million tonnes of potential reduction of CO2 emissions at a cost of less than 20 euro/tonne. Directing 5 billion euro per year towards such investments would have a significant impact on EU emissions: at least 6% reduction.
A recent report from ECN uses empirical and statistical analyses to estimate pass-through rates, and finds in 4 countries (Germany, Belgium, France and the Netherlands) that carbon certificates have been charged to customers over the period January - July 2005. The report mentions as well that 10 billion emission allowances of 1 tonne CO2 will be allocated for the period 2008-2012, representing a value of more than 200 billion euro at today's trading price. It is therefore time to make changes and to start harnessing the power of carbon markets for moving towards a sustainable energy system.

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