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Emissions Trading: Impact on Electricity Prices and Energy-Intensive Industries

Author

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  • Frondel, Manuel
  • Schmidt, Christoph M.
  • Vance, Colin
Abstract
The EU-wide Emission Trading Scheme (ETS), established in 2005, is a key pillar of Europe¿s strategy to attain compliance with the Kyoto Protocol. Under this scheme, CO2 allowances have thus far been allocated largely free of charge. This paper demonstrates that such cost-free allocation, commonly called grandfathering, implies an increase in electricity prices even when strong competition prevails on electricity markets. As our estimations for Germany¿s power sector show, these price increases result in substantial windfall profits, giving rise to public skepticism and calls for an auctioning of certificates in the future. While empirical evidence on the ETS¿ impacts is scant, the findings reviewed here indicate that even in the absence of certificate auctioning, energy-intensive industry sectors, such as primary aluminum production, may suffer heavily from the ETS-induced electricity price increases. We therefore argue that an abrupt transition to a complete auctioning system may endanger the competitive position of energy-intensive industries in Europe, unless all other major industrial and transition countries are integrated into a global emissions trading system.

Suggested Citation

  • Frondel, Manuel & Schmidt, Christoph M. & Vance, Colin, 2008. "Emissions Trading: Impact on Electricity Prices and Energy-Intensive Industries," Ruhr Economic Papers 81, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:81
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    References listed on IDEAS

    as
    1. Patrick Graichen & Till Requate, 2005. "Der steinige Weg von der Theorie in die Praxis des Emissionshandels: Die EU‐Richtlinie zum CO2‐Emissionshandel und ihre nationale Umsetzung," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 6(1), pages 41-56, February.
    2. Damien Demailly & Philippe Quirion, 2006. "CO 2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: grandfathering versus output-based allocation," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 93-113, January.
    3. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2002. "The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances," The Electricity Journal, Elsevier, vol. 15(5), pages 51-62, June.
    4. Jos Sijm & Karsten Neuhoff & Yihsu Chen, 2006. "CO 2 cost pass-through and windfall profits in the power sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 49-72, January.
    5. Damien Demailly & Philippe Quirion, 2006. "CO 2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: grandfathering versus output-based allocation," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 93-113, January.
    6. Damien Demailly & Philippe Quirion, 2006. "CO2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: Grandfathering vs. output-based allocation," Post-Print halshs-00639327, HAL.
    7. E. Raphael Branch, 1993. "Short Run Income Elasticity of Demand for Residential Electricity Using Consumer Expenditure Survey Data," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 111-122.
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    Cited by:

    1. Alberini, Anna & Gans, Will & Velez-Lopez, Daniel, 2011. "Residential consumption of gas and electricity in the U.S.: The role of prices and income," Energy Economics, Elsevier, vol. 33(5), pages 870-881, September.
    2. Zeng, Yingying, 2017. "Indirect double regulation and the carbon ETSs linking: The case of coal-fired generation in the EU and China," Energy Policy, Elsevier, vol. 111(C), pages 268-280.

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    More about this item

    Keywords

    Grandfathering; auctioning; competition;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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