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

摘要: 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 charge. This paper demonstrates that such cost-free allocation, commonly called grandfathering, implies an increase electricity prices even when strong competition prevails on markets. As our estimations for Germany's power sector show, these price increases result substantial windfall profits, giving rise public skepticism and calls auctioning certificates future. While empirical evidence ETS' impacts scant, findings reviewed here indicate absence certificate auctioning, energy-intensive industry sectors, as primary aluminum production, may suffer heavily from ETS-induced increases. We therefore argue abrupt transition complete system endanger competitive position industries Europe, unless all other major industrial countries are integrated into global emissions trading system.