The impact of the EU ETS on electricity prices.
Final report to DG Environment of the European Commission
On February 2, 2009, a revised edition of the report has been released, including some adjustments and editorial corrections particularly in Section 2.2 and Appendix A. The present study analyses the impact of the EU Emissions Trading Scheme (ETS) on electricity prices, in particular on wholesale power markets across the EU. To study this impact, it uses a variety of methodological approaches, including theoretical, empirical, model, literature and policy analyses.
The study shows that a significant part of the costs of freely allocated CO2 emission allowances is passed through to power prices, resulting in higher electricity prices for consumers and additional (‘windfall’) profits for power producers. In addition, it discusses some policy implications of the pass-through of these costs. It concludes that the pass-through of CO2 costs to electricity prices is a rational, carbon-efficient policy, while the issue of windfall profits can be addressed by either taxing these profits or auctioning - rather than free allocations - of the emission allowances.