Tuesday, May 29, 2007

Big Profits For Carbon Generators

Financial Times - May 18 2007 - Power generators will make tens of billions of euros in profit from the second phase of the European Union’s emissions trading scheme, according to predictions in an analysis of the market released on Friday.

The second phase of the scheme, which imposes a limit on carbon dioxide emissions from industry, will run from 2008 to 2012. Businesses covered by the scheme are issued with allowances for the amount of carbon they may emit; cleaner companies can sell their excess quotas to others who need to emit more than their share.

Electricity generators are expected to profit by passing on the cost of buying allow­ances to customers in lib­­eralised electricity markets.

The Carbon Trust, the UK government-funded body that conducted the analysis, found that power companies made more than €1bn ($1.4bn, £864m) from the first phase of the scheme, which began on January 1 2005 and runs to the end of this year. That is because the generators received their allowances without charge from their governments but passed on to consumers the notional cost of having to buy them in the market.

In addition, the analysis found the scheme would fail to reduce greenhouse gas emissions from new investments, because most member state governments had put aside large numbers of allowances for new entrants, or companies that started up operations after the scheme was introduced.

Michael Grubb, the chief economist at the Carbon Trust, said: “In effect, the cost of carbon at the point of the investment decision by a new investor is zero. They will not be held to account for their emissions.”

In many countries, entrants investing in high carbon fuels such as coal and lignite receive even more free allowances than investors in lower carbon technologies. In order to prevent companies from making excessive profits from the trading scheme, governments can force companies to buy some of their allowances at auction rather than giving them out free.

However, across the EU, governments plan to auction only 1.5 per cent of the available allowances in the second phase. That will severely limit the impact of auctioning, according to the trust.

But Prof Grubb said more allowances might end up being auctioned, because governments retained the right to auction up to 10 per cent of their allowances.

In the first phase, governments gave out too many allowances, so the price of carbon allowances collapsed and, as a result, companies had little incentive to reduce emissions.

But most member states propose to tighten emissions caps substantially in the second phase. Analysts expect the price of carbon to be €18 to €20 in the second phase of the scheme.

Copyright The Financial Times Limited 2007