germany: April 25, 2008

According to a new report by the World Wildlife Fund (WWF), over the next four years, power companies in five EU countries could reap profits in excess of €70 billion due to continued allocation of free CO₂ emission permits.

The report prepared by the market research firm Point Carbon, provides a calculation of the likely windfall or excess profits that will be made by energy firms in Germany, Italy, Poland, Spain, and the United Kingdom during the second phase (2008-2012) of the EU Emissions Trading Scheme or ETS.

Most of the profits are expected in Germany where firms could cash in on up to €34bn. The United Kingdom’s power sector could collect up to €15bn with significantly lower excess profits estimated for firms in the remaining three countries.

EU consumers will inevitably face higher energy bills over the coming years as firms face higher costs for producing “clean” or low CO₂ electricity according to the Commission which estimates that energy prices will rise by 10 to 15 percent by 2020. However, the handing out of free pollution allowances under EU guidelines pushes prices even higher as firms are simply passing on to consumers the extra cost of CO₂ permits even if they did not have to actually purchase the emission rights. Additionally, providing a free allocation to an individual plant that is carbon intensive does reduce the incentives provided by the scheme to invest in low emissions generation technology – thereby undermining one of the main aims of the ETS.

The aforementioned situation has led to strong criticism of the EU’s nascent carbon market.

The Commission states that it intends to correct the situation of excess profits derived from free pollution credits as the new scheme commences in 2013. After that date, power companies will need to obtain all of their CO₂ emissions permits at auction.