CO 2 cost pass-through and windfall profits in the power sector

“Tentative ex post estimates on pass-through-rates come to the conclusion that peakload periods offer opportunities to pass through costs in the order of 41 % and 117 % (SIJM et al. 2005, 2006; HUCHLER 2007).”

“Third, there is evidence that fossil fuel power plants experienced windfall profits from free allocation of emission allowances and carbon cost pass-through under the EU ETS (e.g., Sijm et al. 2006).”

“Sijm et al. (2006) calculate empirical pass-through rates of between 60% and 117% for 2005 for Germany.”

“Sijm et al. (2006) test empirically if a change in the permit price is passed through on theend prices and find strong evidence for so called windfall profits for German and Dutch electricity producers.”

“…deutschen Stromerzeugung ausgegangen und angenommen wird, dass im Schnitt 80 % der CO2-Opportunitätskosten auf die Kunden abgewälzt werden können (Sijm et al. 2006: 67), so ergibt sich bei dem im Jahr 2010 vorherrschenden Zertifikatpreis von durchschnittlich 15 € /t CO2 ein Aufschlag auf den…”

“For example, it is well documented that granting free allocation based on a historic emission baseline (ex-ante allocation), as was done during the two initial phases (2005-2012) of the EU ETS, can create early action problems and other economic distortions, and over compensate polluters resulting in large windfall pr…”

“Sijm et al. (2006) estimated annual windfall profits for electricity generators situated in Belgium, France, Germany, and the Netherlands at between € 5.3 and € 7.7 billion at a carbon price of 20 €/tCO2 and a level of free allocation of 90%.”

“Sijm et al (2006) argue that the introduction of European Emission Trading Scheme (ETS) contracts in 2005 raised the spot price level in the Nordic market.”

“Other studies have shown that, under the cost constraints of market-incentive ERP, companies generally seek to reduce their costs to alleviate the economic pressure of their own environmental pollution [13, 14].”

“The latter has been discussed under the label of "windfall profits" in the EU ETS: Firms receive a large share of their allocation for free, but nevertheless pass through the opportunity costs of emissions to consumers (Neuhoff et al., 2006; Sijm et al., 2006).”

“Using different econometric techniques, Sijm et al. (2006), Bunn and Fezzi (2007), Zachmann and von Hirschhausen (2008), Fabra and Reguant (2014), Wild et al.”

“, Tietenberg, 2013) broadly accepts such policy realism, and key papers have highlighted the tight limits needed on free permits or tax thresholds to avoid the injustice of giving polluters large windfall profits (e.g., Bovenberg and Goulder, 2001; Sijm et al., 2006), but several authors still study or even recommend…”

“2 Power companies in the European Union earned large windfall profits when the CO2 cap was first introduced (e.g., Sijm et al. 2006).”

“Actually, empirical research of European electricity prices strongly suggest that 60% to 100% of carbon price is pass through to the consumers [ 1 ].”

“The degree to which companies can pass costs on to consumers will depend on the development of carbon-free power generation, consumer demand response to increasing energy prices and regulatory processes that determine local electricity rates 43,44 .”

“In 2018, emission allow-ances were included in the Markets in Financial Instruments Directive II (MiFID II) imposing trading authorization, transparency requirements, reporting obligations, anti-money laundering rules, etc. 1”

“…literature provides evidence that electric utilities, which are subject to stringent air pollution regulations, place most of the burden of their compliance costs on consumers in the form of higher electricity prices (Sijm et al., 2006; Fabra and Reguant 2014; Hintermann 2016; Krumholz 2019).”

“…program, but in fact, this approach lost support once it became clear that under Europe’s CO2 Emissions Trading System, power companies were earning large windfall profits because the value of allowance giveaways to these entities greatly exceeded their compliance costs (e.g., Sijm et al. 2006).”

“Walker (2006) conducts a comparable study for the European cement sector.”

“SO 2 ETS increases the environmental cost of enterprises (Sijm et al., 2006 [11]; Fabra and Reguant, 2014 [12]).”

“Sijm et al. (2006) report a cost pass-through of about 60–117% for Germany, and of 64–81% for the Netherlands.”

“Sijm et al. (2006) analysed the implications of the EU ETS for the power sector and presented empirical estimates of CO2 cost pass-through for Germany and The Netherlands, indicated that the passthrough rates vary between 60% and 100% of CO2 costs.”

“The existence of the pass-through effect has been already proven for the energy sector during the first two trading phases of the EU ETS by Sijm, Neuhoff and Chen [38], Lise, Sijm and Hobbs [39].”

“The amount of the windfall profit of a company relies on the pass-through rates, which vary between 60% and 100% of the CO2 cost in the wholesale electricity markets of Germany and Netherlands [9], [31].”

“A study of the EU Emissions Trading Scheme by Sijm et al. (2006) estimated that for the German and Dutch power industries between 60 and 100 per cent of the market price of the permits was passed forward to consumers as higher electricity prices.”

“Even though Europe is far less dependent on fossil fuels for its electricity than Australia, <60 per cent, Sijm et al. (2006) estimate that between 60 and 100 per cent of the market price of tradable permits is passed forward as higher electricity prices.”

“Such a power plant is costly and may not turn a profit if it is not scaled correctly [2].”

“In Germany the proportion of carbon price transferred is about 100%, and in north Europe this ratio ranges from 75% to 95% (Atukia et al., 2006; Sijm et al., 2006).”

“Here, studies such as the GETS initiative by Eurelectric (2004), Sijm et al (2006), Smale et al (2006) examples of these studies are included in this volume.”

“CO2 abatement can be regarded, thus, as another variable cost for the firm ( Sijm et al. 2006 ).”

“Resources for the Future Burtraw 12 unanticipated earnings due to free allocation of emissions allowances in the European Union’s Emission Trading Scheme (Sijm et al. 2006).”

“This has amounted by conservative estimates to about € 8-10 billion (Sijm et al. 2006; Cramton and Kerr 2002; Hepburn et al. 2006; Neuhoff et al. 2006).”

“…that companies which were able to pass on the opportunity costs of EUAs to their customers enjoyed substantial windfall profits in the EU ETS, especially in the power and in several industry sectors (e.g. Sijm et al., 2006 ; Verde et al., 2019; Cludius et al., 2020; Dagoumas and Polemis, 2020).”

“In addition, Veith et al. (2009) by using a modified multifactor market similar to Eq.”

“However, evidence suggests that firms, despite receiving free carbon allowances, pass most carbon costs onto product prices (Sijm et al., 2006; Castagneto-Gissey, 2014; Fabra and Reguant, 2014; Hintermann, 2016; Dagoumas and Polemis, 2020; Liu et al., 2025).”

“Scholars such as Sijm [6] and Zachmannl [7] have also studied the conductivity of carbon prices in the context of the EU carbon market.”

“Reference [3] analyzes the carbon cost pass-through in Germany and the Netherlands by using marginal cost to conduct regression analysis.”

“Literature [23] further found that in the EU carbon market, the carbon price transfer rate of the power sector varies from country to country, with the lowest transfer rate of 5% and the highest transfer rate of 100%.”

“I first summarise the main findings of relevant review papers addressing the EU ETS, SRE support instruments, emission reductions, and firm performance. Oberndorfer, Rennings, & Sahin (2006) find that the results of the reviewed environmental regulation studies strongly depend on the reference scenario.”