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CO 2 cost pass-through and windfall profits in the power sector
Open accessAbstract
In order to cover their CO2 emissions, power companies receive most of the required EU ETS allowances for free. In line with economic theory, these companies pass on the costs of these allowances in the price of electricity. This article analyses the implications of the EU ETS for the power sector, notably the impact of free allocation of CO2 emission allowances on the price of electricity and the profitability of power generation. As well as some theoretical reflections, the article presents empirical and model estimates of CO2 cost pass-through for Germany and The Netherlands, indicating that pass-through rates vary between 60 and 100% of CO2 costs, depending on the carbon intensity of the marginal production unit and various other market- or technology-specific factors. As a result, power companies realize substantial windfall profits, as indicated by the empirical and model estimates presented in the article.
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“Since electricity prices are determined by marginal costs of the marginal production technology, often coal or gas, the opportunity costs created by free allowances were also included in electricity prices and led to an increase in firms ' profits, a phenomenon that has been labeled ' windfall profits ' (Wietze et al., 2010; Sijm et al., 2006).”
From The joint impact of the European Union emissions trading system on carbon emissions and economic performance (2023) · cites this paper as Sijm et al., 2006
In the citing paper
“Full carbon cost pass-through is observed in liberalized electricity markets (41, 42) but negligible in highly regulated markets such as South Korea (43).”
From Carbon Leakage, Consumption, and Trade (2022) · cites this paper as [41]
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Research works printed but not linked: 12
- 10.1016/S1040-6190(02)00316-0 · DOI
- Burtraw , D. , Palmer , K. and Kahn , D. 2005 . Allocation of CO2 Emissions Allowances in the Regional Greenhouse Gas Cap-and-Trade Program., RFF Discussion Papers 05 – 25 .
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- 10.1080/14693062.2006.9685589 · DOI · Paper page
- Reinaud , J. 2003 . Emissions Trading and its Possible Impacts on Investment Decisions in the Power Sector. IEA Information Paper Paris
- Reinaud , J. 2005 . Industrial Competitiveness under the European Union Emissions Trading Scheme. IEA Information Paper Paris
- Sijm , J. , Bakker , S. , Chen , Y. , Harmsen , H. and Lise , W. 2005 . CO2 Price Dynamics: The Implications of EU Emissions Trading for the Price of Electricity. ECN-C–05–081 Petten , , The Netherlands : Energy Research Centre of the Netherlands .
- Sijm , J. , Chen , Y. , ten Donkelaar , M. , Hers , S. and Scheepers , M. 2006 . CO2 Price Dynamics: A Follow-up Analysis of the Implications of EU Emissions Trading for the Price of Electricity, ECN-C–06–015 Petten , , The Netherlands : Energy Research Centre of the Netherlands .
- Stewart , M. and Wallis , K. 1981 . Introductory Econometrics, , 2nd edition Oxford : Basil Blackwell .
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Items 501–527 of 527
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Coggins, J. S., Goodkind, A. L., Nguyen, J., & Wang, Z. (2018) · Environmental and Resource Economics · doi:10.1007/s10640-018-0217-0 · Cited by 1
“5 See Burtraw et al. (2001), Palmer et al. (2006), Smale et al. (2006), Sijm et al. (2006), Burtraw and Evans (2008), Fan et al. (2010), Goulder et al. (2010) and Bushnell et al. (2012).”
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Núñez, A., & Pérez-Arriaga, I. (2014) · doi:10.1080/15567241003623611
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Moreno, M., & Dana, S. (2011) · doi:10.2139/ssrn.1808124
Economic Analysis of the European Climate Policy: the European emissions trading scheme
Cló, S. (2010) · AMS Dottorato Institutional Doctoral Theses Repository (University of Bologna) · doi:10.6092/unibo/amsdottorato/3197
“57 Stavins (2004) argues that when “costs are similar among sources, command-andcontrol instruments may perform equivalent to (or better than) market-based instruments, depending on transactions costs, administrative costs, possibilities for strategic behavior, political costs, and the nature of the pollutants” (p.”
BackgroundEmission Trading Scheme and the Price of Energy
Zanotti, G., & Gabbi, G. (2009) · doi:10.2139/ssrn.1473233
“It always pointed out specific factors: carbon intensity of power production for Sijm et al. (2006), oligopolistic markets for Honkatukia et al.”
Competitividad y fuga de carbono: el caso de la economía vasca
González-Eguino, M. (2009) · Ekonomiaz : Revista Vasca de Economía · doi:10.69810/ekz.0963
Interaction of carbon and electricity prices under imperfect competition
Chernyavs’ka, L., & Gullí, F. (2007) · doi:10.2139/ssrn.1031674
“Sijm et al. (2006) argue in favour of a full pass-through, especially in Germany.”
InfluentialMichaelowa, A. (2007) · doi:10.1080/14693062.2007.9685669
Supply-Side Crediting to Manage Climate Policy Spillover EffectsPreprint
Mehling, M. (2023) · SSRN Electronic Journal · doi:10.2139/ssrn.4491674
“…they have done so at the expense of muted abatement incentives and thus reduced climate benefits (Neuhoff et al. 2015), in some cases generating windfall profits (Sijm, Neuhoff, and Chen 2006) or incentivizing changes in production to increase benefits (Fischer and Fox 2007; Branger et al. 2015).”
BackgroundEnvironmental Violations in the Power Sector: Accountability and Community WelfarePreprint
Foroughi, P., Bahar, H. H., & Ng, L. (2023) · SSRN Electronic Journal · doi:10.2139/ssrn.4559526
The Missing Carbon Pass-through in China’s Electricity MarketPreprint
Wu, L., Zhang, N., & Zhou, Y. (2023) · SSRN Electronic Journal · doi:10.2139/ssrn.4604443 · Cited by 1
Chapter 9: Adam Smith on the Abuse of Markets
van Staveren, I. (2021) · Springer eBooks · doi:10.1007/978-3-030-57609-7_10
Durable by Design?: References
(2020) · Durable by Design? · doi:10.1017/9781108779869.014
Jordan, A., & Moore, B. (2020) · Durable by Design? · doi:10.1017/9781108779869.001
Jordan, A., & Moore, B. (2020) · Durable by Design? · doi:10.1017/9781108779869.015
Implications for Decision Theory, Enforcement, Financial Stability and Systemic Risk
Nwogugu, M. C. I. (2018) · Palgrave Macmillan UK eBooks · doi:10.1057/978-1-137-44701-2_13 · Cited by 2
Who is in the driver seat? : Evolution of actors in the renewable electricity industry
Darmani, A. (2015) · doi:10.20868/upm.thesis.45572
“In addition, these companies benefited from their assets in nuclear plants with no emissions (Sijm et al., 2006).”
BackgroundMarket failures in climate economics and finance
Werner, T. (2012) · doi:10.3929/ethz-a-007604164
“For a detailed discussion see Stock and Yogo (2002) and Cameron and Trivedi (2009).”
BackgroundHow Does Emissions Trading Influence Corporate Risk Management
Günther, E., Nowack, M., & Weber, G. (2011) · doi:10.1007/978-3-642-20592-7_8
“Thereby companies can benefit from windfall profits ( Sijm et al. 2006 ).”
BackgroundEllerman, A. D., Convery, F. J., & de Perthuis, C. (2001) · Cambridge University Press eBooks · doi:10.1017/cbo9781139042765.011
Ellerman, A. D., Convery, F. J., & de Perthuis, C. (2001) · Cambridge University Press eBooks · doi:10.1017/cbo9781139042765.005
Sequence of events in the development of the EU ETS and Linking Directives
Ellerman, A. D., Convery, F. J., & de Perthuis, C. (2001) · Cambridge University Press eBooks · doi:10.1017/cbo9781139042765.013
Ellerman, A. D., Convery, F. J., & de Perthuis, C. (2001) · Cambridge University Press eBooks · doi:10.1017/cbo9781139042765.004
Origins and development of the EU ETS
Ellerman, A. D., Convery, F. J., & de Perthuis, C. (2001) · Cambridge University Press eBooks · doi:10.1017/cbo9781139042765.003
Ellerman, A. D., Convery, F. J., & de Perthuis, C. (2001) · Cambridge University Press eBooks · doi:10.1017/cbo9781139042765.014
Metadata
- Authors
- Sijm, J., Neuhoff, K., & Chen, Y.
- Affiliations
- Energy Research Centre of the Netherlands (NL)
- University of Cambridge (GB)
- Johns Hopkins University (US)
- Venue
- Climate Policy
- Publisher
- Informa UK Limited
- Published
- 2006-01
- Volume
- 6
- Issue
- 1
- Pages
- 49-72
- ISSN
- 1469-3062 (ISSN-L)
- 1752-7457
- OpenAlex
- W2040126491
- Cited by
- 576
- References
- 0
- Citations by year
- 2026: 10 · 2025: 29 · 2024: 20 · 2023: 24 · 2022: 21 · 2021: 19 · 2020: 33 · 2019: 16 · 2018: 21 · 2017: 19 · 2016: 24 · 2015: 31 · 2014: 26 · 2013: 38 · 2012: 30
- FWCI
- 85.71
- Type
- journal article
- Language
- en
- Open access
- green
- resolver.tno.nl
- Locations
- Climate Policy (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- TNO Repository (submittedVersion)
- Repository hosted by TU Delft Library (TU Delft) (submittedVersion)
- Data Archiving and Networked Services (DANS) (submittedVersion, other-oa)
- Funders
- Johns Hopkins University
- Changchun University of Science and Technology
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Climate Change Policy and Economics
- Physical Sciences › Energy › Renewable Energy, Sustainability and the Environment › Renewable energy and sustainable power systems
- Physical Sciences › Engineering › Electrical and Electronic Engineering › Electric Power System Optimization
- Keywords
- EU Emissions Trading System, free allocation of emission allowances, windfall profits, electricity prices, carbon intensity, electric utilities, Germany, Netherlands
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