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on Environmental Economics |
| By: | Jos Sijm; Karsten Neuhoff; Yihsu Chen |
| Abstract: | This paper 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. Besides some theoretical reflections, the paper presents empirical and model estimates of CO2 cost pass through, indicating that pass through rates vary between 40 and 100 percent of CO2 costs, or - in absolute terms - between 3 and 18 €/MWh, depending on the carbon intensity of the marginal production unit and other, market or technology specific factors concerned. As a result, power companies realise substantial windfall profits, indicated by empirical and model estimates presented in the paper. In order to avoid these windfall profits, the paper concludes that free allocation to power companies should be phased out in favour of auctioning. |
| Keywords: | Emissions trading; allocation; CO2 cost pass through; windfall profits; power sector |
| JEL: | C81 L11 L94 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0639&r=env |
| By: | Dam, Lammertjan (Groningen University) |
| Abstract: | Inter-generational externalities associated with the conservation of the environment are usually tackled through fiscal policy. The recent increase in socially responsible investment funds creates a potential role for the stock market to deal with these environmental externalities. We study this alternative approach in an overlapping generations model in which agents choose between investing in clean or polluting technologies. Since agents are short-lived, they do not account for the long-term effects of pollution. We show that when firm property rights are traded separately on a forward looking stock market, proper firm valuation can resolve the conflict between current and future generations. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugccs:200601&r=env |