Windfall profits in the power sector

CO2 allowances charged through to the customer

Although European power companies have received most of their EU ETS (Emission Trading Scheme) allowances for free, they are charging them through to the customer. That is the main conclusion of the paper CO2 Cost Pass Through and Windfall Profits in the Power Sector from the Faculty of Economics at Cambridge University.

In many countries, through fear of hurting the most carbon-intensive industries, CO2 allowances have been granted based on historical figures, without serious benchmarking. 60% of these free allowances were granted to the power sector.

Companies treat these allowances as a cost, regardless of whether they have received them for free or have purchased them on the market. Empirical and model-based estimates seem to indicate that between 60% and 100% of this cost is charged through to the customer (depending mainly on the carbon intensity of the marginal production unit). As a result, substantial windfall profits may be realised by the electricity sector.