EU Looks to Curb Utility Windfall Carbon Profits
Date: 04-May-07
Country: GERMANY
Author: Gerard Wynn
"It's undermining the credibility of the scheme. It would be helpful if participants think very hard about it," said Jos Delbeke, director at the EC's climate change directorate, speaking at a World Bank-sponsored carbon conference.
Europe wants to show the world its flagship climate policy is working, ahead of global climate change talks in December in Bali, Indonesia, on a deal to extend the Kyoto Protocol.
"A working European emissions trading scheme is a key for international negotiations," said Matthias Machnig, State Secretary at Germany's environment ministry.
Power generators are Europe's biggest carbon emitters, but analysts say they will make annual profits from the trading scheme well in excess of 5 billion euros (US$7 billion), assuming a steady carbon price of 20 euros where the price is now.
Under the scheme governments hand companies free quotas for emissions. If businesses exceed these they will have to buy extra permits on the market. If they emit less they can sell the surplus.
Utilities use the carbon emissions permits when they burn fossil fuels to produce power, and are passing on this cost to power prices though they got most permits for free, handing them profits and limiting incentives to cut emissions.
"Nobody is changing investments," said Guy Tuner, analyst at New Carbon Finance. "In Germany they're still building coal-fired lignite power stations."
The European Commission is now consulting on the rules for its carbon market after 2012, the end of its next trading phase. One way of curbing windfall profits would be to auction rather than hand out emissions permits free.
"As an economist I'd say it's easier to use more auctioning to tackle it, rather than taxing the profits," said Delbeke.
KYOTO
The aviation sector joins the European carbon scheme in 2011, after many airlines had lobbied for that, and analysts suspect airlines are eyeing windfall profits too.
"The passing through of costs (to airline ticket prices) is going to be an issue," said Delbeke.
Auctioning of airlines' emissions permits would limit such profits. German airline Lufthansa opposes auctioning.
"Mandatory auctioning doesn't make any sense," said Luthansa's head of environmental issues Karl-Heinz Haag.
"It works like a tax."
Other possible changes to Europe's carbon market from 2013 include extending the target period to eight years from five now, including road transport, linking to other markets outside Europe and centralising permit allocation to Brussels.
The European Commission has not yet decided how far companies will be able to meet their emissions limits under the scheme by buying cheap carbon credits from developing nations.
Such carbon trade under the Kyoto Protocol's clean development mechanism (CDM) is seen as vital to cut the cost for European business of meeting tough EU emissions targets.
Such trade after 2012 depended on other industrialised countries outside Europe taking part, said Delbeke. The present Kyoto cap and trading framework expires in 2012.
