Press Office

CO2-emissions trading: Effects on power prices and energy-intensive industries

Press release from 15 September 2008

The European Union established trading in carbon dioxide (CO2) emission certificates in 2005. The intention was to comply with the climate protection goals laid down for the EU in the Kyoto Protocol. When EU-wide emissions trading was launched, the CO2 certificates in Germany were initially allocated gratis. This was the practice followed in most of the other EU countries. Since most of the certificates were allocated free in the initial emissions trading periods, most electricity consumers are hard pressed to understand why an increase in power prices should follow. As a result, it is often surmised that power generators have simply used the introduction of this new instrument as an excuse to raise power prices and, in turn, to boost their own profits. It has often further been alleged that this would be thwarted if there were greater competition on the electrical power market.

Neither of these conclusions is correct as stated here. Whether there are many or few competitors on the power market is actually immaterial as to whether emissions trading will prompt a rise in power prices. Including the value of the CO2 certificates in cost calculations is what actually causes the rise. The increase in electric power rates is in fact a desirable effect from the economic viewpoint, since the purpose of the entire exercise is to motivate consumers to reduce their demand for power.

It would, on the other hand, be legitimate for the state to siphon off a sizeable portion of the windfall profits that power producers reap in the future when the certificates are sold at auction. That is one of the reasons why the European Commission is considering auctioning all the certificates as of the third trading period, starting in 2013. In this case, however, it is quite conceivable that the position of Europe¿s energy-intensive industries in global competition could be seriously damaged when compared with enterprises located in countries that do not participate in emissions trading. Concomitant impacts on economic growth and employment would ensue.

It would, on the other hand, be legitimate for the state to siphon off a sizeable portion of the windfall profits that power producers reap in the future when the certificates are sold at auction. That is one of the reasons why the European Commission is considering auctioning all the certificates as of the third trading period, starting in 2013. In this case, however, it is quite conceivable that the position of Europe¿s energy-intensive industries in global competition could be seriously damaged when compared with enterprises located in countries that do not participate in emissions trading. Concomitant impacts on economic growth and employment would ensue.

These are the essential findings revealed in a current "RWI : Position" paper. It reflects the conclusions drawn in empirical studies on the effects of emissions trading. These findings fuel doubt as to whether 100% auction in the future, now being considered by the EU Commission, is indeed the proper course of action.

For further information, please contact:
Dr. Manuel Frondel, Phone: +49 201 8149-204,
Joachim Schmidt (RWI Press Office), Phone: (0201) 81 49-292,

This press release is based on "RWI : Position" No. 26, "CO2-Emissionshandel: Auswirkungen auf Strompreise und energieintensive Industrien". It is available for download as a PDF file (in German) on the Internet at www.rwi-essen.de/publikationen/rwi-positionen/.

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