Arbejdsrapport fra Miljøstyrelsen Nr. 23 2007 – Impact of CO2 quota allocation to new entrants in the electricity market

Impact of CO2 quota allocation to new entrants in the electricity market

1 Introduction

In 2003 the EU adopted the directive on a greenhouse gas emissions trading scheme (ETS) encompassing all major energy producing units and the majority of the energy intensive industry. The EU ETS is based on the recognition that creating a price for carbon through the establishment of a market for emission reductions provides the most cost-effective way of complying with international greenhouse gas commitments (EU 2005, EU action against climate change).

The EU ETS does not require member states to allocate quotas for free to new entrants, however all countries have established a reserve for new entrants in the first allocation period. According to the EU regulation only fossil fuel plants can be allocated quotas. This distorts the incentives of the EU ETS because the free quotas are effectively a financial subsidy for the fossil fired plants. Free allocation of quotas to new power plants will have the effect of encouraging fossil fuel power plants on behalf of renewable energy technologies, and may thereby reduce the economic efficiency of the scheme.

Furthermore, differences in allocation principles can affect the timing of investments and the geographical localisation of new plants. This may impact on the security of supply and the functioning of the electricity market.

This project examines the consequences of allocating CO₂ allowances to new entrants under the EU emissions trading scheme (EU ETS). These circumstances are illustrated through comprehensive explanations and graphs depicting the competitiveness of different technologies w/without allocation.

To quantify the consequences of allocation in more detail, model-analyses are carried out examining future investments the German and Nordic electricity and district heating markets.