Working Report, 23/2007

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

13-06-2007

The present study shows that allocation to new entrants will have the following long term consequences if the allocation principles from the 2005-7 National Allocation Plans are continued:

  • Investments in new capacity will shift from gas power and renewables to coal power increasing CO2-emissions by 40 million tonnes/year in the long term (a 6 per cent increase).
  • Distortions in the market will lead to a welfare-economic loss of almost €5 billion (net present value) at a CO2-price of 20 euro/tonne.
  • Carbon prices will rise, and hence excacerbate the welfare-economic loss mentioned above. If carbon prices reach 40 euro/tonne, this may endanger the functioning of the EU ETS as the subsidy for fossil-fuel plants will exceed the investment costs of new power plants.
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