Rents of electricty generators in france and germany due to carbon trading under different allocation mechanisms

Authors

Jan Horst Keppler, Alexis Paskoff

Abstract

The European Union Emission Trading Scheme (EU ETS), the key pillar of the EU’s climate policy, establishes a Europe-wide carbon price. With over 50% of allocated carbon quotas, electricity generators are heavily affected by carbon pricing. However, its impact on generators’ rents and profits varies widely from one technology to another and depends on the price of the quotas as well as their allocation mechanism, i.e. auctioning or grandfathering. Based on detailed models of the electricity systems in France and Germany, the present paper establishes precise estimates of the impact of carbon pricing on the profits of power producers in these two countries. The model is based on hourly 2017 price data from the EPEX Spot day-ahead market and fully accounts for fuel switching between coal- and gas-plants of different efficiencies. The paper also discusses the different impacts of auctioning and grandfathering for consumers, low carbon and fossil fuel-based producers as well as government revenues.