EU Emission Trading Scheme and the Effect on the Price of Electricity

Starting from 1st January 2005 the European Union will implement a scheme for trading with greenhouse gas (GHG) emission allowances. During the first trading period, 2005–2007, the scheme covers only CO2, and there is no international commitment to reduce the emission of GHG. During the second period, 2008–2012 the European Union has committed to reduce their emissions of GHG by 8% compared to 1990 levels. Emissions trading will create a cost of CO2 emissions, and increase the marginal cost of producing electricity in fossil fuelled plants. This will result in an increase in the electricity price. For the period 2005–2007 the likely range of allowance prices in the EU is estimated to be € 1-5/tonne CO2 and for 2008–2012 € 8-13/tonne CO2. Based on these estimates the effect on the price of electricity is analysed. In the short run the price increases in the Nordic countries, except Jutland, is less than the increase in marginal cost for coal plants. In the somewhat longer run (2012) the price increase is approximately the same as the increase in the marginal cost of modern gas-fired plants.