Analysis: EU-ETS: No auctioning of certificates hard to understand

Despite improvements to its draft 2nd National Allocation Plan (NAP 2), the German government makes a weak case for not allowing energy companies to auction off emission certificates, says Eric Heymann of Deutsche Bank Research.

The most recent draft of Germany’s NAP for the second phase of the EU CO2 emissions trading scheme (2008-2012) contains some key improvements over previous versions, says Eric Hymann of Deutsche Bank Research. But it also contains some contradictions when it comes to the auctioning of emission certificates by energy companies, he adds.

• The industrial sector will only be held to a fraction of previous CO2 emission requirements (1.25% lower than 2000-2005 average), which he sees as positive due to the fact that the sector has already made significant improvements. The energy sector must achieve the largest reductions (15%).
• He notes this will encourage energy companies to reinvest in newer, more efficient plants, though not necessarily in less CO2 intensive sources of energy. “The reason lies in the fact that new power plants receive the necessary emission permits 100% free of cost no matter what energy source they use.” This leads “to a situation where coal-fired power stations receive more emission permits than the gas and steam-fired stations.” He argues that this reflects Germany’s dependence on coal.
• New plants are exempt all together for a period of 14 years; a period of time he and his colleagues feel could be reduced.
• Other positive points include “increasing use of the flexible mechanisms” of the Kyoto Protocol, reduced red tape and the “transferability of emission permits between two trading periods.”
• He remains unconvinced by the government’s decision to prohibit the auctioning of up to 10% of its permits in the second trading period citing a possible rise in cost for the consumer. “Even without auctions, energy producers will add the certificates’ market value to the price of electricity, citing opportunity cost as a reason.” A possible solution, in his view, would be increased competition in the energy sector. “If energy companies faced fierce competition in a sector in which customers could change their suppliers relatively quickly and without high transaction costs, the companies would hardly be able to pass on merely virtual costs to the price of the product to the same extent as today.”