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

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.