Carbon Brief response on the cost of the EU ETS and Renewables Obligation

August 19, 2011 7:01 PM

Hopefully at some point environmentalist website Carbon Brief will continue the debate over excessive green taxes.  You can see my response to their attack on those figures in the book here.  Today they have attacked another set of figures, which address the cost of the European Union Emissions Trading Scheme and were reported in the Daily Mail earlier this week.  They have made a few mistakes that I wanted to correct:

Attributing the costs of the Renewables Obligation - which is the UK government's main mechanism for supporting large-scale generation of renewable energy - entirely to the EU seems a bit tenuous and perhaps says more about the Mail's attitude to the EU than anything else.


The Renewables Directive sets out - at the EU level - the amount of renewable energy each country has to use.  The Renewables Obligation is, along with the Renewable Transport Fuels Obligation, the way the Government plans on getting us to that target.  Firm enough a connection?

Leaving that aside, the figures quoted by the Mail are wildly at odds with government estimates. When we asked DECC for their figures on the impact of the Emissions Trading Scheme and the Renewables Obligation on domestic bills, they pointed us their latest figures in Appendix D and E of this document (pdf).


The Daily Mail quoted the cost to consumers, not the contribution to domestic electricity bills.  Residential, industrial and commercial consumers of energy are all affected by these regulations.  The misapprehension, probably due to earlier debates with the newspaper over electricity bills, appears to be the source of most of Carbon Brief's confusion over my research.

Businesses don't ultimately pay energy bills, any more than they drive a car.  People do.  Rory Meakin discussed this issue in a different context on this site recently.  If the restaurant at the end of the street pays more to keep the lights on, and it is in a competitive market and all the other restaurants face the same burden, it will pass the cost on to you.  That is why the cost of up to £115 a family imposed by the EU ETS and the cost of the Renewables Obligation was given.

The area where there is uncertainty, as Carbon Brief rightly identify, is the extent to which the carbon price is passed on to consumers.  In the Appendix to the book I set out a number of reasons why all of the cost won't be passed on.  Manufacturing firms, for example, might compete with rival firms in places outside the EU ETS who don't face the same burden and therefore can't pass it on without losing market share.

The best academic research that I've seen in this area suggests that in the electricity market in the Netherlands and Germany the critical pass-through rate was 60 to 100 per cent.  Other research has suggested that more of the carbon price is passed through in relatively competitive markets.

What I did for the book was run the numbers on two assumptions.  First, I assumed 80 per cent of the carbon price was passed through.  Second, I again assumed 80 per cent was passed through, but only the carbon price the regulation put on emissions at combustion installations with a rated thermal input exceeding 20 MW (Main Activity Type Code 1 in the CITL).  That second assumption produced a total pass-through rate of 65 per cent for the UK.  The figure quoted is based on that lower number.

I noted in the book that the category isn't perfect - and some other installations aren't included - but it is mostly composed of power plants which face little competition from outside the EU and can be expected to pass on the vast majority of the carbon price.  The estimate is conservative because the pass-through rate for other installations probably isn't zero.Hopefully at some point environmentalist website Carbon Brief will continue the debate over excessive green taxes.  You can see my response to their attack on those figures in the book here.  Today they have attacked another set of figures, which address the cost of the European Union Emissions Trading Scheme and were reported in the Daily Mail earlier this week.  They have made a few mistakes that I wanted to correct:

Attributing the costs of the Renewables Obligation - which is the UK government's main mechanism for supporting large-scale generation of renewable energy - entirely to the EU seems a bit tenuous and perhaps says more about the Mail's attitude to the EU than anything else.


The Renewables Directive sets out - at the EU level - the amount of renewable energy each country has to use.  The Renewables Obligation is, along with the Renewable Transport Fuels Obligation, the way the Government plans on getting us to that target.  Firm enough a connection?

Leaving that aside, the figures quoted by the Mail are wildly at odds with government estimates. When we asked DECC for their figures on the impact of the Emissions Trading Scheme and the Renewables Obligation on domestic bills, they pointed us their latest figures in Appendix D and E of this document (pdf).


The Daily Mail quoted the cost to consumers, not the contribution to domestic electricity bills.  Residential, industrial and commercial consumers of energy are all affected by these regulations.  The misapprehension, probably due to earlier debates with the newspaper over electricity bills, appears to be the source of most of Carbon Brief's confusion over my research.

Businesses don't ultimately pay energy bills, any more than they drive a car.  People do.  Rory Meakin discussed this issue in a different context on this site recently.  If the restaurant at the end of the street pays more to keep the lights on, and it is in a competitive market and all the other restaurants face the same burden, it will pass the cost on to you.  That is why the cost of up to £115 a family imposed by the EU ETS and the cost of the Renewables Obligation was given.

The area where there is uncertainty, as Carbon Brief rightly identify, is the extent to which the carbon price is passed on to consumers.  In the Appendix to the book I set out a number of reasons why all of the cost won't be passed on.  Manufacturing firms, for example, might compete with rival firms in places outside the EU ETS who don't face the same burden and therefore can't pass it on without losing market share.

The best academic research that I've seen in this area suggests that in the electricity market in the Netherlands and Germany the critical pass-through rate was 60 to 100 per cent.  Other research has suggested that more of the carbon price is passed through in relatively competitive markets.

What I did for the book was run the numbers on two assumptions.  First, I assumed 80 per cent of the carbon price was passed through.  Second, I again assumed 80 per cent was passed through, but only the carbon price the regulation put on emissions at combustion installations with a rated thermal input exceeding 20 MW (Main Activity Type Code 1 in the CITL).  That second assumption produced a total pass-through rate of 65 per cent for the UK.  The figure quoted is based on that lower number.

I noted in the book that the category isn't perfect - and some other installations aren't included - but it is mostly composed of power plants which face little competition from outside the EU and can be expected to pass on the vast majority of the carbon price.  The estimate is conservative because the pass-through rate for other installations probably isn't zero.

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