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Climate Change: Emissions

Volume 707: debated on Wednesday 4 February 2009

Question

Asked by

To ask Her Majesty's Government further to the Written Answer by Lord Hunt of Kings Heath on 26 November 2008 (WA 297–98), whether the statement that large electricity producers are able to “pass the costs of carbon to consumers in the form of higher electricity prices” and have received fewer European Union Emissions Trading Scheme Allowances is due to such producers requiring further incentives to adopt renewable energy schemes. [HL706]

The current financial incentive mechanism for renewables, the renewables obligation, is not relevant to the distribution of allowances in the EU Emissions Trading Scheme (EU ETS).

Large electricity producers (LEPs) have received fewer EU ETS allowances in phase II of the system for three main reasons: first, because the power sector has faced the effort required under the cap; secondly, the LEPs have to contribute to allowances in the new entrant reserve (NER); and thirdly, the allowances available for auctioning in phase II have been taken from those previously allocated for free to the power sector. From 2013 there will be 100 per cent auctioning to the power sector in the UK, which will remove the issue of windfall profits as a result of passing through costs to consumers.

Passing on the cost of EU allowances is a rational response from firms and it is also a desired response from the point of view of the effectiveness of the EU ETS.