�1bn windfall for carbon trade firms

Power firms could make a £1bn windfall profit from the EU Carbon Emissions Trading Scheme, BBC News has learned.

The windfall is likely because many firms have benefited from increases in electricity prices brought about by the scheme without needing to make any extra investment in return.

Peter Bedson, from IPA Consulting, confirmed to the BBC that the unwarranted profit could reach around £1bn.

Part of the problem, he said, is that firms have been given, free-of-charge, the carbon emissions permits on which the scheme is based. This, he explained, is like the government giving energy firms free money.

The WWF pressure group called it a scandal and demanded a windfall tax to re-direct the profits into energy conservation.

The Conservatives said it was an example of government incompetence.

Their environment spokesman Peter Ainsworth said: "MPs warned the Department of Trade and Industry (DTI) this would happen but they took no notice."

A true market scheme would see the permits auctioned, not given away by governments


The windfall lies in the design of the EU emissions trading scheme, which works by governments setting a limit for the total amount of carbon that can be emitted from its heavy industry and the power sectors.

Instead of banning firms from exceeding the limit, governments hand the firms free pollution allowances up to a certain level.

If a firm can cheaply cut its pollution by installing better technology it will have carbon permits to spare.

If another firm is overshooting its pollution limit it will need to get hold of extra allowances. The firms can then trade carbon permits on the EU market.

Economists like it because it gives maximum pollution savings at least cost. But a true market scheme would see the permits auctioned, not given away by governments.

The system means that generators using high-carbon fuels like coal need to buy extra carbon permits.

That forces up the price of electricity overall, which benefits generators using low-carbon fuels like nuclear and gas. This is where the power firms have made their windfall profit.

Carbon price

Mr Bedson did a report on the issue for the DTI earlier this year.

Since then the price of carbon shot up and his revised estimates suggest that the resulting windfall will reach around £1bn.

This will depend on the future price of carbon, which is in doubt since the crash in the carbon price partly triggered by over-allocations of pollution permits to French generating.

Green groups are particularly angry that despite knowing about the windfall, the government have been fighting the EU in the courts to try to get the carbon allocation for the firms increased.

Last week they confirmed they would abandon the fight. But the DTI wants to compensate the generators by increasing their allocation under the next phase of the scheme.

All round Europe governments are in cahoots with the lowest common denominator of business

Conservative environment spokesman Peter Ainsworth

WWF, the Conservatives and the Lib Dems all want the government to set much tougher limits on carbon emissions from the biggest polluters.

They all say the government should auction the permits.

Conservative environment spokesman Peter Ainsworth said: "All round Europe governments are in cahoots with the lowest common denominator of business.

"The problem will not be sorted out until the market is made to work properly by forcing firms to bid for their permits instead of being allowed to lobby government for them free of charge. The DTI aren't competent to decide on this."

Pollution 'increase'

Attention will now be focused on the government's carbon targets for big business under the next phase of the EUETS, which are due to be resolved shortly.

The government has said it will cut carbon emissions from big firms by between three and eight million tonnes. But experts note that the cuts are not real cuts - they are based on what industry is projecting it will emit in future.

So the three million tonnes cut is in fact an increase in pollution.

Government supporters will argue that there were bound to be problems when a large complex scheme like the scheme was set up, but that it was vital to design a scheme that would be supported by big business.

They will hope that problems will be ironed out in future year when the scheme beds down.

Problems are happening across Europe. The price of carbon crashed last week, and the market is in disarray.

It will come to a head this week when governments reveal how many extra carbon permits need to be purchased.

The scheme is a mainstay of the EU's policy for meeting its Kyoto obligations. Critics of the Kyoto Protocol are already celebrating the problems in the market.

The UK government is failing in its carbon emissions targets. It planned to cut CO2 20% by 2010 to tackle climate change - described by Tony Blair as the biggest long-term challenge for mankind.

But under Labour emissions have gone up by more than 2%.