Member states will set annually diminishing caps on the amounts of CO2 that six industrial sectors -- responsible for 46% of EU CO2 emissions in 2010 -- are allowed to emit. Electricity generation is one of the six. Any industrial installation within these sectors exceeding the limits will have to buy credits from installations with allowances to spare, or face penalties of EUR 40 per tonne of CO2 rising to EUR 100 from 2008.
A EUR 40 fine could conceivably result in a EUR 0.04/kWh hike in the price of coal fired generation and EUR 0.016/kWh for gas, rising to EUR 0.10 and EUR 0.04, respectively, at the higher penalty rate. If that happens, both sources of fossil fuel generation will become significantly more expensive to produce than wind power. But while EU Commission sources confirm that it is the intention for the environmental cost of fossil generation to be internalised in prices to the consumer, most observers believe a direct link between penalties and retail prices to be unlikely.
Among the variables set to influence actual prices are the determination of some member states to protect their domestic industries and possible linkage with CO2 credit markets built around the Joint Implementation (JI) and Clean Development Mechanism (CDM) mechanisms set in motion by the Kyoto Protocol. Credits on these markets are now being bought at around EUR 5/tonne of CO2 equivalent, well below the penalty.
The European Wind Energy Association's Christian Kjaer welcomes any move that prices pollution as "good for wind," but predicts that a penalty of EUR 40 will not be a significant market driver. He is critical of the decision to freely allocate rather than auction initial emission allowances. This could penalise parties who have already taken action to reduce emissions, he points out.
Decisions on allocations will be taken by individual states and a draft directive on linkage between the trading system and JI and CDM is due next year. There is no definition yet of what will qualify as a credit.