This is how the CO2 market works that fuels the skyrocketing escalation of light


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Every time we turn on the light or connect an appliance in our homes we are paying, in practice, a ‘tax’ for emitting CO2 into the atmosphere. It is not emitted by us, but by the producer of the electricity generated with fossil fuels, in the case of coal or gas –although the latter emits less CO2 and, therefore, has a much lower cost due to greenhouse effect emissions–. And how much is that tax? It depends on the type of client in question, but the price is not small. Recently, the Bank of Spain calculated that, In the skyrocketing rise in the price of electricity that has been taking place, 20% is due to the increase in the price of CO2 emission rights and 50% to the increase in gas prices, an essential source for producing electricity in combined cycle plants.

Sources in the electricity sector explain that around 25% of the cost of the megawatt generated in combined cycle is due to the price of CO2 emissions. But, as the electricity consumed comes from different generation sources, the impact on the receipt is somewhat less.

In global computing, the expert Alberto Martin, partner in charge of the Energy and Natural Resources area at the KPMG consulting firm, currently estimates the impact of CO2 on the price of the wholesale electricity market at around 25 euros per megawatt. That is, about 25 euros in a price per megawatt that this week has exceeded 140 euros in the wholesale market.

This cost of emitting CO2 has been paid since 2005. It was when the EU introduced this tax, this penalization to certain sectors emitting greenhouse gases. Among them, the electrics.

Since then, a certain number of CO2 emission rights. The EU sets the maximum number of rights that it puts up for auction, which is becoming lower and lower, which causes its price to be higher and higher.

The electricity companies, as entities obliged to pay for their CO2 emissions, they go to those auctions. There is a primary market, controlled by the EU, and a secondary market, in which the companies themselves negotiate with each other to sell their excess rights or buy those they lack for their production processes.

The EU strategy

The price of CO2 emission rights has skyrocketed in recent years. “The EU wants a high price for CO2 and has equipped itself with the mechanisms to raise it if it does not rise by itself in the emissions market”, explains Alberto Martín. The two fundamental tools are, on the one hand, gradually reduce the number of rights that are in circulation; and, on the other, the so-called «stability mechanism», by which the EU can intervene directly to further restrict the available allowances, if it sees that their price does not reach the level it considers desirable to push the productive sectors to invest in decarbonization. That is, so that those who pay for CO2 pay more money to invest in decarbonization than to pay the penalty for their polluting gases.

The problem is that, in the case of the electricity bill, the price of CO2 ends up falling on the pocket of the final consumer instead of being covered by the electricity companies as a cost not passed on. Thus, el CO2 becomes a kind of compulsory tax for homes and companies every time they use electricity.

On the one hand, companies transfer the cost of their emission rights to the price of electricity. And, on the other hand, governments profit from this emissions market, due to the growing collection they obtain with this tax. And consumers, in the middle.

It is enough to see the evolution of the price of electricity and that of CO2 emissions to verify that direct correlation between one and the other. So far this year, the average price of electricity on the wholesale market has doubled; that of CO2, too. And the escalation adds up and continues, with a not very reassuring horizon.

The final invoice

Strictly following the decarbonisation strategy set by the EU, the expert Pedro Linares placeholder image, director of the BP Chair of Energy and Sustainability at the Universidad Pontificia de Comillas, believes that it is not unreasonable to think of a price of even 100 euros per ton of CO2 within ten years. “Currently, prices of between 30 and 50 euros per tonne of CO2 emitted into the atmosphere seem reasonable due to the decarbonisation path set by the EU. And if in the 2030 year horizon the price is between 50 and 100 euros, it also seems coherent “taking into account that roadmap that the European authorities have set for themselves,” says Pedro Linares.

In the opinion of this expert, this model of taxing CO2 emissions that is implemented in Europe “is a successful strategy.” But see necessary introduce compensation so that, in the end, this does not fall unfairly on society, especially vulnerable sectors. Linares believes that effective measures must be introduced to protect “vulnerable households, families for whom electricity is a very important cost that shakes their family budget.” And also ensure that the impact on the industry is not harmful in the future.

The expert Alberto Martín, from KPMG, has the same effect. “We must protect the most vulnerable consumers, and the Government has for this the money it obtains from the collection of emission rights. In addition, investments in energy efficiency and expansion of renewable energy plants must be encouraged ”. He insists that “many more renewable energy facilities have to be built, and this is not being done, basically, due to the administrative obstacles faced by developers.”

Punished pockets

Francisco Benedito, CEO and founder of the Climate Trade company, is committed to a more drastic solution: intervene in the electricity market so that companies do not pass on the cost of CO2 to consumers with the heavy consequences it is having. Benedito knows first-hand the market for CO2 emission rights. Your company manages a digital platform for the sale of decarbonization titles for entities that voluntarily want to reduce their carbon footprint. In addition, Climate Trade also operates as a broker for companies that have to operate in the CO2 emissions market.

In Benedito’s opinion, the model devised by the EU is perverted if electricity companies pass on the cost of their emissions to the consumer. The EU established CO2 emission rights as a way to tax those who pollute and move them to be more sustainable. “But that does not occur if the polluter does not notice it in his income statement because it is passed on to the final consumer” , reflects Francisco Benedito. He considers that the matter is even more serious if one takes into account that it is affecting electricity, “which is a basic social good”.

For its part, from the electricity sector they ask that the effort be shared by the State. They emphasize that the government raises more and more money from CO2 emission rights, and they ask that this growing revenue be used to cushion the increase in electricity generation costs. Industry sources say they indicate that this increase in the price of CO2 emissions, set by the European authorities, will report to the Spanish Government this year about 2,400 million euros. They are about a billion more than until now. According to these sources, if the Government were to allocate those billion to finance costs in the sector, “the regulated part of the electricity bill could be reduced by 7.5%, which in the final consumer bill would represent a saving of close to 4%.”

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