Electricity generators gain from emissions trading - 17 July

Britain 's electricity generators could make windfall profits of about £1.5bn a year from the European Union's emissions trading scheme, industry estimates suggest, raising further questions about the operation of the programme intended to combat global warming.

Across Europe, the profits could add up to about €20bn (£13.6bn) a year.

The profits are created because of the way the emissions trading scheme works. rather than because of sharp practice by the companies. Electricity prices are higher as a result of the scheme. But generators' costs do not rise to the same extent, as they are given most of their permits for free.

In phase two of the scheme, which runs from 2008 to 2012, the price of permits is about €23 a tonne of carbon dioxide, and UK electricity companies have been allocated permits for 104m tonnes of carbon dioxide a year. In the first phase of the scheme, 2005-07, it is thought the total windfall profit for the generators was about £2bn.

For some companies, these profits are significant. Peter Atherton, an analyst at Citigroup, estimates that for Drax, which owns Britain's biggest coal-fired power station in Yorkshire, the value of emissions permits could represent about half of next year's profits.

For the other leading generators, most of which are also electricity suppliers and part of large European groups, the profits may make a smaller contribution, but will still be important.

Environmental campaigners and industry experts have argued that the generators should be forced to buy their permits in auctions.

But at the moment in phase two of the scheme, the EU has set a maximum level of auctions of just 10 per cent of the permits being issued. Britain will be issuing 7 per cent, all of that to power generators, but that will be on top of the allowances they receive for free.

Germany has proposed that in the future, perhaps in phase three of the scheme after 2012, all allowances should be auctioned.

Mr Atherton said: "If you thought that that carbon permits would be auctioned to a greater extent before 2012, you would see a severe reaction in the share prices of Drax and the other major generators around Europe."

German electricity companies are reported to be planning a political and legal challenge to Berlin's plans to auction 10 per cent of the permits for phase two.

In Britain, the generators argue that they are not making pure windfall profits because they are having to buy some of their permits, and that they need relatively favourable treatment to encourage them to make the investments in new power stations the country needs.