Companies Earn Big Profits From Free Carbon Credits

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Discussion of carbon cap-and-trade systems usually focuses on whether such schemes can set a workable price for permits, given the volatility that has characterized the system in Europe.

“If you auction all of the credits, then it’s just a carbon tax.”

— Michael Morris
American Electric Power

Companies are concerned that issuing too few permits will make them costly and force industry to spend a lot of money to clean up their operations. Environmentalists are concerned that issuing too many permits would make them cheap and allow companies and industry to get away with doing too little remediation.

But an arguably more fundamental issue concerns permits that are given away, rather than sold at auction.

In Europe, power generators have been charging customers for these permits even though they received them for free. This practice has earned some of the heaviest emitters of CO2 billions of extra euros since 2005.

Europe’s power companies are set to receive up to 71 billion euros (or roughly $90 billion) over the next four years, according to Point Carbon and WWF — two organizations tracking the market. And because permits still will be given away for free in parts of Eastern Europe after 2012, the windfall profits are set to continue for coal generators there until at least 2020.

Under the European system, steel companies and other manufacturers also received their permits for free. But they faced low-cost overseas competition and thus could not afford to raise their prices like companies producing electricity — a commodity that is mostly produced and consumed nationally or sometimes regionally.

During his election campaign, President Barack Obama pledged to institute a system in the United States where all permits would be auctioned. That could avoid the mind bogglingly large windfall profits made by utilities in Europe.

Whether Mr. Obama can keep to that pledge remains to be seen. The head of the nation’s largest burner of coal for power generation last week signaled his group’s determination to fight for a significant chunk of free allowances under any United States system, according to Reuters.

“If you auction all of the credits, then it’s just a carbon tax,” Michael Morris, the chief executive of American Electric Power, was reported as saying. “So let’s forget the game. Let’s call it a carbon tax, and let’s see if the populace wants to have a carbon tax,” Mr. Morris said.