Options to address EU ETS induced increases in power prices and windfall profits

Since the official start of the EU emissions trading scheme (ETS) on January 1, 2005, electricity prices in several EU Member States have increased rapidly. Some have argued that these price increases are predominantly due to the passing through of the (opportunity) costs of freely allocated CO₂ emission allowances to the power sector, resulting in significant additional (windfall) profits for this sector. In some countries, this has resulted in a lively debate in which both politicians and major power-intensive users have suggested that the EU ETS induced increases in power prices and windfall profits should be addressed by means of adequate policy measures. The major purpose of the paper is to analyse a variety of options to address EU ETS induced increases in power prices and windfall profits, notably whether these options are effective and whether they have other (adverse) effects as well.