Emissions trading and the European electricity market

In 2001 the European Commission proposed the introduction of a European system of trading in greenhouse gases. This proposal is currently subject to fierce debates. The European Commission has proposed a method of direct allocation while others, like representatives of large industries, plead for an indirect method. In the former approach, permits are distributed directly to the group of firms that emit the gases. End-users of energy receive their permits in the latter method. Emitters and end-users of energy are the same group of firms only when use of energy coincides directly with emissions. The debate on the method of allocation concerns its effects on the price of electricity and the competitiveness of large users of electricity. Questions that have to be answered are: ‘will power producers raise their prices if they obtain their permits free of charge?’, and ‘to which extent does a rise in electricity price affect industries such as Steel, and Aluminium?’.