This study addresses the question whether the new EU ETS allocation mechanism to be introduced in 2013 will alter the scope for energy-intensive companies to pass through the costs of freely obtained allowances and obtain additional profits. Recent empirical research by CE Delft has indicated that it is not only power generators but also energy-intensive industries that have passed through the costs of their EU emission allowances in product prices. As they obtained these emission rights for free, they may have made a windfall profit during the first two phases of the EU ETS. In the third phase, starting in 2013, more rights are to be auctioned, however, and benchmarks introduced.
This study establishes that under this new system firms will have even more incentives to obtain windfall profits. For the marginal firm, energy costs will rise substantial owing to the auctioning of emission rights in excess of the benchmarks. This will put upward pressure on price levels in EU product markets. Cost pass-through and windfall profits are therefore likely to continue even after 2013.