Measuring Windfall Profits to Coal-Fired Electricity Generators from Free Emission Permit Allocations

23 Pages Posted: 10 Dec 2021

See all articles by Alastair Fraser

Alastair Fraser

University of Sydney

Jonathan Chiew Sheen Kuok

affiliation not provided to SSRN

Gordon Leslie

Monash University - Department of Economics

Date Written: December 3, 2021

Abstract

Introducing climate change policies such as carbon pricing can bring substantial costs for fossilfuel- fired electricity generators, with incumbents often granted a transitional allocation of free emission permits. The free allocation of emission permits and the passthrough of carbon prices to higher electricity prices has created substantial concern that these policies allow emissions-intensive firms to reap windfall profits. We use the implementation and later repeal of Australia’s price on carbon to show that coal-fired plants which received free permits had a substantial increase in their operating profits. This result supports calls for any transitional climate policy assistance to be tied to passthrough rates in order to avoid creating wealth transfers from taxpayers to emission-intensive generator owners.

Keywords: Environmental Taxes, Cost Passthrough, Policy Grandfathering, Electric Utilities, Energy and Environmental Policy

JEL Classification: H23, L94, Q41, Q58

Suggested Citation

Fraser, Alastair and Kuok, Jonathan Chiew Sheen and Leslie, Gordon, Measuring Windfall Profits to Coal-Fired Electricity Generators from Free Emission Permit Allocations (December 3, 2021). USAEE Working Paper No. 21-532, Available at SSRN: https://ssrn.com/abstract=3980854 or http://dx.doi.org/10.2139/ssrn.3980854

Alastair Fraser

University of Sydney

Australia

Jonathan Chiew Sheen Kuok

affiliation not provided to SSRN

Gordon Leslie (Contact Author)

Monash University - Department of Economics ( email )

Faculty of Business and Economics
900 Dandenong Rd
Caulfield East, Victoria 3145
Australia

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