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Column: Carbon market is a political scapegoat - Wynn

By Gerard Wynn

LONDON (Reuters) - European lawmakers have made emissions trading a scapegoat as they grapple to compete with far cheaper U.S. energy prices, yet taxes and other charges dwarf the impact a boost in carbon prices would have had.

A proposed reform knocked down last week was meant to raise record low carbon prices by temporarily withdrawing surplus emissions permits, a move which also would have hiked wholesale power prices by as much as 10 percent.

Certainly, the political backdrop to the European Parliament vote and comments in its aftermath was about its impact on power prices.

"It would place an additional burden on our industry and harm the competitiveness of Germany and the whole EU," said Philipp Roesler, Germany's economy minister, after the European Parliament rejected the reform in a vote last Tuesday.

"We will avoid higher energy costs for consumers," said Eija-Riitta Korhola MEP, the European People's Party (EPP) negotiator of the legislative proposal, after the vote.

The EPP is the major European political party of the center-right.

EU policymakers and industry have drawn frequent comparisons with the United States where industry is benefiting from a boom in cheap shale gas.

A comparison of power prices shows that European wholesale power prices, which include generation and carbon costs, are as much as 50 percent higher than in the United States, based on eastern PJM hub wholesale power prices.

But the difference is starker when regarding end user, retail power prices, which include network charges, renewable energy tariffs and electricity taxes.

Average European industrial and residential power prices are more than double those in the United States and the difference is growing.

That indicates that rejecting higher carbon prices will head off higher European wholesale power prices but that narrowing the gap with the United States would require cuts in renewable energy support, grid investment or energy taxes.

Europe's emissions trading scheme was perhaps a convenient sacrifice: renewable energy support is viewed as an industrial policy in countries including Germany and Denmark, and therefore less negotiable, while few European countries are in a position to cut taxes.

WHOLESALE POWER PRICES

Germany and Britain are illustrative of contrasts in European wholesale power prices, where British prices are presently far higher.

Germany (and Nordic countries) benefit from low marginal cost renewable power, while Britain is stuck with increasing imports of expensive gas and coal, while its more isolated grid means it can import less electricity from its neighbors.

U.S. and German month-ahead peak power prices are presently tracking fairly closely while British prices are far more expensive. (Chart 1)

In general, it can be concluded, European wholesale power prices are considerably higher than in the United States, particularly so since 2009 and the impact of the shale gas boom.

END USERS

Retail power prices show an even greater difference.

The U.S. Energy Information Administration and the EU's statistics agency Eurostat publish end user power prices, averaged and disaggregated by country and U.S. state.

Both include taxes, but U.S. retail power prices do not include the cost of federal renewable energy tax credits, while EU prices will include the cost of a price premium of feed-in tariff for renewable power.

Average EU residential power prices are more than double those in the United States, at 0.186 euros ($0.24) per kilowatt hour (kWh) in the first half of last year, compared with $0.1188 for full-year 2012.

Such averages conceal wide ranges. For example, Bulgaria was below but Germany nearly three times the U.S. average.

Regarding industrial power prices, average EU prices are again more than double those in the United States.

Average EU industrial power prices in the first half of 2012 were 0.117 euros ($0.15) per kWh compared with $0.0645 in the United States last year.

It appears that EU policymakers do therefore have some cause to fret over higher energy costs and the difference is growing, with residential and industrial power prices both rising more quickly in Europe. (See Charts 2 and 3)

CARBON PRICE IMPACT

Reform of the emissions trading scheme was meant to hike record low carbon prices and could have increased wholesale power prices by as much as 10 percent.

Proportionally that would impact more on retail prices in poorer, east European countries, some of which were particularly opposed to the reform, notably Poland.

There were some offsetting factors: for example steel and other manufacturing sectors are sitting on huge surpluses of carbon emissions permits whose value is a windfall profit under the scheme.

The timing for reform of the carbon market was not the best, where it was easy for energy-intensive industry to point to the danger of hiking business costs.

But rejecting higher carbon prices will have limited impact: European end-user power prices remain much higher than the United States, where higher taxes and other charges, not carbon prices, make the biggest difference.

(The author is a Reuters market analyst. The views expressed are his own.)

(Reporting by Gerard Wynn; editing by Jason Neely)

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