Point Carbon gets it wrong
Posted by Rich Sweeney on April 7, 2008
Today Environmental Capital touted a new study by Point Carbon on free permit allocation. Commissioned by the WWF, the report unsurprisingly finds that free allocation has lead to windfall profits in Europe. Largely a tutorial on opportunity cost supplemented with an empirical analysis of pass through in Europe, everything seemed straight forward until the one quote the WSJ decided to pull out of the summary:
“Providing a free allocation to individual plant that is carbon intensive does reduce the
incentives provided by the scheme to invest in low emissions generation technology –
thereby off-setting one of the main aims of the scheme.”
Um, no. Firms have an incentive to maximize profits, which depends on price and cost. And as the report explains beautifully, and as I’ve said here numerous times before, what matters is opportunity cost, not nominal cost. Thus the CO2 price, and therefore the resulting electricity price, is the same in both scenarios, giving firms the same incentive to innovate as before. The only difference is that they make a lot more money under free allocation.
H/T to Anthony Paul for actually reading the summary carefully.