“Carbon Prices Are Having Perverse Effects”

NataliaFabra 2

Carlos Schwartz | Natalia Fabra is a director of Enagás and chair of the European programme “CURRENT TOOLS AND POLICY CHALLENGES IN ELECTRICITY MARKETS”.

Q:There seems to be a shift in thinking about pricing mechanisms in the energy sector at the moment.

A: Yes, it is part of the paradigm shift. It has been realised that, in the case of the electricity market, it is not correct to remunerate power plants of different technologies with the same price. For example, at the moment, the price of the electricity market reflects the crazy cost of producing electricity in combined cycle plants, which consume gas. And which have nothing to do with the costs of producing the same electricity in renewable, nuclear or hydroelectric plants. In the future, it will not be gas but renewable energies that will set the price in the electricity market. It is not right either way. It is simply not right because a single price – whether it comes from gas or renewables – cannot adequately reflect the diversity and technological richness in the electricity sector. My impression is that we will move towards market designs that will take into account this technological wealth, which is inherent to the electricity system. In the case of gas, the issues are different, because there is no such technological diversity. In addition, gas is mainly traded on international markets, less regulated markets. Basically, in Europe we are takers of the price that is set on international markets.

Q: Remember when there was a whole fight by the EC to increase the price of carbon emission rights, that the EU even neutralised part of the stock of rights in order to increase their price? And nowadays it seems that this has not been efficient and it is suggested that there is an excessive level of speculation in that market… Do you think that the price of emission allowances will also be intervened?

A: I think it is important that the price of carbon reflects the social cost of emissions. There are estimates that this cost can be much higher than the €100 per tonne that emission allowances are currently priced at. Carbon prices play a very important role. Above all, and this is fundamental, when it comes to conditioning long-term decisions on electrification, location of investments, etc. The problem, I understand, is not the price of carbon, but the design of electricity markets that make us pay for all electricity as if it were produced only in gas-fired power plants which emit CO2. This price does not reflect the carbon footprint of the electricity mix, but the carbon footprint of gas-fired generation, which is three times the footprint of the mix. Therefore, the problem is not the price of carbon, but how it is transferred to the price of electricity. Moreover, it is important to bear in mind that electrification will increase the demand for electricity, which will be covered by new investments in renewables. It therefore makes no sense to discourage investment in electrification by making the electricity price reflect the cost of emissions from gas-fired generation, when that demand will be met by renewables.

Q: At the moment and with these prices it seems nonsense…

A: At the moment, under the current electricity market design, carbon prices are having perverse effects. In addition to discouraging investment in electrification, they are having distributive effects that need to be corrected. It is documented that the relative weight of carbon-intensive activities is higher in the budgets of lower-income households. Therefore, a carbon tax can have regressive effects that need to be corrected through other mechanisms. The conclusion is that we should be concerned about the efficiency of the price signal so that the cost of carbon is correctly passed through to the prices of different energy consumption. But we should also be concerned about the distributional effects of regulation. If there is social opposition to carbon pricing, let us not pass on 20, 30 or 100 euros per tonne of CO2 simply because emissions’ regulation will have no future.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.