Credit ratings agency Standard & Poor's has issued a new report, "Greenhouse Gas Regulation Creates Upward Pricing Pressure and Windfall Profits for European Utilities," in which it says some European generation companies have boosted profits from the European Emissions trading scheme (EU ETS). The report echoes the findings of a previous study by the Dutch Energy Research Council.

The agency report suggests generators have added costs in relation to the cost of emissions allowances, despite the fact that the majority of certificates required are issued for free by the relevant government authorities. Standard and Poor’s says this price pass through has in turn raised wholesale power prices, but the hike has been delivered almost exclusively as profit. “For many generators, the higher wholesale prices drop directly to the bottom line as windfall profits, either because the allowance has never had to be purchased or because the generator does not emit greenhouse gases,” say the report’s authors Toby Hsieh and Peter Kernan.

The report identifies the more competitive power markets of the UK, Scandinavia, Germany and Italy as regions where such carbon windfall profits are most likely while in the more regulated markets windfall profits are less likely to occur says the report. “The principal policy impacts (of the EU’s greenhouse gas emissions trading scheme) will be a continued boost to the profitability of European generation companies that operate in countries where power markets have been fully liberalised,” says the study.

One method of preventing such price gouging in the future, suggests the report, would be to introcude a windfall tax on carbonm profits, although any move in the immediate future seems unlikely.

While the agency did not estimate figures the FT has calculated profits could be as much as a447 million annually if 25% of the average spot price for carbon is passed on to consumers. Carbon dioxide allowances currently trade at about a22/tonne up from a16 in the first half.