Source: The McKinsey Quarterly
The European Commission has made a proposal to cap the greenhouse gas emissions of Europe's 5,000 largest power and industrial plants, starting January 2005. Its "cap-and-trade" scheme would allow them to buy and sell emissions rights to minimize the cost of regulation. However, a microeconomic model of the scheme has produced surprising conclusions, and no strategic decision or valuation in the European utilities industry should be taken without considering them.
The take-away: Wholesale and retail electricity prices will be forced upward, and gas will replace coal as the basic fuel in many countries. The current proposal, though, would deliver unexpected benefits to many power generators, including fossil fuel plants that are emitting the most CO. More regulatory negotiations are therefore certain, and European utilities and heavy electricity users will have to give the debate closer attention.