Irish Supreme Court Restores Common Sense to the Single Electricity Market

Abstract

Does the European Union’s Emissions Trading Scheme (ETS) for CO2 emissions “cap and trade” a real resource? Do emissions allowances allocated free to electricity generators have an opportunity cost? And if so, does a levy on the value of these allowances have an opportunity cost? In 2011, Ireland’s electricity regulator raised these questions, and answered them “yes”, “yes” and “no”, directing generator companies not to include the carbon revenue levy in their offer prices. Given the current state of the Irish economy, it is understandable that the Irish government would wish to tax electricity generators without imposing additional costs on electricity consumers. However, in March 2012, the Irish Supreme Court overturned the regulation, based on the realisation that the levy is in fact an input into generation and a cost, and that it has an opportunity cost.This case shows that additional costs imposed on producers will pass through to consumers in a competitive market, particularly when the costs are linked to output. Politicians working with – or considering whether to introduce – a cap-and-trade scheme such as the EU ETS need to understand better how market prices react to new costs. Trying to prevent competitive markets from passing through taxes and levies into prices is often bad for competition and bad for efficiency.This paper examines the facts, economics and economic arguments on both sides in a case that demonstrates that regulatory agencies have little or no room to re-define economic terms in ways that suit government policy.