Eamon Ryan (Dublin South, Green Party)

The rate of 65% as set out in the legislation is included for a reason. Setting the rate at this level allows the Government to recover a substantial portion of the windfall gains from generators but also to ensure it avoids over-recovery of funds. The latter is a real risk because the levy is only an approximate figure of the windfall gains electricity generators are earning. The easiest and most precise solution would be to charge electricity generators the market price for each free carbon allowance they receive. However, I understand this would be in direct contravention of EU Directive 203/87 which requires member states to allocate at least 90% of carbon allowances to generators free of charge. Since interference with the terms of the directive would be legally impossible, the Government cannot levy for the free allowances directly and has been obliged to consider other options.

The structure of the single electricity market means that the precise calculation of the windfall gain for each generator in each half hour period would be a technical and administrative nightmare and require significant time and resources to accomplish, if it was possible to make it. Further complicating the issue is the fact that a generator may have been obliged to purchase a portion of the carbon allowances it is using. A generator receives its free carbon allowance allocation from the EPA based on the national allocation plans. The current plan which covers the period from 2008 to 2012 based the allowances to generators on an average figure of their output in the period from 2003 to 2004. Whether a generator is required to purchase additional allowances depends on how much its current output varies from this historical output figure. Needless to say, if a generator has been obliged to purchase allowances on the market, it is not earning windfall gains on that portion of its allowances.

The Government also faces the difficulty that a certain portion of the emissions for each generator is attributable to in-house consumption, that is, electricity consumed directly by the generator and not sold to the market. Since it is not sold to the market, generators are not earning a return for such output, yet tye are required to surrender allowances for it. Therefore, there is no windfall gain on this element of generators' emissions.

It should be remembered that generators are required to incorporate the opportunity costs of carbon on a day-ahead basis and that all scheduled generators receive the same system marginal price. Therefore, it can be stated the system marginal price reflects the anticipated opportunity cost of carbon. However, the method of calculation of the levy is to use a simple arithmetic average of the daily price of carbon allowances during the levy period, rather than what generators actually bid and receive for carbon. The difference between the two is unlikely to be significant but is yet another abstraction the Government has been obliged to create to ensure the levy can work effectively in practice. For these reasons, I have been obliged to adjust the levy amount downwards by a percentage rate; 65% is my Department's best estimate of a figure that will raise significant levy proceeds, while avoiding over-recovery. My concern is that in setting the rate higher, one would create a risk that the levy would start to claw back sums from generators in excess of the windfall gains they are making in practice. One of the fundamental tenets of the levy is that it can be justified because generators are, in effect, getting something for nothing. We should not lose sight of that in trying to increase the percentage rate at this point. The Bill, however, provides the Minister with power to amend that figure. I will keep the issue under draft review and conduct a review of the percentage rate if I deem that generators are getting off too lightly. As per the Bill, any such review will be conducted in public with any interested parties having an opportunity to respond to any proposed changes.