By DAVID DERBYSHIRE

Last updated at 01:36 15 June 2007

Energy companies have

made up to £2billion profit

at the expense of

customers under the EU’s

controversial carbon trading

scheme, the Government has

conceded.

The scheme – introduced

two and a half years ago – was

supposed to encourage dirty

power stations to switch to

cleaner, low carbon, energy.

But, in practice, the first phase

of the scheme has allowed some

of the dirtiest polluters to

generate huge profits by ramping up

customer bills, without lowering

greenhouse gas emissions.

Some industry experts believe

the carbon trading ‘windfall’ will

soar to around £1.5billion a year

when the second phase begins

next year.

Consumer and environmental

groups yesterday said the

scheme had lined the pockets of

electricity generators such as

PowerGen and Scottish Power

without reducing emissions.

European carbon trading is a

key part of the Government’s

drive to reduce greenhouse gas

emissions. Under the scheme,

major manufacturers and electricity producers are handed

permits that allow them to

produce a fixed amount of carbon

dioxide each year.

Companies that reduce their

pollution ration can sell unused

permits on the open market,

while companies that exceed

their carbon target must buy

additional permits.

It was assumed that

companies would be forced to buy the

permits, giving them a real

financial incentive to reduce

pollution. But, after lobbying from

industry, the EU handed out the

permits for free.

Because power firms were now

keen to reduce pollution by

cutting their total electricity

output, the knock-on effect was to

increase the price of electricity,

generating massive windfall

profits.

In addition, they were able to

sell any unused permits for a

profit on the open market.

Peter Ainsworth, the Tory

shadow Environment Secretary,

said the principle of carbon

trading was sound.

‘But the carbon trading

scheme is designed to bring

down carbon emissions, not

create windfall profits for the power

companies,’ he said.

‘Some of the worst polluters

have been given free permits to

produce carbon, and have then

passed on the cost of these

allowances to customers as if

they had paid for them. It’s a

design fault in the scheme which

needs to be rectified.’

The wildlife charity WWF said

it also backs the principle of carphasebon trading, but described the

free allocation of carbon permits

as ‘a mistake’.

Yesterday, the Department of

Trade and Industry’s Malcolm

Wicks said energy suppliers were

making around £800million a

year profit from carbon trading

‘based on the assumption that

electricity generators pass on

the full cost of carbon

allowances through to higher

electricity prices’.

The industry believes that

figure will rise when the second

of carbon trading starts

next year. ‘Between 2008 and

2012, we expect the windfall to

be at least £1.5billion a year,’ said

an industry insider.

The windfall came during a

period when wholesale gas

prices, and the gas and

electricity prices paid in the home, were

at a record high.

Although prices have fallen

over the last few months, energy

companies have been accused of

taking too long to cut prices.

The Government concedes

that the windfall profits for

energy companies have been a

problem.

However the Department for

the Environment, Food and

Rural Affairs said the estimate of

£800million was the ‘potential’

windfall, but in reality was

probably lower.

A spokesman for the

Association of Electricity Producers said

power companies are investing

heavily in new power stations

and reducing carbon emissions

and the scheme acted partly as a

form of compensation.

‘It was a political decision to

give the allocations to power

companies for free,’ she added.