Europe’s plan to control the greenhouse gases responsible for global warming will probably lead to higher energy prices for both consumers and businesses and greatly accelerate the shift from coal (including lignite) to gas as the primary fuel used in power plants. These are the main conclusions to be drawn from a McKinsey model of mainland Europe’s¹ energy market as it would emerge under a European Commission scheme to cap the emissions of power and heavy-industrial plants. But the model also generated a paradoxical finding: unless utility regulators intervene, many power producers—including some of the fossil-fuel-burning generators that emit the largest amounts of carbon dioxide (CO₂), the greenhouse gas that the European Union is trying to control—could receive unexpected financial gains under the scheme.

The proposal as it stands would lead utilities to invest in new gas plants and to write off obsolete coal plants. But in many cases, the cost would be more than covered by increased operating profits arising from a forecast 40 percent rise in wholesale electricity prices. Europe’s power regulators have never given utilities a free ride, however, and are unlikely to do so now, when the whole point is to curb...