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The impact of the European Union emission trading scheme on the electricity-generation sector

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  • Kirat, Djamel
  • Ahamada, Ibrahim

Abstract

In order to comply with their commitments under the Kyoto Protocol, France and Germany participate in the European Union Emission Trading Scheme (EU ETS) which predominantly concerns the electricity-generation sectors. In this paper we ask whether the EU ETS provides the appropriate economic incentives to produce an efficient system in line with the Kyoto commitments. If so, electricity producers in the countries concerned should include the price of carbon in their cost functions. After identifying different sub-periods of the EU ETS during its pilot phase (2005-2007), we model the prices of various electricity contracts in France and Germany and look at the volatility of electricity prices around their fundamentals while evaluating the correlation between electricity prices in the two countries. We find that electricity producers in both countries were constrained to include the carbon price in their cost functions during the first two years of the EU ETS. Over this period, German electricity producers were more constrained than their French counterparts, and the inclusion of the carbon price in the electricity-generation cost function was much more stable in Germany than in France. We also find evidence of fuel switching in electricity generation in Germany after the collapse of the carbon market. Furthermore, the European market for emission allowances has greatly contributed to the partial alignment of the wholesale price of electricity in France to that in Germany.

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  • Kirat, Djamel & Ahamada, Ibrahim, 2011. "The impact of the European Union emission trading scheme on the electricity-generation sector," Energy Economics, Elsevier, vol. 33(5), pages 995-1003, September.
    • Handle: RePEc:eee:eneeco:v:33:y:2011:i:5:p:995-1003
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    More about this item

    Keywords

    Carbon emission trading Multivariate GARCH models Structural breaks Non-parametric approach Energy prices;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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