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EU-ETS and Nordic Electricity: A CVAR Analysis

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  • Harrison Fell

Abstract

A cointegrated vector autoregressive (CVAR) model is estimated to determine the dynamic relationship between Nordic wholesale electricity prices and EU emissions trading scheme (EU-ETS) CO2 allowance prices. An impulse response analysis reveals that electricity prices have large short-term responses to CO2 price shocks, but that this response dampens over time. Using hourly Nordic electricity spot market prices, I find that the value of short-term response of electricity prices to a shock in CO2 prices in off-peak hours is consistent with expected values for near complete pass-through of CO2 emission costs when coal-generated power is at the margin. Likewise, the estimates reveal that peak hour electricity price responses to CO2 price shocks are as expected for a market that has near complete pass-through of CO2 emission costs when natural gas-generated power is at the margin. These results further suggest the Nordic electricity market is pricing as a competitive market.

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Bibliographic Info

Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 31 (2010)
Issue (Month): Number 2 ()
Pages: 1-26

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Handle: RePEc:aen:journl:2010v31-02-a01

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Cited by:
  1. Aleksandar Zaklan, 2013. "Why Do Emitters Trade Carbon Permits?: Firm-Level Evidence from the European Emission Trading Scheme," Discussion Papers of DIW Berlin 1275, DIW Berlin, German Institute for Economic Research.
  2. Jouvet, Pierre-André & Solier, Boris, 2013. "An overview of CO2 cost pass-through to electricity prices in Europe," Energy Policy, Elsevier, vol. 61(C), pages 1370-1376.
  3. Pahle, Michael & Fan, Lin & Schill, Wolf-Peter, 2011. "How emission certificate allocations distort fossil investments: The German example," Energy Policy, Elsevier, vol. 39(4), pages 1975-1987, April.
  4. Golombek, Rolf & Kittelsen, Sverre A.C. & Rosendahl, Knut Einar, 2013. "Price and welfare effects of emission quota allocation," Energy Economics, Elsevier, vol. 36(C), pages 568-580.
  5. Widerberg, Anna & Wråke, Markus, 2009. "The Impact of the EU Emissions Trading System on CO2 Intensity in Electricity Generation," Working Papers in Economics 361, University of Gothenburg, Department of Economics.
  6. Frieder Mokinski & Nikolas Wölfing, 2014. "The effect of regulatory scrutiny: Asymmetric cost pass-through in power wholesale and its end," Journal of Regulatory Economics, Springer, vol. 45(2), pages 175-193, April.
  7. Thoenes, Stefan, 2011. "Understanding the Determinants of Electricity Prices and the Impact of the German Nuclear Moratorium in 2011," EWI Working Papers 2011-6, Energiewirtschaftliches Institut an der Universitaet zu Koeln.

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