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Marginal CO2 cost pass-through under imperfect competition in power markets

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  • Chernyavs'ka, Liliya
  • Gullì, Francesco
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    Abstract

    In line with economic theory, carbon ETS determines a rise in marginal cost equal to the carbon opportunity cost regardless of whether carbon allowances are allocated free of charge or not. This paper aims at evaluating to what extent firms in imperfectly competitive markets will pass-through into electricity prices the increase in cost. By using the load duration curve approach and the dominant firm with competitive fringe model, we show that the result is ambiguous. The increase in price can be either lower or higher than the marginal CO2 cost, depending on several structural factors: the degree of market concentration, the available capacity (whether there is excess capacity or not), the power plant mix in the market and the power demand level (peak vs. off-peak hours). The empirical analysis of the Italian context (an emblematic case of imperfectly competitive market), which can be split into four sub-markets with different structural features, provides a contribution supporting the model predictions. Market power, therefore, would determine a significant deviation from the "full pass-through" rule but we cannot know the sign of this deviation, a priori, i.e. without before taking carefully into account the structural features of the power market.

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    File URL: http://www.sciencedirect.com/science/article/B6VDY-4SS9V9R-1/2/df38f7d558a4486f56acea305925c538
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    Bibliographic Info

    Article provided by Elsevier in its journal Ecological Economics.

    Volume (Year): 68 (2008)
    Issue (Month): 1-2 (December)
    Pages: 408-421

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    Handle: RePEc:eee:ecolec:v:68:y:2008:i:1-2:p:408-421

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    Web page: http://www.elsevier.com/locate/ecolecon

    Related research

    Keywords: Emissions trading Power pricing Imperfect competition;

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    Cited by:
    1. Jouvet, Pierre-André & Solier, Boris, 2013. "An overview of CO2 cost pass-through to electricity prices in Europe," Economics Papers from University Paris Dauphine 123456789/7761, Paris Dauphine University.
    2. Lambie, Neil Ross, 2010. "Understanding the effect of an emissions trading scheme on electricity generator investment and retirement behaviour: the proposed Carbon Pollution Reduction Scheme," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(2), June.
    3. Francesco Gullì, 2011. "The interaction between emissions trading and energy and competition policies," RSCAS Working Papers 2011/20, European University Institute.
    4. Sijm, Jos & Chen, Yihsu & Hobbs, Benjamin F., 2012. "The impact of power market structure on CO2 cost pass-through to electricity prices under quantity competition – A theoretical approach," Energy Economics, Elsevier, vol. 34(4), pages 1143-1152.
    5. Spash, Clive L., 2009. "The Brave New World of Carbon Trading," MPRA Paper 19114, University Library of Munich, Germany.
    6. Phil Wild & William Paul Bell & John Foster, 2012. "The Impact of Carbon Pricing on Wholesale Electricity Prices, Carbon Pass-Through Rates and Retail Electricity Tariffs in Australia," Energy Economics and Management Group Working Papers 5-2012, School of Economics, University of Queensland, Australia.
    7. Keppler, Jan Horst & Cruciani, Michel, 2010. "Rents in the European power sector due to carbon trading," Energy Policy, Elsevier, vol. 38(8), pages 4280-4290, August.
    8. Wietze Lise & Jos Sijm & Benjamin Hobbs, 2010. "The Impact of the EU ETS on Prices, Profits and Emissions in the Power Sector: Simulation Results with the COMPETES EU20 Model," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 47(1), pages 23-44, September.
    9. Lambie, N. Ross, 2009. "The role of real options analysis in the design of a greenhouse gas emissions trading scheme," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 47626, Australian Agricultural and Resource Economics Society.

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