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An overview of CO2 cost pass-through to electricity prices in Europe

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  • Jouvet, Pierre-André
  • Solier, Boris

Abstract

This paper investigates the link between wholesale electricity prices in Europe and the CO2 cost, i.e. the price of European Union Allowances (EUAs), over the two first phases of the European Union Emissions Trading Scheme (EU ETS). We set up a theoretical framework and an empirical model to estimate to what extent daily fluctuations of CO2 costs may have impacted electricity prices. Regarding estimation results for the first phase of the EU ETS, about 42% of estimated pass-through rates appear to be statistically significant, while only one third of them are statistically different from zero in the second phase. We try to improve those results by proposing alternative estimates based on the EU ETS compliance periods.

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File URL: http://basepub.dauphine.fr/xmlui/bitstream/123456789/7761/1/11-07-12-Cahier-R-2011-8-Solier-and-Jouvet-Pass-through-2.pdf
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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/7761.

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Date of creation: Oct 2013
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Publication status: Published in Energy Policy, 2013, Vol. 61. pp. 1370-1376.Length: 6 pages
Handle: RePEc:dau:papers:123456789/7761

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Keywords: European Union Emissions Trading Scheme; EU ETS; spot markets;

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References

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  1. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(1), pages 25-44, January.
  2. Hintermann, Beat, 2010. "Allowance price drivers in the first phase of the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 43-56, January.
  3. Alberola, Emilie & Chevallier, Julien & Cheze, Benoi^t, 2008. "Price drivers and structural breaks in European carbon prices 2005-2007," Energy Policy, Elsevier, Elsevier, vol. 36(2), pages 787-797, February.
  4. Keppler, Jan Horst & Mansanet-Bataller, Maria, 2010. "Causalities between CO2, electricity, and other energy variables during phase I and phase II of the EU ETS," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/5269, Paris Dauphine University.
  5. Sijm, J. & Neuhoff, K. & Chen, Y., 2006. "CO2 cost pass through and windfall profits in the power sector," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0639, Faculty of Economics, University of Cambridge.
  6. Harrison Fell, 2010. "EU-ETS and Nordic Electricity: A CVAR Analysis," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 2), pages 1-26.
  7. Zachmann, Georg & von Hirschhausen, Christian, 2008. "First evidence of asymmetric cost pass-through of EU emissions allowances: Examining wholesale electricity prices in Germany," Economics Letters, Elsevier, Elsevier, vol. 99(3), pages 465-469, June.
  8. Keppler, Jan Horst & Cruciani, Michel, 2010. "Rents in the European power sector due to carbon trading," Energy Policy, Elsevier, Elsevier, vol. 38(8), pages 4280-4290, August.
  9. Fell, Harrison, 2008. "EU-ETS and Nordic Electricity: A CVAR Approach," Discussion Papers, Resources For the Future dp-08-31, Resources For the Future.
  10. Derek W. Bunn & Carlo Fezzi, 2007. "Interaction of European Carbon Trading and Energy Prices," Working Papers, Fondazione Eni Enrico Mattei 2007.63, Fondazione Eni Enrico Mattei.
  11. Chernyavs'ka, Liliya & Gullì, Francesco, 2008. "Marginal CO2 cost pass-through under imperfect competition in power markets," Ecological Economics, Elsevier, Elsevier, vol. 68(1-2), pages 408-421, December.
  12. Bréchet, Thierry & Jouvet, Pierre-André, 2009. "Why environmental management may yield no-regret pollution abatement options," Ecological Economics, Elsevier, Elsevier, vol. 68(6), pages 1770-1777, April.
  13. Declercq, Bruno & Delarue, Erik & D'haeseleer, William, 2011. "Impact of the economic recession on the European power sector's CO2 emissions," Energy Policy, Elsevier, Elsevier, vol. 39(3), pages 1677-1686, March.
  14. Juha Honkatukia & Ville Mälkönen & Adriaan Perrels, 2006. "Impacts of the European Emission Trade System on Finnish Wholesale Electricity Prices," Discussion Papers, Government Institute for Economic Research Finland (VATT) 405, Government Institute for Economic Research Finland (VATT).
  15. Alberola, Emilie & Chevallier, Julien & Chèze, Benoît, 2008. "Price drivers and structural breaks in European carbon prices 2005-07," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/4222, Paris Dauphine University.
  16. McKitrick, Ross, 1999. "A Derivation of the Marginal Abatement Cost Curve," Journal of Environmental Economics and Management, Elsevier, vol. 37(3), pages 306-314, May.
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Cited by:
  1. Renner, Marie, 2014. "Carbon prices and CCS Investment:comparative study between the European Union and China," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/12983, Paris Dauphine University.
  2. Marie Renner, 2014. "Carbon prices and CCS investment: comparative study between the European Union and China," Working Papers 1402, Chaire Economie du Climat.
  3. O'Mahoney, Amy & Denny, Eleanor, 2013. "Electricity prices and generator behaviour in gross pool electricity markets," Energy Policy, Elsevier, Elsevier, vol. 63(C), pages 628-637.
  4. Tim Laing & Misato Sato & Michael Grubb & Claudia Comberti, 2013. "Assessing the effectiveness of the EU Emissions Trading System," Grantham Research Institute on Climate Change and the Environment Working Papers, Grantham Research Institute on Climate Change and the Environment 106, Grantham Research Institute on Climate Change and the Environment.

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