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First Evidence of Asymmetric Cost Pass-through of EU Emissions Allowances: Examining Wholesale Electricity Prices in Germany

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Georg Zachmann
Christian von Hirschhausen

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Abstract

This paper applies the literature on asymmetric price transmission to the emerging commodity market for EU emissions allowances (EUA). We utilize an error correction model and an autoregressive distributed lag model to measure the relationship between CO2 price changes and the development of wholesale electricity prices. Using data from the German market for electricity and EUAs, we find that the rising prices of EUAs have a stronger impact on wholesale electricity prices than falling prices -- the first empirical evidence of asymmetric cost passthrough for these new allowances.

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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 708.

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Length: 8 p.
Date of creation: 2007
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Publication status: Published in: economics letters 99 (2008), 465-469
Handle: RePEc:diw:diwwpp:dp708

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  1. Sam Peltzman, 2000. "Prices Rise Faster than They Fall," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 466-502, June. [Downloadable!] (restricted)
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  2. Jeffrey D. Karrenbrock, 1991. "The behavior of retail gasoline prices: symmetric or not?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 19-29. [Downloadable!]
  3. Kaufmann, Robert K. & Laskowski, Cheryl, 2005. "Causes for an asymmetric relation between the price of crude oil and refined petroleum products," Energy Policy, Elsevier, vol. 33(12), pages 1587-1596, August. [Downloadable!] (restricted)
  4. Matteo Manera & Giliola Frey, 2005. "Econometric Models of Asymmetric Price Transmission," Working Papers 2005.100, Fondazione Eni Enrico Mattei. [Downloadable!]
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  5. Nathan S. Balke & Stephen P. A. Brown & Mine Yücel, 1998. "Crude oil and gasoline prices: an asymmetric relationship?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q 1, pages 2-11. [Downloadable!]
  6. Borenstein, Severin & Cameron, A Colin & Gilbert, Richard, 1997. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 305-39, February.
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  1. Wölfing, Nikolas, 2008. "Asymmetric Price Transmission in Supply Function Equilibrium, Carbon Prices and the German Electricity Spot Market," ZEW Discussion Papers 08-040, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
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