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Interaction of European Carbon Trading and Energy Prices

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  • Derek W. Bunn

    (London Business School)

  • Carlo Fezzi

    (University of East Anglia)

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    Abstract

    This paper addresses the economic impact of the EU Emission Trading Scheme for carbon on wholesale electricity and gas prices. Specifically, we analyse the mutual relationships between electricity, gas and carbon prices in the daily spot markets in the United Kingdom. Using a structural co-integrated VAR model, we show how the prices of carbon and gas jointly influence the equilibrium price of electricity. Furthermore, we derive the dynamic pass-trough of carbon into electricity price and the response of electricity and carbon prices to shocks in the gas price.

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    Bibliographic Info

    Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2007.63.

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    Date of creation: Jun 2007
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    Handle: RePEc:fem:femwpa:2007.63

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    Keywords: Carbon Emission Trading; Energy Markets; Structural VECM;

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    Cited by:
    1. Chevallier, Julien & Alberola, Emilie & Chèze, Benoît, 2008. "European carbon prices fundamentals in 2005-2007: the effects of energy markets, temperatures and sectorial production," Economics Papers from University Paris Dauphine 123456789/4229, Paris Dauphine University.
    2. Daskalakis, George & Markellos, Raphael N., 2009. "Are electricity risk premia affected by emission allowance prices? Evidence from the EEX, Nord Pool and Powernext," Energy Policy, Elsevier, vol. 37(7), pages 2594-2604, July.
    3. Boris Solier & Pierre-André Jouvet, 2011. "An overview of CO2 cost pass-through to electricity prices in Europe," Working Papers 1108, Chaire Economie du Climat.
    4. 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.
    5. Liu, Hsiang-Hsi & Chen, Yi-Chun, 2013. "A study on the volatility spillovers, long memory effects and interactions between carbon and energy markets: The impacts of extreme weather," Economic Modelling, Elsevier, vol. 35(C), pages 840-855.
    6. Fell, Harrison, 2008. "EU-ETS and Nordic Electricity: A CVAR Approach," Discussion Papers dp-08-31, Resources For the Future.
    7. Markus Wråke & Erica Myers & Dallas Burtraw & Svante Mandell & Charles Holt, 2010. "Opportunity Cost for Free Allocations of Emissions Permits: An Experimental Analysis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 46(3), pages 331-336, July.
    8. 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.
    9. Liu, Ming-Hua & Margaritis, Dimitris & Zhang, Yang, 2013. "Market-driven coal prices and state-administered electricity prices in China," Energy Economics, Elsevier, vol. 40(C), pages 167-175.
    10. Cerruti, Davide, 2013. "No free polluting anymore: The impact of a vehicle pollution charge on air quality," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150575, Agricultural and Applied Economics Association.
    11. Alberola, Emilie & Chevallier, Julien & Cheze, Benoi^t, 2008. "Price drivers and structural breaks in European carbon prices 2005-2007," Energy Policy, Elsevier, vol. 36(2), pages 787-797, February.
    12. 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.
    13. Julien Chevallier & Benoît Sévi, 2011. "On the realized volatility of the ECX CO 2 emissions 2008 futures contract: distribution, dynamics and forecasting," Annals of Finance, Springer, vol. 7(1), pages 1-29, February.

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