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Interaction of European Carbon Trading and Energy Prices

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Author Info
Derek W. Bunn (London Business School)
Carlo Fezzi (University of East Anglia)
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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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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Related research
Keywords: Carbon Emission Trading; Energy Markets; Structural VECM;

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Find related papers by JEL classification:
Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  4. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16. [Downloadable!]
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  13. Doornik, Jurgen A, 1998. " Approximations to the Asymptotic Distributions of Cointegration Tests," Journal of Economic Surveys, Blackwell Publishing, vol. 12(5), pages 573-93, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fell, Harrison, 2008. "EU-ETS and Nordic Electricity: A CVAR Approach," Discussion Papers dp-08-31, Resources For the Future. [Downloadable!]
  2. Emilie Alberola & Julien Pierre Chevallier & Benoît Chèze, 2007. "European carbon prices fundamentals in 2005-2007: the effects of energy markets, temperatures and sectorial production," EconomiX Working Papers 2007-33, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
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