Interaction of carbon and electricity prices under imperfect competition
AbstractIn 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. Hence, common sense would suggest that .rms in imperfectly competitive markets will pass-through into electricity prices only a part of the increase in cost. Instead, by using the load duration curve approach and the dominant .rm with competitive fringe model, the analysis proposed in this paper shows 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) and the power plant mix in the market; the allowance price 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 in four sub-markets with different structural features, confirms the model predictions. Market power, therefore, can determine a significant deviation from the "full pass-through" rule but we can not know which is the sign of this deviation, a priori, i.e. without before carefully accounting for the structural features of the power market.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 5866.
Date of creation: May 2007
Date of revision:
Emission trading; power pricing; imperfect competition;
Find related papers by JEL classification:
- Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply (the Commons)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-24 (All new papers)
- NEP-COM-2007-11-24 (Industrial Competition)
- NEP-ENE-2007-11-24 (Energy Economics)
- NEP-ENV-2007-11-24 (Environmental Economics)
- NEP-MIC-2007-11-24 (Microeconomics)
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