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EU-ETS and Nordic Electricity: A CVAR Approach

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Fell, Harrison () (Resources for the Future)

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Abstract

A cointegrated vector autoregressive (CVAR) model is estimated to determine the dynamic relationship between Nordic wholesale electricity prices and EU emissions trading scheme (EU-ETS) CO2 allowance prices. An impulse response analysis reveals that electricity prices have large short-term responses to CO2 price shocks, but that this response dampens over time. Using hourly Nordic electricity spot market prices, I find that the value of short-term response of electricity prices to a shock in CO2 prices in off-peak hours is consistent with expected values for near complete pass-through of CO2 emission costs when coal-generated power is at the margin. Likewise, the estimates reveal that peak hour electricity price responses to CO2 price shocks are as expected for a market that has near complete passthrough of CO2 emission costs when natural gas-generated power is at the margin. These results further suggest the Nordic electricity market is pricing as a competitive market.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-08-31.

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Date of creation: 15 Aug 2008
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Handle: RePEc:rff:dpaper:dp-08-31

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Related research
Keywords: cointegrated vector autoregression; impulse response; electricity markets; CO2 cost pass-through; EU-ETS;

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Find related papers by JEL classification:
Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Costs; Distributional Effects; Employment Effects
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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    Other versions:
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