Carbon pricing, forward risk premiums and pass-through rates in Australian electricity futures markets

We investigate the impacts of the carbon tax (effective July 2012 to July 2014) on wholesale electricity prices in the Australian National Electricity Market (NEM). Analyzing spot and futures contracts in four major regional markets, we first compute ex-ante forward risk premiums in the pre-tax period, then use them to derive market-implied carbon premiums and pass-through rates in the carbon tax and post-tax periods. We find that carbon premiums and pass-through rates became increasingly higher, once the Clean Energy Bill had been introduced and subsequently passed in 2011. We also find strong evidence for a quick reaction of the extracted carbon premiums to changes in opinion polls for the Australian federal election in 2013 and the decision to repeal the tax. On the other hand, during periods where market participants could be relatively certain that the tax would be effective, we find expected carbon pass-through rates between 65% and 140%, which seem to be inversely related to emission intensities.