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Marginal CO2 cost pass-through under imperfect competition in power markets

Listed author(s):
  • Chernyavs'ka, Liliya
  • Gullì, Francesco
Registered author(s):

    In 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. This paper aims at evaluating to what extent firms in imperfectly competitive markets will pass-through into electricity prices the increase in cost. By using the load duration curve approach and the dominant firm with competitive fringe model, we show 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), the power plant mix in the market 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 into four sub-markets with different structural features, provides a contribution supporting the model predictions. Market power, therefore, would determine a significant deviation from the "full pass-through" rule but we cannot know the sign of this deviation, a priori, i.e. without before taking carefully into account the structural features of the power market.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0921-8009(08)00177-8
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    Article provided by Elsevier in its journal Ecological Economics.

    Volume (Year): 68 (2008)
    Issue (Month): 1-2 (December)
    Pages: 408-421

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    Handle: RePEc:eee:ecolec:v:68:y:2008:i:1-2:p:408-421
    Contact details of provider: Web page: http://www.elsevier.com/locate/ecolecon

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    1. Natalia Fabra & Nils‐Henrik Fehr & David Harbord, 2006. "Designing electricity auctions," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 23-46, 03.
    2. repec:rje:randje:v:37:y:2006:1:p:23-46 is not listed on IDEAS
    3. Requate, Till, 2005. "Environmental Policy under Imperfect Competition : A Survey," Economics Working Papers 2005,12, Christian-Albrechts-University of Kiel, Department of Economics.
    4. Jos Sijm & Karsten Neuhoff & Yihsu Chen, 2006. "CO 2 cost pass-through and windfall profits in the power sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 49-72, January.
    5. Derek W. Bunn & Carlo Fezzi, 2007. "Interaction of European Carbon Trading and Energy Prices," Working Papers 2007.63, Fondazione Eni Enrico Mattei.
    6. Bushnell, James, 2003. "A Mixed Complementarity Model of Hydro-Thermal Competition in the Western U.S," Staff General Research Papers Archive 13144, Iowa State University, Department of Economics.
    7. von der Fehr, Nils-Henrik Morch & Harbord, David, 1993. "Spot Market Competition in the UK Electricity Industry," Economic Journal, Royal Economic Society, vol. 103(418), pages 531-546, May.
    8. Bonacina, Monica & Gulli`, Francesco, 2007. "Electricity pricing under "carbon emissions trading": A dominant firm with competitive fringe model," Energy Policy, Elsevier, vol. 35(8), pages 4200-4220, August.
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