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A Market Design Proposal for Decoupling Carbon and Electricity Prices

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  • Simon Finster
  • Bernhard Kasberger
  • Simon Rutten

Abstract

In European day-ahead electricity markets, carbon allowance costs passed through by marginal fossil plants raise consumer expenditure and generate inframarginal rents for non-emitting generators. We propose a settlement modification: when the zonal day-ahead price exceeds a threshold, non-emitting generation is remunerated at the clearing price minus a fixed CO2 proxy deduction, while all other units continue to receive the uniform price. The mechanism thus reallocates a part of the inframarginal rents to consumers. Using hourly data we estimate static average expenditure reductions of about 8.5% in Austria and 4.7% in Germany in 2025. We discuss bidding incentives around the threshold, interactions with Contracts for Difference, implementation in coupled bidding zones, and a gas-cost variant for the 2022 energy crisis.

Suggested Citation

  • Simon Finster & Bernhard Kasberger & Simon Rutten, 2026. "A Market Design Proposal for Decoupling Carbon and Electricity Prices," Papers 2603.25874, arXiv.org.
    • Handle: RePEc:arx:papers:2603.25874
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    References listed on IDEAS

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    1. Sijm, Jos & Chen, Yihsu & Hobbs, Benjamin F., 2012. "The impact of power market structure on CO2 cost pass-through to electricity prices under quantity competition – A theoretical approach," Energy Economics, Elsevier, vol. 34(4), pages 1143-1152.
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