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Pass-through of CO2 Emission Costs to Hourly Electricity Prices in Germany

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  • Beat Hintermann

Abstract

I estimate the level of emissions cost pass-through to hourly wholesale electricity prices in Germany, based on spot market data. I control for contemporaneous shocks to demand and supply by constructing a detailed supply curve for fossil generation, and intersecting it with residual demand for fossil-based electricity for every hour. Determining the marginal generator allows me to use marginal fuel and carbon costs (rather than prices) as explanatory variables in order to identify the level of cost pass-through directly and with a high level of precision. I find that carbon costs are passed through to electricity prices by at least 84 %, with a central range of 98 %–104 % for different load periods. My results suggest that there is no economic reason for free allowance allocation to the electricity sector, and thus validate the updated allocation rules in Phase 3 of the European Union Emissions Trading Scheme.

Suggested Citation

  • Beat Hintermann, 2014. "Pass-through of CO2 Emission Costs to Hourly Electricity Prices in Germany," CESifo Working Paper Series 4964, CESifo.
    • Handle: RePEc:ces:ceswps:_4964
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    More about this item

    Keywords

    EU ETS; emission trading; air pollution; cost pass-through; electricity; climate change;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • 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 Adoption and Costs; Distributional Effects; Employment Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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