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The impact of phase II of the EU ETS on the electricity-generation sector

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  • Ibrahim Ahamada

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Djamel Kirat

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

This paper addresses the economic impact of the European Union Emission Trading Scheme (EU ETS) for carbon on wholesale electricity prices in France and Germany during the Kyoto commitment period (2008-2012). Specifically, we use first identify a structural break occurred on the carbon spot price series on October 2008, which is mainly resulting from the financial and economic crisis. Then, we model the prices of day-ahead electricity contracts. We look at the volatilities around their fundamentals and simultaneously evaluate the correlation between electricity prices in both countries. We find that the price of carbon does not matter for electricity prices in either countries before October 2008. After October 2008, electricity producers in both countries were constrained to include the carbon price in their cost functions. During that period, French electricity producers were more constrained than their German counterparts. Comparing the results with those reported in Kirat and Ahamada (2011) reveals improvements in the response of electricity generation sector to carbon constraints. The impact of carbon constraint increased significantly by 300% and 150% in France and Germany, respectively, between the pilot phase and the second phase of the EU ETS. This is a consequence of the possibility of "banking" for subsequent periods and the reduction of allowance caps introduced in the second phase. We also find evidence of a trade off between gas and coal in electricity generation in Germany. Furthermore, the conditional correlation of electricity prices in both countries is highly significant and greater than during the pilot phase of the EU ETS.

Suggested Citation

  • Ibrahim Ahamada & Djamel Kirat, 2012. "The impact of phase II of the EU ETS on the electricity-generation sector," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00673918, HAL.
  • Handle: RePEc:hal:cesptp:halshs-00673918
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00673918
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    References listed on IDEAS

    as
    1. Kirat, Djamel & Ahamada, Ibrahim, 2011. "The impact of the European Union emission trading scheme on the electricity-generation sector," Energy Economics, Elsevier, vol. 33(5), pages 995-1003, September.
    2. Engle, Robert F & Sheppard, Kevin K, 2001. "Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH," University of California at San Diego, Economics Working Paper Series qt5s2218dp, Department of Economics, UC San Diego.
    3. Perron, Pierre & Vogelsang, Timothy J, 1992. "Nonstationarity and Level Shifts with an Application to Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 301-320, July.
    4. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    5. Perrels, Adriaan & Honkatukia, Juha & Mälkönen, Ville, 2006. "Impacts of the European Emission Trade System on Finnish Wholesale Electricity Prices," Discussion Papers 405, VATT Institute for Economic Research.
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    Cited by:

    1. Ibrahim Ahamada & Djamel Kirat, 2012. "Evidence of a nonlinear effect of the EU ETS on the electricity-generation sector," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00717629, HAL.
    2. Frieder Mokinski & Nikolas Wölfing, 2014. "The effect of regulatory scrutiny: Asymmetric cost pass-through in power wholesale and its end," Journal of Regulatory Economics, Springer, vol. 45(2), pages 175-193, April.
    3. Djamel Kirat & Ibrahim Ahamada, 2016. "Evidence for threshold eff​ects in the pass-through of carbon prices to wholesale electricity prices," Economics Bulletin, AccessEcon, vol. 36(4), pages 2350-2364.
    4. Ibrahim Ahamada & Djamel Kirat, 2012. "Evidence of a nonlinear effect of the EU ETS on the electricity-generation sector," Post-Print halshs-00717629, HAL.
    5. Ralf Martin & Mirabelle Muûls & Ulrich J. Wagner, 2016. "The Impact of the European Union Emissions Trading Scheme on Regulated Firms: What Is the Evidence after Ten Years?," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(1), pages 129-148.

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    More about this item

    Keywords

    energy prices; Carbon emission trading; multivariate GARCH models; structural breaks; energy prices.; prix des énergies.; modèles GARCH multivariés; changements structurels; Marché des permis d'émission;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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