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

  • Ibrahim Ahamada

    ()

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Djamel Kirat

    ()

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

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.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00673918.

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Date of creation: Jan 2012
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Handle: RePEc:hal:cesptp:halshs-00673918
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00673918
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  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. 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 301-20, July.
  3. Juha Honkatukia & Ville Mälkönen & Adriaan Perrels, 2006. "Impacts of the European Emission Trade System on Finnish Wholesale Electricity Prices," Discussion Papers 405, Government Institute for Economic Research Finland (VATT).
  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 339-50, July.
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