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Pass-through of Emissions Costs in Electricity Markets

  • Natalia Fabra
  • Mar Reguant

We measure the pass-through of emissions costs to electricity prices and explore its determinants. We perform both reduced-form and structural estimations based on optimal bidding in this market. Using rich micro-level data, we estimate the channels affecting pass-through in a flexible manner, with minimal functional form assumptions. Contrary to many studies in the general pass-through literature, we find that emissions costs are almost fully passed-through to electricity prices. Since electricity is traded through high-frequency auctions for highly inelastic demand, firms have weak incentives to adjust markups after the cost shock. Furthermore, the costs of price adjustment are small.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19613.

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Date of creation: Nov 2013
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Publication status: published as Natalia Fabra & Mar Reguant, 2014. "Pass-Through of Emissions Costs in Electricity Markets," American Economic Review, American Economic Association, vol. 104(9), pages 2872-99, September.
Handle: RePEc:nbr:nberwo:19613
Note: EEE IO
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