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EU-ETS and Nordic Electricity: A CVAR Approach

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  • Fell, Harrison

    (Resources for the Future)

Abstract

A cointegrated vector autoregressive (CVAR) model is estimated to determine the dynamic relationship between Nordic wholesale electricity prices and EU emissions trading scheme (EU-ETS) CO2 allowance prices. An impulse response analysis reveals that electricity prices have large short-term responses to CO2 price shocks, but that this response dampens over time. Using hourly Nordic electricity spot market prices, I find that the value of short-term response of electricity prices to a shock in CO2 prices in off-peak hours is consistent with expected values for near complete pass-through of CO2 emission costs when coal-generated power is at the margin. Likewise, the estimates reveal that peak hour electricity price responses to CO2 price shocks are as expected for a market that has near complete passthrough of CO2 emission costs when natural gas-generated power is at the margin. These results further suggest the Nordic electricity market is pricing as a competitive market.

Suggested Citation

  • Fell, Harrison, 2008. "EU-ETS and Nordic Electricity: A CVAR Approach," RFF Working Paper Series dp-08-31, Resources for the Future.
  • Handle: RePEc:rff:dpaper:dp-08-31
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    File URL: http://www.rff.org/RFF/documents/RFF-DP-08-31.pdf
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    Cited by:

    1. M. Cummins, 2013. "Multiple comparisons problem: Recent advances applied to energy and emissions," Applied Economics Letters, Taylor & Francis Journals, vol. 20(9), pages 903-909, June.
    2. Charles Holt & Erica Myers & Markus Wrake & Dallas Burtraw & Svante Mandell, 2010. "Teaching Opportunity Cost in an Emissions Permit Experiment," International Review of Economic Education, Economics Network, University of Bristol, vol. 9(2), pages 34-42.
    3. Kim, Wook & Chattopadhyay, Deb & Park, Jong-bae, 2010. "Impact of carbon cost on wholesale electricity price: A note on price pass-through issues," Energy, Elsevier, vol. 35(8), pages 3441-3448.
    4. Jaraitė, Jūratė & Kažukauskas, Andrius, 2013. "The profitability of electricity generating firms and policies promoting renewable energy," Energy Economics, Elsevier, vol. 40(C), pages 858-865.
    5. Wråke, Markus & Myers, Erica & Mandell, Svante & Holt, Charles & Burtraw, Dallas, 2008. "Pricing Strategies under Emissions Trading: An Experimental Analysis," RFF Working Paper Series dp-08-49, Resources for the Future.
    6. Philippe Quirion, 2009. "Historic versus output-based allocation of GHG tradable allowances: a comparison," Climate Policy, Taylor & Francis Journals, vol. 9(6), pages 575-592, November.
    7. Golombek, Rolf & Kittelsen, Sverre A.C. & Rosendahl, Knut Einar, 2013. "Price and welfare effects of emission quota allocation," Energy Economics, Elsevier, vol. 36(C), pages 568-580.
    8. Botterud, Audun & Kristiansen, Tarjei & Ilic, Marija D., 2010. "The relationship between spot and futures prices in the Nord Pool electricity market," Energy Economics, Elsevier, vol. 32(5), pages 967-978, September.
    9. Carlos Pinho & Mara Madaleno, 2011. "CO 2 emission allowances and other fuel markets interaction," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 13(3), pages 259-281, September.
    10. Jouvet, Pierre-André & Solier, Boris, 2013. "An overview of CO2 cost pass-through to electricity prices in Europe," Energy Policy, Elsevier, vol. 61(C), pages 1370-1376.
    11. Mauritzen, Johannes, 2011. "Dead Battery? Wind Power, The Spot Market, and Hydro Power Interaction in the Nordic Electricity Market," Discussion Papers 2011/16, Norwegian School of Economics, Department of Business and Management Science.
    12. Alexeeva-Talebi, Victoria, 2011. "Cost pass-through of the EU emissions allowances: Examining the European petroleum markets," Energy Economics, Elsevier, vol. 33(S1), pages 75-83.
    13. Beat Hintermann, 2011. "Market Power, Permit Allocation and Efficiency in Emission Permit Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 49(3), pages 327-349, July.
    14. Yu, Haisan, 2010. "The EU ETS and Firm Profits: An Ex-post Analysis for Swedish Energy Firms," Working Paper Series 2011:2, Uppsala University, Department of Economics.
    15. Markus Wråke & Erica Myers & Dallas Burtraw & Svante Mandell & Charles Holt, 2010. "Opportunity Cost for Free Allocations of Emissions Permits: An Experimental Analysis," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 46(3), pages 331-336, July.
    16. Thoenes, Stefan, 2011. "Understanding the Determinants of Electricity Prices and the Impact of the German Nuclear Moratorium in 2011," EWI Working Papers 2011-6, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).

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    More about this item

    Keywords

    cointegrated vector autoregression; impulse response; electricity markets; CO2 cost pass-through; EU-ETS;
    All these keywords.

    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • 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
    • 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

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