EU-ETS and Nordic Electricity: A CVAR Approach

Harrison Fell ()

Discussion Papers from 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.

Keywords: cointegrated vector autoregression; impulse response; electricity markets; CO2 cost pass-through; EU-ETS (search for similar items in EconPapers)
JEL-codes: Q40 Q48 Q52 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-ene and nep-env
Date: 2008-08-15
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