Time variation in European carbon pass-through rates in electricity futures prices

Ronald Huisman and Mehtap Kiliç

Energy Policy, 2015, vol. 86, issue C, 239-249

Abstract: The European Union Emissions Trading Scheme is a means to price emission allowances. Electricity market prices should reflect these market prices of emission allowances as they are a cost factor for power producers. The pass-through rate is the fraction of the emission allowance price that is passed through to electricity market prices. It is often measured and presented as an average or a fixed estimate over some time period. However, we expect that the pass-through rates should actually vary over time as electricity supply curves reflect the marginal costs of different producers that differ in emission intensity. We apply a Kalman Filter approach to observe pass-through rates in Germany and U.K. and find strong support for time varying instead of fixed pass-through rates. Although policy makers are interested in the impact of a policy on average, our results indicate that one needs to be careful with the time-frame over which pass-through rates are measured for policy evaluation, as an incorrect chosen evaluation period could cause an under- or overestimation of the pass-through rate. In addition, our model helps to provide policy makers with insight in the development of pass-through rates when market circumstances change with respect to power production.

Keywords: Emission rights; Pass-through rates; Kalman Filter; Electricity futures prices (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0301421515300161
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:86:y:2015:i:c:p:239-249

DOI: 10.1016/j.enpol.2015.07.005

Access Statistics for this article

Energy Policy is currently edited by N. France

More articles in Energy Policy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().