The CO2 cost pass-through in nonlinear emission trading schemes

Zhe Chen, Yan-ling Chen, Yue Su, Xue-ying Wang and You Wu

Journal of Commodity Markets, 2023, vol. 30, issue C

Abstract: In this paper, we theoretically study the issues that how nonlinear structures of energy market affect CO2 costs of energy firms being passed through to energy prices in emission trading schemes. We set up oligopoly models to investigate CO2 cost pass-through under different emission right allocations, characterize analytic derivations of CO2 cost pass-through rates and then explore the connections between CO2 pass-through rates and nonlinear market structures. Our findings suggest that the CO2 cost pass-though rates are not only dependent on the elasticities of energy demand and supply, but largely determined by the convexity of demand curve and the competition intensity of energy market. More importantly, an economic curiosity (CO2 cost pass-through overshifting) is also observed in the emission trading schemes under suitable market conditions. The existence of CO2 cost pass-through overshifting provides regulators and policy makers important information that the emission trading schemes are at the risk of imperfect competition and may require further policy adjustments.

Keywords: Emission trading; Nonlinear market structure; CO2 cost; Overshifting; Oligopoly (search for similar items in EconPapers)
JEL-codes: D42 L12 Q41 Q50 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:30:y:2023:i:c:s2405851322000435

DOI: 10.1016/j.jcomm.2022.100286

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