European Union emissions trading scheme impact on the Spanish electricity price during phase II and phase III implementation

Carlos Freitas and Patricia Silva

Utilities Policy, 2015, vol. 33, issue C, 54-62

Abstract: The European Union Emissions Trading Scheme (EU ETS) is a cornerstone of the European Union's policy to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively. The purpose of the present work is to evaluate the influence of CO2 opportunity cost on the Spanish wholesale electricity price. Our sample includes all Phase II of the EU ETS and the first year of Phase III implementation, from January 2008 to December 2013. A vector error correction model (VECM) is applied to estimate not only long-run equilibrium relations, but also short-run interactions between the electricity price and the fuel (natural gas and coal) and carbon prices. The four commodities prices are modeled as joint endogenous variables with air temperature and renewable energy as exogenous variables. We found a long-run relationship (cointegration) between electricity price, carbon price, and fuel prices. By estimating the dynamic pass-through of carbon price into electricity price for different periods of our sample, it is possible to observe the weakening of the link between carbon and electricity prices as a result from the collapse on CO2 prices, therefore compromising the efficacy of the system to reach proposed environmental goals. This conclusion is in line with the need to shape new policies within the framework of the EU ETS that prevent excessive low prices for carbon over extended periods of time.

Keywords: Q58; H23; Q48; C32; L94; Environmental policy; Carbon emissions; Electricity prices; Cointegration; Vector error correction model (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0957178715000053
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:juipol:v:33:y:2015:i:c:p:54-62

DOI: 10.1016/j.jup.2015.01.004

Access Statistics for this article

Utilities Policy is currently edited by Beecher, Janice

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