Evaluation of dynamic pass-through of carbon prices into electricity prices - a cointegrated VECM analysis

Carlos Freitas and Patricia Silva

International Journal of Public Policy, 2013, vol. 9, issue 1/2, 65-85

Abstract: This paper addresses the impact of the CO₂ opportunity cost on the wholesale electricity price in the context of the Iberian electricity market (MIBEL), namely on the Portuguese system, for the period corresponding to the Phase II of the European Union Emission Trading Scheme (EU ETS). In the econometric analysis a vector error correction model (VECM) is specified to estimate both long-run equilibrium relations and short-run interactions between the electricity price and the fuel (natural gas and coal) and carbon prices. The model is estimated using daily spot market prices and the four commodities prices are jointly modelled as endogenous variables. Moreover, a set of exogenous variables is incorporated in order to account for the electricity demand conditions (temperature) and the electricity generation mix (quantity of electricity traded according the technology used). The outcomes for the Portuguese electricity system suggest that the dynamic pass-through of carbon prices into electricity prices is strongly significant and a long-run elasticity was estimated (equilibrium relation) that is aligned with studies that have been conducted for other markets.

Keywords: European Union Emission Trading Scheme; EU ETS; Iberian electricity market; cointegration; vector error correction model; VECM; European climate policy; Kyoto Protocol; carbon cost pass-through; climate change; CO2; carbon dioxide; carbon trading; opportunity costs; wholesale electricity prices; Portugal; fuel prices; natural gas prices; coal prices; carbon prices; modelling; electricity demand conditions; electricity generation mix. (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (16)

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