Carbon Taxation and Electricity Price Dynamics: Empirical Evidence from the Australian Market

Nicola Comincioli (), Mattia Guerini and Sergio Vergalli
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Nicola Comincioli: University of Brescia
Mattia Guerini: University of Brescia
Sergio Vergalli: University of Brescia

Environmental & Resource Economics, 2024, vol. 87, issue 12, No 3, 3161 pages

Abstract: Abstract In this paper, we study the change of Australian electricity price dynamics that was observed before, during and after the two-year period in which a Carbon Pricing Mechanism was in force. We fit a two-states Markov Switching Model, representing a high- and a low-volatility state of the world. To avoid the interference due to periodic patterns, a deseasonalization process accounting for short- and long-term seasonality is carried out prior to the study of volatility. Estimation results highlight that, during the period when the carbon tax applies, the volatility level is lower for both the states of the world. Furthermore, the persistence in the low-volatility state is increased in the presence of the carbon tax. This conclusion is particularly relevant for macroeconomic and investment considerations because the increased uncertainty in electricity prices can significantly influence firms’ investment decisions and shape inflation expectations.

Keywords: Carbon pricing; Electricity price volatility; Markov switching models (search for similar items in EconPapers)
JEL-codes: C51 Q41 Q48 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10640-024-00908-4

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