Revisiting Cap-and-Trade in Presence of Publicly Owned Polluters: The Case of Italy 2006-2018

Jakub Kastl, Bruno Baranek and Federico Boffa

No 15989, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We use the example of the Italian electricity spot market to empirically document that carbon pricing schemes may not work efficiently when the major ï¬ rms in the market are government- controlled. We show that government-controlled companies do not internalize emission prices implied by the European Union emissions trading system in their bids, which reduces pass- through of emission costs and introduces inefficiency. A vast majority of electricity generators in the world are government owned and this is especially true for fossil fuel burning ones. We argue that, as a result, contrary to conventional wisdom among economists, carbon pricing is unlikely to be an efficient way to regulate and mitigate emissions in the electricity sector. A command- and-control approach, involving emission standards, might be more suitable, especially since reliable estimates of the production functions of electric generators are readily available. Our results cast doubts on the welfare implications of the massive ETS program that China will be implementing starting in 2021.

Keywords: Electricity; Emission permits; Multiunit auctions; Cap-and-trade regulation; Government-controlled companies (search for similar items in EconPapers)
JEL-codes: D44 H23 L32 Q40 Q52 (search for similar items in EconPapers)
Date: 2021-03
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