Interaction of European Carbon Trading and Energy Prices

Derek Bunn and Carlo Fezzi
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Derek Bunn: London Business School
Carlo Fezzi: University of East Anglia

No 2007.63, Working Papers from Fondazione Eni Enrico Mattei

Abstract: This paper addresses the economic impact of the EU Emission Trading Scheme for carbon on wholesale electricity and gas prices. Specifically, we analyse the mutual relationships between electricity, gas and carbon prices in the daily spot markets in the United Kingdom. Using a structural co-integrated VAR model, we show how the prices of carbon and gas jointly influence the equilibrium price of electricity. Furthermore, we derive the dynamic pass-trough of carbon into electricity price and the response of electricity and carbon prices to shocks in the gas price.

Keywords: Carbon Emission Trading; Energy Markets; Structural VECM (search for similar items in EconPapers)
JEL-codes: C32 L94 Q48 (search for similar items in EconPapers)
Date: 2007-06
New Economics Papers: this item is included in nep-eec, nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (70)

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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2007.63

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