The impact of phase II of the EU ETS on the electricity-generation sector

Ibrahim Ahamada and Djamel Kirat

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: This paper addresses the economic impact of the European Union Emission Trading Scheme (EU ETS) for carbon on wholesale electricity prices in France and Germany during the Kyoto commitment period (2008-2012). Specifically, we use first identify a structural break occurred on the carbon spot price series on October 2008, which is mainly resulting from the financial and economic crisis. Then, we model the prices of day-ahead electricity contracts. We look at the volatilities around their fundamentals and simultaneously evaluate the correlation between electricity prices in both countries. We find that the price of carbon does not matter for electricity prices in either countries before October 2008. After October 2008, electricity producers in both countries were constrained to include the carbon price in their cost functions. During that period, French electricity producers were more constrained than their German counterparts. Comparing the results with those reported in Kirat and Ahamada (2011) reveals improvements in the response of electricity generation sector to carbon constraints. The impact of carbon constraint increased significantly by 300% and 150% in France and Germany, respectively, between the pilot phase and the second phase of the EU ETS. This is a consequence of the possibility of "banking" for subsequent periods and the reduction of allowance caps introduced in the second phase. We also find evidence of a trade off between gas and coal in electricity generation in Germany. Furthermore, the conditional correlation of electricity prices in both countries is highly significant and greater than during the pilot phase of the EU ETS

Keywords: Carbon emission trading; multivariate GARCH models; structural breaks; energy prices (search for similar items in EconPapers)
JEL-codes: C32 C51 Q49 Q58 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2012-01
New Economics Papers: this item is included in nep-ene, nep-env and nep-eur
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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http://mse.univ-paris1.fr/pub/mse/CES2012/12007.pdf (application/pdf)

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Working Paper: The impact of phase II of the EU ETS on the electricity-generation sector (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:12007

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