Time variation in European carbon pass-through rates in electricity futures prices

Time variation in European carbon pass-through rates in electricity futures prices The European Union Emissions Trading Scheme is a means to price emission allowances. Electricity market prices should reflect these market prices of emission allowances as they are a cost factor for power producers. The pass-through rate is the fraction of the emission allowance price that is passed through to electricity market prices. It is often measured and presented as an average or a fixed estimate over some time period. However, we expect that the pass-through rates should actually vary over time as electricity supply curves reflect the marginal costs of different producers that differ in emission intensity. We apply a Kalman Filter approach to observe pass-through rates in Germany and U.K. and find strong support for time varying instead of fixed pass-through rates. Although policy makers are interested in the impact of a policy on average, our results indicate that one needs to be careful with the time-frame over which pass-through rates are measured for policy evaluation, as an incorrect chosen evaluation period could cause an under- or overestimation of the pass-through rate. In addition, our model helps to provide policy makers with insight in the development of pass-through rates when market circumstances change with respect to power production. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Energy Policy Elsevier

Time variation in European carbon pass-through rates in electricity futures prices

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Publisher
Elsevier
Copyright
Copyright © 2015 Elsevier Ltd
ISSN
0301-4215
D.O.I.
10.1016/j.enpol.2015.07.005
Publisher site
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Abstract

The European Union Emissions Trading Scheme is a means to price emission allowances. Electricity market prices should reflect these market prices of emission allowances as they are a cost factor for power producers. The pass-through rate is the fraction of the emission allowance price that is passed through to electricity market prices. It is often measured and presented as an average or a fixed estimate over some time period. However, we expect that the pass-through rates should actually vary over time as electricity supply curves reflect the marginal costs of different producers that differ in emission intensity. We apply a Kalman Filter approach to observe pass-through rates in Germany and U.K. and find strong support for time varying instead of fixed pass-through rates. Although policy makers are interested in the impact of a policy on average, our results indicate that one needs to be careful with the time-frame over which pass-through rates are measured for policy evaluation, as an incorrect chosen evaluation period could cause an under- or overestimation of the pass-through rate. In addition, our model helps to provide policy makers with insight in the development of pass-through rates when market circumstances change with respect to power production.

Journal

Energy PolicyElsevier

Published: Nov 1, 2015

References

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