Markets for Carbon and Power Pricing in Europe

Markets for Carbon and Power Pricing in Europe

Theoretical Issues and Empirical Analyses

New Horizons in Environmental Economics series

Edited by Francesco Gullì

Why do power prices seem to be correlated with the carbon price in some markets and not in others? This crucial question is at the centre of Francesco Gullì’s enlightening book, through which the contributing authors investigate a number of related issues. In particular, they explore why power firms are not consistent in passing-through into power prices the opportunity cost of carbon. They also examine the relationship between the pass-through mechanism and the structure of the power market.

Chapter 7: Impacts of the European Emissions Trading Scheme on Finnish Wholesale Electricity Prices

Juha Honkatukia, Ville Mälkönen and Adriaan Perrels

Subjects: economics and finance, energy economics, environmental economics, environment, environmental economics


Juha Honkatukia, Ville Mälkönen and Adriaan Perrels1 7.1 INTRODUCTION The immediate and anticipated effect of the European Emissions Trading Scheme (EU ETS) has been an increase in electricity prices. The basic effect of emissions trading on unit costs is clear enough; however, it is not straightforward to assess with a reasonable degree of precision by what amount the electricity wholesale price has risen as a result of price rises in the EU ETS. This chapter overviews the industrial organization aspects of how the ETS affects electricity pricing and empirically examines the developments in the first two years of emissions trading. The goals of the study are twofold. First, the theoretical section (Section 7.2) explains the pricing mechanisms that may be relevant at the Nordic electricity markets and how the ETS should affect the prices under different assumptions about the market structures. Second, the empirical section (Section 7.3) involves econometric estimations of the extent to which EU ETS permit prices affect wholesale electricity prices in Finland. The results from the empirical section will then be discussed in the light of the results illustrated in the theoretical section. Section 7.2 shows that under perfectly competitive markets the carbon price is passed on to the spot-market price only in times of peak demand when the market-clearing price exceeds the generators’ cost of switching to fossil-fuel power. Comparing these results with the empirical observations in the NordPool spot market where the price closely follows the ETS...

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