Theoretical Issues and Empirical Analyses
New Horizons in Environmental Economics series
Edited by Francesco Gullì
Chapter 7: Impacts of the European Emissions Trading Scheme on Finnish Wholesale Electricity Prices
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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