Pass-through of emissions costs in electricity markets Articles uri icon

publication date

  • September 2014

start page

  • 2872

end page

  • 2899

issue

  • 9

volume

  • 104

international standard serial number (ISSN)

  • 0002-8282

electronic international standard serial number (EISSN)

  • 1944-7981

abstract

  • We measure the pass-through of emissions costs to electricity prices. We perform both reduced-form and structural estimations based on optimal bidding in this market. Using rich micro-level data, we estimate the channels affecting pass-through in a flexible manner, with minimal functional form assumptions. Contrary to many studies in the general pass-through literature, we find that emissions costs are almost fully passed through to electricity prices. Since electricity is traded through high-frequency auctions for highly inelastic demand, firms have weak incentives to adjust markups after the cost shock. Furthermore, the costs of price adjustment are small.

keywords

  • spot market; structural approach; exchange-rate; competition; oligopoly; auctions; permits; prices