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Carbon content of electricity futures in Phase II of the EU ETS

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We estimate the relationship between electricity, fuel and carbonpricesinGermany, France, the Netherlands, the Nord Pool market and Spain, using one-year futures for base and peakload prices for the years 2008-2011, corresponding to physical settlement during the second market phase of the EU ETS. We employ a series of estimation methods that allow for an increasing interactionbetweenelectricityand input prices on the one hand, and between electricity markets on the other. The results vary by country due to different generation portfolios. Overall, we find that (a) carbon costs are passed through fully in most countries; (b) under some model specifications, cost pass-through is higher during peakload than during baseload for France, Germany and the Netherlands; and (c) the results are sensitive to the degree of cross-commodity and cross-market interaction allowed.

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JEL Codes: Q42: Alternative Energy Sources, Q41: Energy: Demand and Supply; Prices, Q35: Hydrocarbon Resources, Q54: Climate; Natural Disasters and Their Management; Global Warming, C51: Model Construction and Estimation

Keywords: Cost pass-through, Electricity markets, EU ETS, Cointegration, Carbon content, Renewables, GARCH

DOI: 10.5547/01956574.36.4.hfel

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Published in Volume 36, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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