Pass-through of CO2 emission costs to hourly electricity prices in Germany

05 November 2014, 16:00 - 17:15

This is a past event

I estimate the level of emissions cost pass-through to hourly wholesale electricity prices

in Germany, based on spot market data. I control for contemporaneous shocks to demand

and supply by constructing a detailed supply curve for fossil generation, and intersecting

it with residual demand for fossil-based electricity for every hour. Determining the

marginal generator allows me to use marginal fuel and carbon costs (rather than prices)

as explanatory variables in order to identify the level of cost pass-through directly and

with a high level of precision. I find that carbon costs are passed through to electricity

prices by at least 84 %, with a central range of 98 %–104 % for different load periods. My

results suggest that there is no economic reason for free allowance allocation to the electricity

sector, and thus validate the updated allocation rules in Phase 3 of the European

Union Emissions Trading Scheme.