EU-ETS and Nordic Electricity: A CVAR Approach

31 Pages Posted: 24 Sep 2008 Last revised: 9 Nov 2008

Date Written: August 15, 2008


A cointegrated vector autoregressive (CVAR) model is estimated to determine the dynamic relationship between Nordic wholesale electricity prices and EU emissions trading scheme (EU-ETS) CO2 allowance prices. An impulse response analysis reveals that electricity prices have large short-term responses to CO2 price shocks, but that this response dampens over time. Using hourly Nordic electricity spot market prices, I find that the value of short-term response of electricity prices to a shock in CO2 prices in off-peak hours is consistent with expected values for near complete pass-through of CO2 emission costs when coal-generated power is at the margin. Likewise, the estimates reveal that peak hour electricity price responses to CO2 price shocks are as expected for a market that has near complete pass-through of CO2 emission costs when natural gas-generated power is at the margin. These results further suggest the Nordic electricity market is pricing as a competitive market.

Keywords: cointegrated vector autoregression, impulse response, electricity markets, CO2 cost pass-through, EU-ETS

JEL Classification: Q40, Q48, Q52, C32

Suggested Citation

Fell, Harrison G., EU-ETS and Nordic Electricity: A CVAR Approach (August 15, 2008). RFF Discussion Paper No. 08-31, Available at SSRN: or

Harrison G. Fell (Contact Author)

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