Pass-Through of Emissions Costs in Electricity Markets

34 Pages Posted: 9 Nov 2013 Last revised: 5 Aug 2021

See all articles by Natalia Fabra

Natalia Fabra

Universidad Carlos III de Madrid - Departmento de Economia

Mar Reguant

Northwestern University - Department of Economics

Date Written: November 2013

Abstract

We measure the pass-through of emissions costs to electricity prices and explore its determinants. 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.

Suggested Citation

Fabra, Natalia and Reguant, Mar, Pass-Through of Emissions Costs in Electricity Markets (November 2013). NBER Working Paper No. w19613, Available at SSRN: https://ssrn.com/abstract=2352130

Natalia Fabra (Contact Author)

Universidad Carlos III de Madrid - Departmento de Economia ( email )

E-28903 Getafe (Madrid)
Spain
+34-91 6249594 (Phone)
+34-91 6249329 (Fax)

Mar Reguant

Northwestern University - Department of Economics ( email )

2001 Sheridan Rd
Evanston, IL 60208
United States

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