Interaction of European Carbon Trading and Energy Prices

Bunn, Derek W.; Fezzi, Carlo

doi:10.2139/ssrn.993791

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Interaction of European Carbon Trading and Energy Prices

FEEM Working Paper No. 63.2007

23 Pages Posted: 15 Jun 2007 Last revised: 15 Jun 2011

See all articles by Derek W. Bunn

Carlo Fezzi

University of East Anglia (UEA) - School of Environmental Sciences

Date Written: June 1, 2007

Abstract

This paper addresses the economic impact of the EU Emission Trading Scheme for carbon on wholesale electricity and gas prices. Specifically, we analyse the mutual relationships between electricity, gas and carbon prices in the daily spot markets in the United Kingdom. Using a structural co-integrated VAR model, we show how the prices of carbon and gas jointly influence the equilibrium price of electricity. Furthermore, we derive the dynamic pass-trough of carbon into electricity price and the response of electricity and carbon prices to shocks in the gas price.

Keywords: Carbon Emission Trading, Energy Markets, Structural VECM

JEL Classification: Q48, L94, C32

Suggested Citation: Suggested Citation

Bunn, Derek W. and Fezzi, Carlo, Interaction of European Carbon Trading and Energy Prices (June 1, 2007). FEEM Working Paper No. 63.2007, Available at SSRN: https://ssrn.com/abstract=993791 or http://dx.doi.org/10.2139/ssrn.993791