Pass-Through of Emissions Costs in Electricity Markets
Abstract
We measure the pass-through of emissions costs to electricity prices. 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. (JEL D44, L11, L94, L98, Q52, Q54)
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The carbon cost is passed through to output prices, in particular in the electricity sector, which faces little international competition.
“In the meantime the carbon cost is passed through to output prices in particular in the electricity sector which faces little international competition (Fabra and Reguant, 2014; Sijm et al., 2008; Fell et al., 2015; Hintermann, 2016).”
From The joint impact of the European Union emissions trading system on carbon emissions and economic performance (2023) · cites this paper as Fabra and Reguant, 2014
Full carbon cost pass-through is observed in liberalized electricity markets.
“Full carbon cost pass-through is observed in liberalized electricity markets (41, 42) but negligible in highly regulated markets such as South Korea (43).”
From Carbon Leakage, Consumption, and Trade (2022) · cites this paper as [42]
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“Within a structural framework that is commonly used in the electricity auctions literature (see Wolak (2000) and Hortaçsu and Puller (2008), among others), we first test if firms’ behavior is consistent with full internalization of permit prices.”
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Does the EU ETS cause carbon leakage in European manufacturing?
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Profiting from Regulation: Evidence from the European Carbon Market
Bushnell, J. B., Chong, H., & Mansur, E. T. (2013) · American Economic Journal: Economic Policy · doi:10.1257/pol.5.4.78 · Cited by 199 · see citing works
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“For Spain, for the period 2004 to 2006, Fabra and Reguant (2014) find that carbon costs were almost fully transferred to final prices with an”
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Carbon Pricing and Emissions: Causal Effects of Britain's Carbon Tax
Gugler, K. P., Haxhimusa, A., & Liebensteiner, M. (2022) · doi:10.2139/ssrn.4116240 · Cited by 74 · see citing works
An endogenous emissions cap produces a green paradox
Gerlagh, R., Heijmans, R. J. R. K., & Rosendahl, K. E. (2021) · Economic Policy · doi:10.1093/epolic/eiab011 · Cited by 46 · see citing works
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- Authors
- Fabra, N., & Reguant, M.
- Affiliations
- Universidad Carlos III de Madrid (ES)
- Stanford University (US)
- Venue
- American Economic Review
- Publisher
- American Economic Association
- Published
- 2014-09-01
- Volume
- 104
- Issue
- 9
- Pages
- 2872-2899
- ISSN
- 0002-8282 (ISSN-L)
- OpenAlex
- W2153894630
- Cited by
- 491
- References
- 2
- Citations by year
- 2026: 68 · 2025: 65 · 2024: 55 · 2023: 48 · 2022: 41 · 2021: 42 · 2020: 30 · 2019: 34 · 2018: 36 · 2017: 24 · 2016: 14 · 2015: 15 · 2014: 10 · 2013: 2 · 2012: 1
- FWCI
- 11.16
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- American Economic Review (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Physical Sciences › Engineering › Electrical and Electronic Engineering › Electric Power System Optimization
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Merger and Competition Analysis
- Physical Sciences › Energy › Renewable Energy, Sustainability and the Environment › Renewable energy and sustainable power systems
- Keywords
- electricity prices, electricity market, optimal bidding, electricity auctions, markups, price adjustment costs, cost shocks, carbon pricing
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