EU-ETS and Nordic Electricity: A CVAR Analysis
DownloadIn a paper examining recent electricity price trends in the Nordic region of Denmark, Finland, Norway, and Sweden, RFF Fellow Harrison Fell focuses on the influence of carbon pricing on electricity markets. The relationship between carbon dioxide (CO2) emissions permit prices and electricity prices has been of considerable interest in many political circles, particularly given the concern that permits given away freely could result in windfall profits for electricity generators.
Fell finds that the response of electricity prices to a price shock in CO2 emissions permits—known as EUAs—is consistent with near complete pass-through of CO2 emissions costs. “From a policy perspective, the estimated short-term responses of electricity prices to EUA price shocks suggest that the CO2 market has created a wealth transfer from electricity consumers to electricity producers,” Fell writes.
His conclusions are derived from a vector autoregressive model commonly used in the macroeconomic literature that estimates a relationship between Nordic region electricity prices, relevant fuel prices, and EUA prices. This region is particularly interesting to study due to its varied electricity generation technologies. Owing to this variety, Fell finds that the response of electricity prices to increases in EUA prices are higher at low electricity demand hours compared to high electricity demand periods. Such findings are consistent with the observation that the price-setting electricity generators in low demand periods tend to have higher CO2 emissions intensities than the price-setting generators in high demand periods.
Authors
Harrison Fell