Pass-through of emissions costs in electricity markets

Pass-through of emissions costs in electricity markets /  Natalia Fabra & Mar Reguant. NBER Working Paper N° 19613, November 2013, 35 p.

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Authors’s 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.

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