Emissions Trading System of the European Union: Emission Allowances and EPEX Electricity Prices in Phase III

Abstract

The Emissions Trading System in the European Union was introduced to achieve the climate goal of reducing emissions by around 43% between 1990 and 2030. Accordingly, the costs of emission allowances are part of power generation and, by extension, the price of electricity. Theoretical works thus suggest a positive relationship between the price of emission allowances and electricity. However, this has not been validated empirically for phase III of the Emissions Trading System in the short run as part of the price setting mechanism of electricity producers. Our evidence suggests an opposite effect: According to our empricial results, both European Power Exchange (EPEX) day-ahead and intraday markets are negatively affected during phase III. We further test for a potentially asymmetric influence with the help of quantile regressions. Altogether, the outcome has implications for policy-makers and calls for further attention by academics and policy-makers in the future design of the Emissions Trading System, especially under larger amount of renewables in the electricity system.

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