The Effects of Carbon Price Pass-through Rate on the Electricity Cost Savings of Eco-friendly Facility

Abstract

This paper provides a case analysis to examine impacts of carbon cost incurred by ETS(Emission Trading System) on the incentives of economic entities to invest in eco-friendly facility. We estimate the present value of the savings of the energy cost(PVS) of ECC building of Ewha Womans University relative to a traditional building for the analysis of the economic value of eco-friendly facilities. Increases in electricity price due to the pass-through effect of carbon costs are taken into consideration to estimate PVS. We first find that PVS increases as the rate of pass-through increases. However, this increase is less prominent as the pass-through is delayed as a result of the governmental effort to reduce the carbon cost. The results suggest that ETS may increase incentives to invest in eco-friendly facilities and the increase in the incentives is greater as the pass-through is prompt and the rate of the pass-through is higher.