Time Variation in European Carbon Pass-Through Rates in Electricity Futures Prices

Carbon Pricing, Forward Risk Premiums and Pass-Through Rates in Australian Electricity Futures Markets

“…With regards to the magnitude of the expected pass-through costs of the carbon tax, recall that following Nazifi (2016), we define the carbon pass-through rate as the ratio of change in the price of electricity to the change in marginal costs due to the carbon tax. Effectively we can think of it as the proportion of higher costs incurred by consumers in the form of higher electricity prices attributable to the carbon tax (Nelson et al, 2012;Sijm et al, 2012;Huisman and Kilic, 2015). We find that by October 2011, our estimated premiums would only suggest a price increase of ca.…”

“…So far, the relationship between carbon and energy prices as well as pass-through rates of carbon on electricity prices have mainly been studied for the European Union Emissions Trading Scheme (EU-ETS), see, e.g., Sijm et al (2006), Hirschhausen and Zachmann (2008), Bunn and Fezzi (2009), Daskalakis and Markellos (2009), Fell (2010), Nazifi and Milunovich (2010), Blyth and Bunn (2011), Chevallier (2011), Gronwald et al (2011), Sijm et al (2012), Benth et al (2013), Jouvet and Solier (2013), Nazifi (2013), Huisman and Kilic (2015) and Kanamura (2015Kanamura ( , 2016. Most of these studies find a significant impact of carbon prices on electricity markets in the European Union, and typically suggest pass-through rates ranging from 30% up to even more than 100% (Gulli and Chernyavska, 2013).…”

“…Some of the cost pass-through to wholesale prices has often been characterized as 'windfall profits' to the electricity industry, since originally there was a free allocation of the permits to the sector in the EU-ETS (Sijm et al, 2006). Further, there is some evidence that pass-through rates vary over time and were significantly lower in 2009, after the global financial crisis (Jouvet and Solier, 2013;Huisman and Kilic, 2015).…”

“…Following Nazifi (2016), we define the carbon pass-through rate as the ratio of change in the price of electricity to the change in marginal costs due to the carbon tax. Similarly, Nelson et al (2012) and Huisman and Kilic (2015) define the carbon pass-through as the proportion of carbon prices passed through into electricity prices, which is effectively the proportion of higher costs incurred by consumers in the form of higher electricity prices attributable to the carbon tax.…”