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Evidence for threshold eff​ects in the pass-through of carbon prices to wholesale electricity prices

Author

Listed:
  • Djamel Kirat

    (Univ. Orléans, CNRS, LEO, UMR 7322, F45067, Orléans, France.)

  • Ibrahim Ahamada

    (IMF, University of Paris 1 Panthéon-Sorbonne, Centre d''Economie de la Sorbonne (CES))

Abstract

This article considers the evidence for threshold effects in the relationship between electricity and emission permit prices in France and Germany during the second phase of the EU ETS. Specifically, we compare linear and nonlinear threshold models of electricity prices using Hansen's (2000) approach of sample splitting and threshold estimation. We find evidence of nonlinear threshold effects in both countries. The estimated carbon price thresholds are 14.94 and 12.57 euros in France and Germany, respectively. The carbon price threshold in France perfectly coincides with the well-known carbon spot price structural break occurred on October 2008. This is not the case for the carbon price threshold in Germany. An in-depth analysis reveals that during the period before October 2008, carbon prices were not reflected in electricity prices in either countries. This is mainly due to uncertainties about the future of the EU ETS that have led electricity producers to adopt a wait and see behavior. After October 2008, French electricity producers passthrough the price of emission permits into electricity prices in a linear way, while their German counterparts do so nonlinearly.

Suggested Citation

  • Djamel Kirat & Ibrahim Ahamada, 2016. "Evidence for threshold eff​ects in the pass-through of carbon prices to wholesale electricity prices," Economics Bulletin, AccessEcon, vol. 36(4), pages 2350-2364.
    • Handle: RePEc:ebl:ecbull:eb-16-00672
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    References listed on IDEAS

    as
    1. Ibrahim Ahamada & Djamel Kirat, 2011. "The impact of the European Union Emission Trading Scheme on electricity generation," PSE-Ecole d'économie de Paris (Postprint) hal-00629900, HAL.
    2. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
    3. Ibrahim Ahamada & Djamel Kirat, 2012. "The impact of phase II of the EU ETS on the electricity-generation sector," Documents de travail du Centre d'Economie de la Sorbonne 12007, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    4. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
    5. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-430, March.
    6. Kirat, Djamel & Ahamada, Ibrahim, 2011. "The impact of the European Union emission trading scheme on the electricity-generation sector," Energy Economics, Elsevier, vol. 33(5), pages 995-1003, September.
    7. Perrels, Adriaan & Honkatukia, Juha & Mälkönen, Ville, 2006. "Impacts of the European Emission Trade System on Finnish Wholesale Electricity Prices," Discussion Papers 405, VATT Institute for Economic Research.
    8. Ibrahim Ahamada & Djamel Kirat, 2015. "The impact of phase II of the EU ETS on wholesale electricity prices," Post-Print insu-01558352, HAL.
    9. Sijm, Jos & Chen, Yihsu & Hobbs, Benjamin F., 2012. "The impact of power market structure on CO2 cost pass-through to electricity prices under quantity competition – A theoretical approach," Energy Economics, Elsevier, vol. 34(4), pages 1143-1152.
    10. Ibrahim Ahamada & Djamel Kirat, 2011. "The impact of the European Union Emission Trading Scheme on electricity generation," Post-Print hal-00629900, HAL.
    11. Ibrahim Ahamada & Djamel Kirat, 2015. "The impact of phase II of the EU ETS on wholesale electricity prices," Revue d'économie politique, Dalloz, vol. 125(6), pages 887-908.
    12. Ibrahim Ahamada & Djamel Kirat, 2011. "The impact of the European Union Emission Trading Scheme on electricity generation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00629900, HAL.
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    More about this item

    Keywords

    Carbon Emission Trading; Energy prices; Nonlinear threshold regression model;
    All these keywords.

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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