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Carbon Taxation and Electricity Price Dynamics: Empirical Evidence from the Australian Market

Author

Listed:
  • Nicola Comincioli

    (University of Brescia
    Fondazione Eni Enrico Mattei (FEEM))

  • Mattia Guerini

    (University of Brescia
    Fondazione Eni Enrico Mattei (FEEM))

  • Sergio Vergalli

    (University of Brescia
    Fondazione Eni Enrico Mattei (FEEM))

Abstract

In this paper, we study the change of Australian electricity price dynamics that was observed before, during and after the two-year period in which a Carbon Pricing Mechanism was in force. We fit a two-states Markov Switching Model, representing a high- and a low-volatility state of the world. To avoid the interference due to periodic patterns, a deseasonalization process accounting for short- and long-term seasonality is carried out prior to the study of volatility. Estimation results highlight that, during the period when the carbon tax applies, the volatility level is lower for both the states of the world. Furthermore, the persistence in the low-volatility state is increased in the presence of the carbon tax. This conclusion is particularly relevant for macroeconomic and investment considerations because the increased uncertainty in electricity prices can significantly influence firms’ investment decisions and shape inflation expectations.

Suggested Citation

  • Nicola Comincioli & Mattia Guerini & Sergio Vergalli, 2024. "Carbon Taxation and Electricity Price Dynamics: Empirical Evidence from the Australian Market," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(12), pages 3131-3161, December.
    • Handle: RePEc:kap:enreec:v:87:y:2024:i:12:d:10.1007_s10640-024-00908-4
    DOI: 10.1007/s10640-024-00908-4
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    Keywords

    Carbon pricing; Electricity price volatility; Markov switching models;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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