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EU-ETS and Nordic Electricity: A CVAR Analysis

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  • Harrison Fell

Abstract

A cointegrated vector autoregressive (CVAR) model is estimated to determine the dynamic relationship between Nordic wholesale electricity prices and EU emissions trading scheme (EU-ETS) CO2 allowance prices. An impulse response analysis reveals that electricity prices have large short-term responses to CO2 price shocks, but that this response dampens over time. Using hourly Nordic electricity spot market prices, I find that the value of short-term response of electricity prices to a shock in CO2 prices in off-peak hours is consistent with expected values for near complete pass-through of CO2 emission costs when coal-generated power is at the margin. Likewise, the estimates reveal that peak hour electricity price responses to CO2 price shocks are as expected for a market that has near complete pass-through of CO2 emission costs when natural gas-generated power is at the margin. These results further suggest the Nordic electricity market is pricing as a competitive market.

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  • Harrison Fell, 2010. "EU-ETS and Nordic Electricity: A CVAR Analysis," The Energy Journal, , vol. 31(2), pages 1-26, April.
    • Handle: RePEc:sae:enejou:v:31:y:2010:i:2:p:1-26
    DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No2-1
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    References listed on IDEAS

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    1. Helmut Lütkepohl, 2005. "New Introduction to Multiple Time Series Analysis," Springer Books, Springer, number 978-3-540-27752-1, February.
    2. Markku Lanne & Helmut Lütkepohl & Pentti Saikkonen, 2002. "Comparison of unit root tests for time series with level shifts," Journal of Time Series Analysis, Wiley Blackwell, vol. 23(6), pages 667-685, November.
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    More about this item

    Keywords

    EU-ETS; Nordic electricity; CVAR model; CO2 emissions;
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