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Interaction of European Carbon Trading and Energy Prices

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  • Bunn, Derek W.
  • Fezzi, Carlo

Abstract

This paper addresses the economic impact of the EU Emission Trading Scheme for carbon on wholesale electricity and gas prices. Specifically, we analyse the mutual relationships between electricity, gas and carbon prices in the daily spot markets in the United Kingdom. Using a structural co-integrated VAR model, we show how the prices of carbon and gas jointly influence the equilibrium price of electricity. Furthermore, we derive the dynamic pass-trough of carbon into electricity price and the response of electricity and carbon prices to shocks in the gas price.

Suggested Citation

  • Bunn, Derek W. & Fezzi, Carlo, 2007. "Interaction of European Carbon Trading and Energy Prices," Climate Change Modelling and Policy Working Papers 9092, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemcc:9092
    DOI: 10.22004/ag.econ.9092
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    References listed on IDEAS

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    Resource /Energy Economics and Policy;

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