Pass-Through of Emissions Costs in Electricity Markets
American Economic Review
vol. 104,
no. 9, September 2014
(pp. 2872-99)
Abstract
We measure the pass-through of emissions costs to electricity prices. We perform both reduced-form and structural estimations based on optimal bidding in this market. Using rich micro-level data, we estimate the channels affecting pass-through in a flexible manner, with minimal functional form assumptions. Contrary to many studies in the general pass-through literature, we find that emissions costs are almost fully passed-through to electricity prices. Since electricity is traded through high-frequency auctions for highly inelastic demand, firms have weak incentives to adjust markups after the cost shock. Furthermore, the costs of price adjustment are small.Citation
Fabra, Natalia, and Mar Reguant. 2014. "Pass-Through of Emissions Costs in Electricity Markets." American Economic Review, 104 (9): 2872-99. DOI: 10.1257/aer.104.9.2872Additional Materials
JEL Classification
- D44 Auctions
- L11 Production, Pricing, and Market Structure; Size Distribution of Firms
- L94 Electric Utilities
- L98 Industry Studies: Utilities and Transportation: Government Policy
- Q52 Pollution Control Adoption Costs; Distributional Effects; Employment Effects
- Q54 Climate; Natural Disasters; Global Warming