Carbon pass-through in the electricity sector: An econometric analysis

Abstract

We conduct an econometric analysis to investigate, the carbon pass-through in the Greek electricity sector. For this reason, we utilize a rich micro-level panel dataset, including hourly data for 24 thermal power plants spanning the period from January 2014 to December 2017. In order to study the pass-through of emissions costs to wholesale electricity prices, we employ an instrumental variable approach. Our findings survived several robustness checks, accounting for logged linear and non-linear econometric specifications. The empirical results indicate the existence of an almost complete pass-through, revealing that retailers fully internalize the cost of CO2 permits. This study incurs important policy implications, since the complete pass-through signify that wholesale electricity prices will increase at least in the short run. However, the overall effect on retail prices will be mostly affected by the amount of CO2 permits and the fuel energy mix.