CO2 price effects on the electricity market and greenhouse gas emissions levels: an application to the Spanish market

Abstract

This research proposes an empirical method to estimate the impact on the wholesale electricity market of an increase in the price of CO2 emission allowances. The current literature in this field is mainly focused on long-term simulation analyses, while this study carries out a short-term analysis with microdata from the electricity market. A higher price of CO2 implies an increase in the electricity generation costs of polluting units and therefore an increase in the price of the electricity market. When CO2 becomes more expensive, polluting electricity generators are shifted in the hourly electricity supply curve towards less competitive positions (in favour of less polluting/cheaper units). Displaced polluting units could even be taken out of the market, which would imply a reduction in CO2 emissions. These short-term movements can be reproduced with our microdata of the day-ahead electricity market –data Provided by the Spanish Market Operator (OMIE). According to our results, increases in the carbon price of 10, 20, or 30 € per ton, respectively, cause increases of 1.8%, 4.2% and 5.3% in the electricity price (year 2018), while the negative effect on emissions is relatively small. Our analysis concludes with the estimation of an ARIMA-SARIMA model that looks for the main determinants of the variations in the hourly energy prices and the carbon emissions. The estimations show that the marginal supply technology in the electricity market is important in explaining these variations.Graphical abstract