Electricity and carbon prices: Asymmetric pass-through evidence from New Zealand

Abstract

ABSTRACTThis paper empirically investigates whether the response of electricity prices to changes in CO2 prices is asymmetric in the case of the New Zealand economy. It makes use of data spanning the period January 2001 to March 2014 and a nonlinear autoregressive distributed lag (NARDL) model to test the relevant hypothesis. The empirical findings indicate that carbon prices have long-run asymmetric effects on electricity prices, with only positive changes in carbon prices signaling a complete pass-through. The results are expected to be of substantial importance for end-user prices and, thus, to enhance the information on the impact of CO2 prices on end-user electricity prices. After all, it is this piece of information that determines how the electricity cost is actually linked to electricity prices.