Emissions Trading System of the European Union: Emission Allowances and EPEX Electricity Prices in Phase III

Georg Wolff,Stefan Feuerriegel

doi:10.3390/en12152894

Abstract

The Emissions Trading System in the European Union was introduced to achieve the climate goal of reducing emissions by around 43% between 1990 and 2030. Accordingly, the costs of emission allowances are part of power generation and, by extension, the price of electricity. Theoretical works thus suggest a positive relationship between the price of emission allowances and electricity. However, this has not been validated empirically for phase III of the Emissions Trading System in the short run as part of the price setting mechanism of electricity producers. Our evidence suggests an opposite effect: According to our empricial results, both European Power Exchange (EPEX) day-ahead and intraday markets are negatively affected during phase III. We further test for a potentially asymmetric influence with the help of quantile regressions. Altogether, the outcome has implications for policy-makers and calls for further attention by academics and policy-makers in the future design of the Emissions Trading System, especially under larger amount of renewables in the electricity system.

Highlights

The European Union introduced the first and largest trading system for greenhouse gases in the world, the Emissions Trading System (EU ETS)
This section analyzes the influence of the carbon prices on electricity prices
Due to the extensive nature of the augmented Dickey–Fuller (ADF) test for each hour and covariates (504 ADF tests), the values are omitted for brevity

Summary

Introduction

The European Union introduced the first and largest trading system for greenhouse gases in the world, the Emissions Trading System (EU ETS). Its launch in 2005 came as a direct consequence of the Kyoto Protocol as a means of achieving the climate objective of reducing emissions by 43 %. The design is based on a cap and trade system, which allows only a fixed amount of emissions for various greenhouse gases such as carbon dioxide (CO2 ), nitrous oxide (N2 O), and perfluorocarbons (PFCs). The actual design of the cap and trade system represents a challenging task for policy-makers. The price for emission allowances needs to be fairly high in order to provide an incentive to reduce emissions [2]. Policy-makers need to combine social, economic, and environmental considerations. The European Commission has broadened the number of industries that are subject to the trade mechanism as part of the modifications when transitioning from phase

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