Abstract
This paper focuses on the relationship between the European Union Emission Trading System allowances’ prices and the Italian electricity price, aiming at assessing whether such a mechanism has been a driver for the decarbonization of the power sector. To this aim, we calculate the long-run relationships between energy prices, natural gas prices and allowances’ prices, through a VECM model, distinguishing between peak and off-peak prices. The analysis is carried out for the third phase of the EU-ETS, which started in 2013, and for two-year rolling windows that account for changes over time of the pass-through rates. It is shown that the natural gas price has a high pass-through rate of roughly 70%, which is increasing over time. On the contrary, the pass-through rate of the allowances’ price is as low as 7% for the wholesale electricity price, being slightly more and less for the peak and off-peak prices, respectively. However, this rate has been substantially changing over time, starting from a high level and falling significantly, becoming negative in the recent years. This could signal that the EU-ETS has been increasingly more effective in endogenizing emission costs for power producers, inducing them to reduce their production costs associated with emissions by means of a change in technologies. However, the analysis of the impulse response functions hardly supports this finding, eventually casting doubts on the effectiveness of the EU-ETS in Italy to drive the transition toward a less carbon-intensive power supply.
Highlights
The Emissions Trading System of the European Union (EU-ETS) is a cap-and-trade system, introduced to fight climate change and to accomplish the reduction targets of theKyoto protocol
It sets a cap to the total amount of greenhouse gases (GHGs) that can be produced by the installations covered by the system, which is set to decrease over time to reduce the total amount of emissions
Power producers can use the allowances they own either to sell them to other market participants or to cover the greenhouse gas emissions resulting from their power production
Summary
The Emissions Trading System of the European Union (EU-ETS) is a cap-and-trade system, introduced to fight climate change and to accomplish the reduction targets of theKyoto protocol. Power producers should respond to an increase in costs due to a rise in the value of the allowances by adopting low-emitting technologies This happens if the rise in costs is perceived as permanent and if prices cannot be raised to shift the burden of the allowances to the final consumers. Whenever power producers perceive the cost of the allowances as a relevant component of their production costs and they are not able to rise their bids in the wholesale market, they should progressively respond to an increase in the allowance price by reducing the power production costs They can do so by minimizing the extent to which they use less efficient (i.e., more emitting) power plants, or by adapting their production portfolio mix to increase the share of plants fueled by renewable energy sources ( onward, RES-plants).
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