Abstract
How much carbon is in the price of power? The answer to this question determines many economic consequences of climate policies, i.e. in terms of costs for downstream industries. It requires, however, to first identify the cost impact of carbon pricing on the price-setting entity on the power market. Economic theory tells us that power prices are determined by the cost of the marginal plant. We propose two simple approaches to conclude on marginal technologies in electricity wholesale from public data. Both approaches are complementary, easy to implement, and based upon assumptions which are commonly used in more complex energy system models. We exemplify their use with a policy example on the compensation for indirect emission costs from the EU Emissions Trading Scheme. We find that the current policy design severely overweighs CO2 emissions from lignite power plants in the Central Western European power market, which may lead to overcompensation of industrial power users and therefore to a distortion with regard to the policy’s stated goal.
Highlights
How much carbon is in the price of power? The Paris Agreement requires drastic changes around the world to decarbonise the economy, and, above all, the power sector
We find that the current policy design severely overweighs CO2 emissions from lignite power plants in the Central Western European power market, which may lead to overcompensation of industrial power users and to a distortion with regard to the policy’s stated goal
In the European Union, carbon dioxide emissions in the power sector are subject to the EU Emission Trading Scheme (EU ETS), which is possibly the most prominent example for an international market based climate policy on the planet
Summary
How much carbon is in the price of power? The Paris Agreement requires drastic changes around the world to decarbonise the economy, and, above all, the power sector. Since the actual indirect CO2 costs depend on the emission intensities of the marginal plants, choosing an appropriate level is crucial for the scheme to compensate as intended by the regulator We consider this to be a typical parametrisation problem of the regulator, which for energy and climate policies very often depends on the identification of marginal technologies. When wholesale electricity prices are set by the marginal plant, the average emission intensity of fossil fuel fired power production does not reflect the actual CO2 cost that is passed-on to the market clearing price. We find that the share of hours, in which lignite was likely price-setting in the German and Austrian wholesale market for electricity, was about 3 to 7 percent and clearly below 15 percent for the period covered in our sample This finding is in stark contrast to the weight of 39 percent that CO2 emissions of lignite currently have in the.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
