Working Paper: CEPR ID: DP15989
Authors: Bruno Baranek; Federico Boffa; Jakub Kastl
Abstract: We use the example of the Italian electricity spot market to empirically document that carbonpricing schemes may not work efficiently when the major firms in the market are government-controlled. We show that government-controlled companies do not internalize emission pricesimplied by the European Union emissions trading system in their bids, which reduces pass-through of emission costs and introduces inefficiency. A vast majority of electricity generators inthe world are government owned and this is especially true for fossil fuel burning ones. We arguethat, as a result, contrary to conventional wisdom among economists, carbon pricing is unlikelyto be an efficient way to regulate and mitigate emissions in the electricity sector. A command-and-control approach, involving emission standards, might be more suitable, especially sincereliable estimates of the production functions of electric generators are readily available. Ourresults cast doubts on the welfare implications of the massive ETS program that China will beimplementing starting in 2021.
Keywords: electricity; emission permits; multi-unit auctions; cap-and-trade; regulation; government-controlled companies
JEL Codes: D44; H23; L32; Q40; Q52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government ownership (L32) | efficiency of carbon pricing (D61) |
| government ownership (L32) | passthrough of emission costs (Q52) |
| passthrough of emission costs (Q52) | productive efficiency (D24) |
| government ownership (L32) | profit-maximization behavior (D21) |
| failure to equalize marginal abatement costs (D61) | inefficiencies (D61) |
| government ownership (L32) | bidding behavior (D44) |