Working Paper: NBER ID: w19613
Authors: Natalia Fabra; Mar Reguant
Abstract: We measure the pass-through of emissions costs to electricity prices and explore its determinants. We perform both reduced-form and structural estimations based on optimal bidding in this market. Using rich micro-level data, we estimate the channels affecting pass-through in a flexible manner, with minimal functional form assumptions. Contrary to many studies in the general pass-through literature, we find that emissions costs are almost fully passed-through to electricity prices. Since electricity is traded through high-frequency auctions for highly inelastic demand, firms have weak incentives to adjust markups after the cost shock. Furthermore, the costs of price adjustment are small.
Keywords: emissions costs; electricity prices; passthrough; auction markets
JEL Codes: D44; L13; L94
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strategic behavior of firms (L21) | passthrough rate (G19) |
| costs of price adjustment (L11) | passthrough process (F16) |
| emissions costs (Q52) | electricity prices (L97) |
| increase in emissions costs (Q52) | passthrough rate (G19) |
| emissions costs (Q52) | electricity prices during peak demand hours (L97) |