(The) impact of carbon price on wholesale electricity price in EU markets

Abstract

Emissions trading systems (ETS) are becoming an increasingly popular tool in the global emissions mitigation tool belt. ETS across the world cover the power sector, a key emitter of greenhouse gasses and therefore critical to the mitigation of climate change, by placing a price on emissions. However, applying carbon pricing to the power sector can be controversial, and remains a point of contention for policy makers, industry, the public and, of course, the power sector. Careful monitoring of the effect of carbon pricing on electricity prices is required to ensure that downstream consumers are not being unfairly penalized and to avoid negative knock-on effects, such as decreases in industry-specific investment and labor demand. This paper presents a price driver analysis of the relationship between the price of EU ETS allowances (EUAs) and wholesale electricity prices in the UK and Finland in 2020. Balanced panel data are examined using a pooled OLS regression model. The countries are then examined separately as time-series data, utilizing a simple linear regression. This paper reveals that, within the bounds of the applied model, carbon pricing does indeed play a role, however, its impact in relation to other price drivers differs across the two countries. The price of wholesale electricity in Finland is determined to a greater extent by the price of carbon than in the UK. We also find the price of gas to be a major driver of electricity price in both countries, which presents policy challenges.