Pass-Through Rates of Emission Costs in the Iberian Electricity Market

Sammanfattning: We investigate the pass-through of emission costs to electricity prices on the Iberian electricity market from 2017 to 2021. Using an IV specification that requires few assumptions on the functional forms of the supply and demand curve we find an average pass-through rate of 110%, which is higher than previous estimates for Spain. To understand this beyond-complete pass-through rate, we quantify pass-through rates during periods of high and low demand, as well as differences in pass-through during periods when carbon prices increase and decrease. Contrary to previous findings from the same geographical context, we do not observe a difference in pass-through during periods of high and low demand. Our results suggest that emission cost decreases are passed through at a greater rate than increases. These findings provide insight into the behavior of firms operating in a market with emission costs.