Carbon cost pass-through rate in power system: evidence from Italy under the EU ETS

TL;DR

This study examines how carbon pricing influences electricity prices in Italy's market zones, revealing partial pass-through rates and regional differences during EU ETS Phases 3 and 4.

Contribution

It provides empirical evidence on the heterogeneity of carbon cost pass-through rates across Italian market zones under the EU ETS.

Findings

Carbon costs significantly influence electricity prices.

Pass-through rates are below 100%, around 30% nationally.

Regional differences affect the extent of pass-through during Phase 4.

Abstract

This paper investigates the impact of carbon pricing under the EU Emissions Trading System (EU ETS) on the Italian electricity market, focusing on the carbon cost pass-through rate (CPTR) across market zones during Phases 3 and 4 (2016-2024). Using daily data, the study applies an econometric framework based on a linear regression model with autoregressive dynamics to estimate the extent to which carbon costs are reflected in wholesale electricity prices. It further incorporates robustness checks and quantile regression to assess how the CPTR varies across different fuel spread levels. The results show that carbon costs are positively and significantly transmitted to electricity prices, confirming the relevance of carbon pricing as a key market driver. However, pass-through is incomplete, with CPTR values consistently below 100%. At the national level, the CPTR remains relatively stable at around 30% across the two phases. Substantial heterogeneity emerges across market zones: pass-through increases in the North, Centre-North, and Sardinia during Phase 4, while it declines in the Centre-South and Sicily, reflecting differences in generation mix, carbon intensity, and market conditions. Overall, the findings highlight the importance of market zones factors in shaping the effectiveness of carbon pricing in electricity markets.