Electricity and carbon prices: Asymmetric pass-through evidence from New Zealand

ABSTRACT

This paper empirically investigates whether the response of electricity prices to changes in CO₂ prices is asymmetric in the case of the New Zealand economy. It makes use of data spanning the period January 2001 to March 2014 and a nonlinear autoregressive distributed lag (NARDL) model to test the relevant hypothesis. The empirical findings indicate that carbon prices have long-run asymmetric effects on electricity prices, with only positive changes in carbon prices signaling a complete pass-through. The results are expected to be of substantial importance for end-user prices and, thus, to enhance the information on the impact of CO₂ prices on end-user electricity prices. After all, it is this piece of information that determines how the electricity cost is actually linked to electricity prices.

Keywords:

• Asymmetric pass-through
• carbon prices
• electricity prices
• New Zealand

Acknowledgments

The author thanks two anonymous referees of this journal for their valuable suggestions. Needless to say, the usual disclaimer applies.