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The Impact of Unilateral Carbon Taxes on Cross-Border Electricity Trading

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Guo, B. 
Newbery, D. 
Gissey, G. 


Market coupling makes efficient use of interconnectors by ensuring lower-price markets import until prices are equated or interconnectors constrained. A carbon tax in one of the market can distort trade and reduce price convergence. This paper uses econometrics to investigate the impact of the British Carbon Price Support (CPS, an extra carbon tax) on GB’s cross-border electricity trading with France (through IFA) and the Netherlands (through BritNed). Over 2015-2018 the CPS led to GB importing 18 TWh more electricity, thereby reducing carbon tax revenue by e74.4 million. Congestion revenue increased by e252 million, half of which was transferred to foreign interconnector owners, and the unilateral CPS created e18 million of deadweight loss. About 60% (s.e.=12%) of the CPS was passed through to the GB day-ahead prices, with 9% of this having been passed through to France and 11% to the Netherlands.



Carbon tax, Interconnectors, Market Coupling, Cost-benefit analysis, MGARCH

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Faculty of Economics, University of Cambridge

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