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Faculty of Economics

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Guo, B., Newbery, D.

The Cost of Trade Distortion: Britain’s Carbon Price Support and Cross-border Electricity Trade


Abstract: This paper replaces CWPE1951.
An additional carbon tax in one market can distort electricity trade with external markets. We show how to estimate the deadweight cost of the distortion and possible external global benefits from reduced emissions, and investigate econometrically the impact of the British Carbon Price Support (CPS, an extra carbon tax) on GB’s cross-border electricity trade with France and The Netherlands. Over 2015-2018 the CPS raised GB day-ahead electricity price by about €11/MWh, after allowing for replacement by cheaper imports. It raised French wholesale price by 3.5% and Dutch wholesale price by 2.8%. The CPS increased GB imports by 12 TWh/yr, thereby reducing carbon tax revenue by €100 m/yr. Congestion income increased by €150 m/yr, half transferred to foreign interconnector owners. The unilateral CPS created €80 m/yr deadweight loss, about 32% of the initial social value created by the interconnector, or 4% of the global emissions benefit of the CPS at €2 bn/yr. About 0.9% of the CO2 emission reduction is undone by France and The Netherlands, the monetary loss of which is about €18 m/yr.

Keywords: Carbon tax, Bilateral Trading, Electricity Market, Cost-benefit analysis

JEL Codes: Q48 F14 D61 C13

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EPRG Paper Link: 2005

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