**6. Conclusions**

The European Union has established a market for trading emission allowances of greenhouse gases. Its objective is to contribute to sustainability goals and to reduce emissions. The spending on emission allowances represents an integral cost driver of power generation affecting operational decision-making and thus price setting. It is therefore of interest to investigate the relationship between carbon and electricity prices across different phases of the Emissions Trading System.

### *6.1. Summary of the Findings*

This paper contributes to the existing literature by analyzing the (asymmetric) impact of carbon prices on EPEX electricity prices, with a special focus on the intraday market. We thus use an autoregressive model with exogenous variables. The results show a behavior of the model contradictory to the intentions of policy-makers. We find a statistically highly significant negative impact in the intraday market during phase III of the European Union Emissions Trading System. Here, a one standard deviation change in the price of emission allowances decreases the price of electricity by up to −0.44 standard deviations. Moreover, the effect is weaker in the day-ahead market during phase III, while throughout phase II, we do not observe any measurable effect. Among the reasons are a growing share of renewable energy resources and an excess supply of emission allowances.

Most notably, we observe differences between the day-ahead and intraday markets. While our autoregressive model detects a weaker (negative) short-run impact of the EUA price in the day-ahead market, we find a stronger significant negative impact of the EUA price on the intraday electricity prices during phase III of the EU ETS. This outcome partially contradicts empirical studies into other markets, which mostly measure a positive impact [9]. Similarly, further research cannot find a short-run impact of the carbon prices on electricity prices [5]. Paraschiv et al. [18] provides evidence of both a positive and negative influence.

Altogether, various factors explain the relationship between emission allowances and electricity generation. Among them, we identify a combination of an excess supply of emission allowances, a growing share of renewable energy source, and the merit order effect. Since we are not aware of previous literature examining the price of emission allowances in the intraday market, we cannot compare these results to the findings of others.

To conclude, the transition from phase II to phase III of the EU ETS was motivated by policy-makers in order to reduce emissions from electricity generation. This is in correspondence to our results, according to which the price of European Emission Allowance was not linked to electricity prices at common statistical significance thresholds during phase II. It is also in line with expectations, as one was not required to hold EUA for carbon-intensive power generation during this phase. For phase III, however, we find evidence that counteracts the intention of policy-makers. Based on our model, we see that a higher EUA price is not reflected in higher electricity prices. Prior literature discussing the general design of the EU ETS has already suggested that the influence of carbon prices is fairly low, particularly due to a large supply. This is also seen in our analysis: The average price for EUA dropped extensively during the move from phase II to phase III of the EU ETS, i.e., from more than 11 e /tCO2 to a little more of 5 e /tCO2. This eases the pressure for electricity providers to incorporate carbon prices in their pricing models and to thus adapt their generation accordingly (e.g., they could be incentivized to use existing carbon-intensive capacities for electricity generation before an increase in carbon prices takes place).

#### *6.2. Limitations and Call for Future Research*

We focused on the short-run relationship of the EUA price and electricity prices since our aim is to investigate the price setting mechanism of electricity providers in both the day-ahead and intraday market. By following a short-run view, we were able to address the intraday variation of electricity prices for each hour of the day, which corresponds to the price setting mechanisms in the markets. As a results, future studies could built upon our research and analyze the impact of EUA prices on electricity prices, focusing on the long run. This would allow a deeper understand of how EUA prices are reflected in electricity prices. While a strength of our work is the focus on the price setting decisions, another limitation of this study originates from the circumstance that, as in other research, the actual trading models of energy firms are proprietary and thus not available for research. Nevertheless, our approach by studying ex post prices is able to shed light on the underlying price setting mechanism.

Our findings deserve attention by academics and policy-makers who should critically reflect whether this matches their intention. Hence, we regard this paper as a starting point for future research in analyzing the functioning of EU ETS with respect to electricity producers. The design of appropriate markets for emissions trading can considerably benefit from further research as many questions are still left unanswered. First of all, it is worthwhile to extensively investigate interactions between different regulations in order to derive policy implications. Here, one could even consider studying distinct price setting mechanisms, especially under increased shares of renewables in the system. These might better pass-through costs of emission allowances and thus help establish real incentives to reduce greenhouse gases. Second, further effort is necessary to understand how the price and trading volume of emission allowances impacts other commodities. With the upcoming advances in the Emissions Trading System, future research should continuously monitor the effect of carbon prices on electricity prices in order to evaluate all impending policy changes.

**Supplementary Materials:** The following are available online at http://www.mdpi.com/1996-1073/12/15/2894/s1.

**Author Contributions:** Both authors contributed equally to this work.

**Funding:** This research received no external funding.

**Conflicts of Interest:** The authors declare no conflict of interest.
