Evidence of a nonlinear effect of the EU ETS on the electricity-generation sector.

This article considers the evidence for threshold effects in the relationship between electricity and emission permit prices in France and Germany during the second phase of the EU ETS. Specifically, we compare linear and nonlinear threshold models of electricity prices using Hansen's (2000) approach of sample splitting and threshold estimation. We find evidence of nonlinear threshold effects in both countries. The estimated carbon price thresholds are 14.94 € and 12.57 € in France and Germany, respectively. In Germany, the carbon price does not affect the electricity price below this threshold. In France, the price of emission allowances affects the cost of electricity generation only below the carbon-price threshold, thus revealing speculative behavior by French electricity producers on the carbon-allowance market. This is not the case for German electricity producers.