Cost pass-through of the EU emissions allowances: Examining the European petroleum markets

This paper explores the ability of European refineries to pass-through costs associated with the introduction of the EU Emissions Trading Scheme (EU ETS). A sequence of vector error correction models (VECM) has been estimated within a multinational setting which covers 14 EU Member States. Using weekly data at the country level, this paper finds an influence of prices for European Union Allowances (EUAs) on unleaded petrol retail prices during the trial phase of the EU ETS from 2005 to 2007. The country-specific long-run elasticities of petrol prices with respect to the EUA prices are between 0.01 and 0.09. Given that these elasticities are of the same order of magnitude as the share of carbon allowances costs in total production costs in the refining industry, the estimates are consistent with the full pass-through potential. The variance decomposition analysis shows furthermore that a significant fraction of petrol price changes in Austria, Germany, France and Spain can be explained by changes in allowances prices (between 10% and 20%).

► The country-specific long-run elasticities of petrol prices with respect to the EUA prices are between 0.01 and 0.09. ► The estimates imply the full pass-through of opportunity cost in refining industry in the EU between 2005 and 2007. ► Significant fraction of petrol price changes in Austria, Germany and France can be explained by changes in allowances prices.