Authors: Bruno Baranek,Federico Boffa, Jakub Kastl

Abstract: 

We use the example ofthe Italian electricity spot market to empirically document that carbon pricingschemes do not work efficiently when the major firms in the market aregovernment-controlled. We show that government-controlled companies are notprofit-maximizers. They do not internalize emission prices implied by theEuropean Union emissions trading system  in their bids, which reducespass-through of emission costs and decreases productive efficiency. A vastmajority of electricity generators in the world are government owned. We arguethat, as a result, contrary to conventional wisdom among economists, carbonpricing is not an efficient way to regulate and mitigate emissions in theelectricity sector. A command-and-control approach, involving emission standards,might be more suitable, especially since, in the electricity generation sector,estimates of the production function are reliable.