Interaction between Australian carbon prices and energy prices.

The aim of carbon trading is to encourage reduction in greenhouse gas emissions by rewarding the production of power through green sources and penalising power produced by the higher-emitting sources. This article investigates the long-term interaction between carbon permit prices of the two most heavily traded Australian carbon trading schemes with electricity prices using a structural cointegrated vector autoregression model. This is analysed over two consecutive periods to determine if the scheme effectiveness changes over time. The analysis indicates that only in the second, or most recent, period do carbon prices relate to electricity prices. Our results indicate that some problems with the design of the current schemes, however, do provide some promise of an improvement more recently. [ABSTRACT FROM AUTHOR]