Beyond borders: Estimating the marginal emission factor of electricity trade

Previous research has largely overlooked electricity trade when estimating marginal emission factors (MEFs), despite its growing significance in Europe and beyond. This study introduces a robust and consistent econometric framework to accurately estimate the MEFs for trade, demand, and different supply technologies in a highly interconnected market. We use exogenous supply shocks (variations in wind electricity) in adjacent markets as an instrument for trade flows, which are endogenous to CO emissions, to generate unbiased MEF estimates. Our analysis, applied to high-frequency and publicly accessible data from Germany, reveals that exports are predominantly driven by lignite and hard coal, leading to considerable additional emissions. We further demonstrate that disregarding trade or ignoring its reverse causality results in substantial estimation biases. Unbiased MEF estimates are essential for shaping informed and effective policy decisions aimed at mitigating the environmental impact of energy systems in interconnected markets.