1.1. What do you think would have happened to pass through if the largest of the electricity providers had been heavily invested in solar power, which does not produce carbon? The cap-and-trade program introduced in Europe and described in the text effectively resulted in a price for carbon in Europe, thus increasing the costs for carbon-producing firms.

Electricity firms are among the largest of the carbon producers, and one might therefore expect increases in electricity prices to be a result. A recent study with Spanish data provides some evidence on this.

We can use the supply and demand analysis we have already learned to look at this question from a theoretical perspective.

The carbon tax increases the marginal costs of electricity producers. Thus, the supply curve for the electricity market is shifted upward to the left. With stable demand, we would expect prices to rise for electricity. The question is by how much. We already know the answer to that as well: It depends on the elasticity of supply and demand!