Abstract: Based on the practice of EU ETS and domestic carbon market development status, the carbon cost pass-through principle are analyzed. Power sector is taken as an instance to emphatically study the effect factors of pass-through rates. Result shows that the pass-through rate (RPT) depends mainly on two factors: the method of allocating CO₂ emission allowances, and the structure of the power market. The method of allocating CO₂ emission allowances includes several factors: auctioning versus perfect free allocation, updating free allocation to incumbents or not, contingent allocation to plant closures or not, and free allocation to new entrants or not. The structure of the power market also includes several factors: the level of market concentration or market competitiveness, the shape of the demand curve, and the shape of the supply (or marginal cost) curve. The influence of the structure of the power market on the RPT is mainly reflected in the degree of market competition, market demand and supply conditions. Finally, based on the current domestic carbon market pilot, the article gives some suggestions: changing the initial allocation of carbon emission allowance step by step, reducing one-time payment of free allowance for long period, and allocating allowance based on electricity production instead of capacity.

Key words: carbon market, cost pass-through, demand curve, supply (or marginal cost) curve, market competitiveness