nep-ene New Economics Papers
on Energy Economics
Issue of 2004‒12‒12
24 papers chosen by
Roger Fouquet
Imperial College, UK

  1. Electricity Liberalisation in Britain: the quest for a satisfactory wholesale market design By David Newbery
  2. Electricity Market Reform in the European Union: Review of progress towards liberalisation and integration By Tooraj Jamasb; Michael Pollitt
  3. Liberalisation of network industries : is electricity an exception to the rule? By Coppens,F.; Vivet,D.
  4. Does Competition Reduce Costs? Assessing the Impact of Regulatory Restructuring on U.S. Electric Generation Efficiency By Karl Markiewicz; Nancy L. Rose; Catherine Wolfram
  5. Structural changes in Russian electricity market By Aleksandr Abolmassov; Denis Kolodin
  6. The Electricity Market Game By Stephen Spear
  7. FAQs about oil and the world economy By Douwe Kingma; Wim Suyker
  8. Equilibrium Commodity Prices with Irreversible Investment and Non-Linear Technologies, By Jaime Casassus; Pierre Collin-Dufresne; Bryan R. Routledge
  9. Petroleum and Investment Operations in Tanzania By Kirby Adam J.R. Faciane
  10. The Impact of Upstream Mergers on Retail Gasoline Markets By Mark D. Manuszak
  11. Firm Conduct in the Hawaiian Retail Gasoline Industry By Mark D. Manuszak
  12. The Potential Viability of Biomass Ethanol as a Renewable Fuel By Lanier Nalley; Darren Hudson
  13. General Equilibrium Benefit Estimates for Spatial Externalities: Projected Ozone Reductions for the Los Angeles Air Basin By V. Kerry Smith; Holger Sieg; H. Spencer Banzhaf; Randy Walsh
  14. The Carbon Kuznets Curve: A Cloudy Picture Emitted by Bad Econometrics? By Martin Wagner; Georg Muller-Furstenberger
  16. The Role of CDM and JI for Fulfilling the European Kyoto Commitments By Helen Lückge; Sonja Peterson
  17. Can auctions control market power in emissions trading markets. By R. Andrew Muller; Stuart Mestelman; John Spraggon; Rob Godby
  18. Emissions trading without a quantity constraint. By R. Andrew Muller
  19. Experimental Methods for Research into Trading of Greenhouse Gas Emissions By R. Andrew Muller
  20. The Effects of a Sudden CO2 reduction in Spain By Xavier Labandeira; Miguel Rodriguez
  21. Microsimulating the Effects of Household Energy Price Changes in Spain By Xavier Labandeira; Jose M. Labeaga; Miguel Rodriguez
  22. The role of auctions and forward markets in the EU ETS: Counterbalancing the economic distortions of generous allocation and a ban on banking By Ehrhart, Karl-Martin; Hoppe, Christian; Schleich, Joachim; Seifert, Stefan
  23. Banning banking in EU emissions trading? By Schleich, Joachim; Ehrhart, Karl-Martin; Hoppe, Christian; Seifert, Stefan
  24. Optimal growth with pollution : how to use pollution permits ? By Pierre-André Jouvet; Philippe Michel; Gilles Rotillon

  1. By: David Newbery
    Abstract: Britain was the exemplar of electricity market reform, demonstrating the importance of ownership unbundling and workable competition in generation and supply. Privatisation created de facto duopolies that supported increasing price-cost margins and induced excessive (English) entry. Concentration was ended by trading horizontal for vertical integration in subsequent mergers. Competition arrived just as the Pool was replaced by New Electricity Trading Arrangements (NETA) intended to address its claimed shortcomings. NETA cost over £700 million, and had ambiguous market impacts. Prices fell dramatically as a result of (pre-NETA) competition, generating companies withdrew plant, causing fears about security of supply and a subsequent widening of price-cost margins.
    Keywords: electricity, liberalisation, market design, market power
    JEL: L94 D43
    Date: 2004–11
  2. By: Tooraj Jamasb; Michael Pollitt
    Abstract: The energy market liberalisation process in Europe is increasingly focused on electricity market integration and related cross border issues. This signals that the liberalisation of national electricity markets is now closer to the long-term objective of a single European energy market. The interface between the national electricity markets requires physical interconnections and technical arrangements. However, further progress towards this objective also raises important issues regarding the framework within which the integrated market is implemented. This paper reviews the progress towards a single European electricity market. We then discuss the emerging issues of market concentration, investments, and security of supply as well as some aspects of market design and regulation that are crucial for dynamic performance of a single European market.
    Keywords: Electricity, energy, liberalisation, regulation, integration, European Union
    JEL: L11 L22 L Q48
    Date: 2004–11
  3. By: Coppens,F.; Vivet,D. (Nationale Bank van Belgie)
    Date: 2004
  4. By: Karl Markiewicz; Nancy L. Rose; Catherine Wolfram
    Abstract: This paper explores the empirical effects of competition on technical efficiency in the context of electricity industry restructuring. Restructuring programs adopted by many U.S. states made utilities residual claimants to cost savings and increased their exposure to competitive markets. We estimate the impact of these changes on annual generating plant-level input demand for non-fuel operating expenses, the number of employees and fuel use. We find that municipally-owned plants, whose owners were for the most part unaffected by restructuring, experienced the smallest efficiency gains over the past decade. Investor-owned utility plants in states that restructured their wholesale electricity markets had the largest reductions in nonfuel operating expenses and employment, while investor-owned plants in nonrestructuring states fell between these extremes. The analysis also highlights the substantive importance of treating the simultaneity of input and output decisions, which we do through an instrumental variables approach.
    Keywords: Efficiency, Production, Competition, Electricity restructuring, Electric Generation, Regulation
    JEL: L11 L43 L51 L94 D24
    Date: 2004–11
  5. By: Aleksandr Abolmassov; Denis Kolodin
    Abstract: The structure of the electricity market in Russia is analyzed. The findings of this project will help to evaluate different scenaria of structural changes in terms of electricity price and market concentration.
    JEL: D4 L43 L51 L94 Q48
    Date: 2003–04–03
  6. By: Stephen Spear
    Abstract: This paper examines the effects of imperfect competition in unregulated electricity markets from a general equilibrium perspective, and demonstrates that horizontal market power can explain both the large peak-period price spikes observed recently in California and elsewhere, and the marked reduction in additions to capacity that have also occurred during the transition to competitive markets.
  7. By: Douwe Kingma; Wim Suyker
    Abstract: The following frequently asked questions about oil and the world economy are answered (with references): <P> Who are the main oil producers? Where is the oil used? What about oil reserves? How important is oil as an energy carrier? Is oil crucial for the world economy? Has oil become less important? What determines the price of oil? What about the current oil price? Is there only one oil price? How powerful is OPEC? What is the role of speculators? How important are taxes? Is the oil price higher in winter? What implies a higher oil price for the world economy? Are these calculations on oil price shocks without qualification? Are futures good predictors for prices in the near future? What will bring the future?
    Keywords: oil; oil price; opec
    JEL: Q41 Q43 Q48 E3 E66
    Date: 2004–12
  8. By: Jaime Casassus; Pierre Collin-Dufresne; Bryan R. Routledge
    Abstract: We model the properties of equilibrium spot and futures oil prices in a general equilibrium production economy with two goods. In our model production of the consumption good requires two inputs: the consumption good and a Oil. Oil is produced by wells whose flow rate is costly to adjust. Investment in new Oil wells is costly and irreversible. As a result in equilibrium, investment in Oil wells is infrequent and lumpy. Equilibrium spot price behavior is determined as the shadow value of oil. The resulting equilibrium oil price exhibits mean-reversion and heteroscedasticity. Further, even though the state of the economy is fully described by a one-factor Markov process, the spot oil price is not Markov (in itself). Rather it is best described as a regime-switching process, the regime being an investment `proximity' indicator. Further, our model captures many of the stylized facts of oil futures prices. The futures curve exhibits backwardation as a result of a convenience yield, which arises endogenously due to the productive value of oil as an input for production. This convenience yield is decreasing in the amount of oil available in the economy. We calibrate our model with economic aggregate data and crude oil futures prices. The models does a good job in matching the first two moments of the futures curves and the average consumption of oil-output and output-consumption of capital ratios from the macroeconomic data. The calibration results suggest the presence of convex adjustment costs for the investment in new oil wells. We also test a linear approximation of the equilibrium regime-shifting dynamics implied by our model. Our empirical specification successfully captures spot and futures data. Finally, the specific empirical implementation we use is designed to easily facilitate commodity derivative pricing that is common in two-factor reduced form pricing models.
  9. By: Kirby Adam J.R. Faciane (Kirby Faciane / KAJR Faciane)
    Abstract: Investment in exploration for petroleum in Tanzania has flourished over the last few years, at a time when circumstances for such investment would not appear to have been auspicious. This paper examines the extent to which the policies and strategies adopted by Tanzania have influenced both the rate of investment and the terms governing it.
    Keywords: petroleum investment; Tanzania; oil
    JEL: F1 F2
    Date: 2004–11–29
  10. By: Mark D. Manuszak
  11. By: Mark D. Manuszak
    Date: 2000–12
  12. By: Lanier Nalley (Mississippi State University); Darren Hudson (Mississippi State University)
    Abstract: Much attention has been paid to alternative fuel sources of late. Ethanol has been a politically popular alternative fuel additive and has recently been pushed to the forefront as a leading replacement to MTBE as an oxygenate. This paper examines the potential markets for ethanol, including biomass ethanol, and discusses the strengths and weaknesses of different oxygenate products. We find that the market for ethanol is tenuous and dependent on government support at this time. Biomass ethanol is more expensive to produce, but does have the advantage of being able to be produced near petroleum refineries, thus reducing transport costs, compared to other sources of ethanol.
    Keywords: biomass, ethanol
    JEL: D1 D2 D3 D4
    Date: 2004–12–08
  13. By: V. Kerry Smith; Holger Sieg; H. Spencer Banzhaf; Randy Walsh
    Abstract: This paper demonstrates how a new framework, using the necessary conditions for a locational equilibrium, offers the potential to transform this policy landscape. We demonstrate in this paper that the framework can be used as part of a benefit analysis of current environmental policy alternatives. We use our earlier estimates of household preferences derived within a locational equilibrium framework for the Los Angeles area. These findings are combined together with the spatially delineated, air quality projections developed by EPA for the evaluation of the 1990 Clean Air Act Amendments reported in EPA's first Prospective Analysis. Our approach is capable of accommodating the levels of detail generated for this policy assessment. It uses the same projected spatial variation in ozone concentrations in the computation of general equilibrium price effects as was developed for the agency's benefit analysis. Our findings indicate that the estimated annual general equilibrium benefits in 2000 and 2010 associated with the ozone improvements due to continuing the policies mandated under the 1990 Clean Air Act Amendments will be dramatically different by income group and location within the South Coast Air Quality Management District. The gains range from $33 to about $2,400 per household (in 1990 dollars). These differences arise from variations in air quality conditions, income, and the effects of general equilibrium price adjustment. To date, existing methods have been unable to measure consistently all of these effects together.
  14. By: Martin Wagner; Georg Muller-Furstenberger
    Abstract: In this paper we discuss three important econometric problems with the estimation of Environmental Kuznets Curves, which we exemplify with the particular example of the Carbon Kuznets Curve (CKC). The Carbon Kuznets hypothesis postulates an inverse U-shaped relationship between per capita GDP and per capita CO2 emissions. All three problems occur in the presence of unit root nonstationary regressors in panels. Two of them are rather fundamental: First, the use of nonlinear transformations of integrated regressors in the Kuznets curve, which usually contains GDP and its square is problematic. This stems from the fact that nonlinear transformations of integrated processes are in general not integrated, which implies that (panel) unit root and cointegration techniques, widely used by now in the Kuznets curve literature, cannot be applied meaningfully in this context. Second, all methods applied up to now rest upon the assumption of cross-sectional independence. With a first application of factor model based methods that allow for cross-sectional dependence, we find evidence for nonstationary common factors in both the GDP and CO2 emissions series. Estimating the CKC on stationary de-factored data, we do not find support for an inverse U-shape. The third problem, abstaining at this point from the above two fundamental problems, is that the unit root and cointegration methods have been used too uncritically. In particular the notorious small sample problems of unit root and cointegration problems have been neglected. By applying various bootstrap algorithms and several estimators we show that a careful analysis should have lead researchers to interpret their results with more caution than commonly done, even when being unaware of the two problems stated above
    Keywords: Carbon Kuznets Curve; panel data; unit roots; cointegration; cross-sectional dependence; nonlinear transformations of regressors
    JEL: Q20 C12 C13
    Date: 2004–12
  15. By: Ariaster Baumgratz Chimeli; Francisco de Assis de Souza Filho
    Abstract: We take small steps towards the approximation between economic analysis and the science of climate forecasting in the formulation of policies to alleviate the impact of climatic shocks. We do so by estimating the relationship between climate variables and corn production in Ceará, an important State in the Brazilian semi-arid. Using parametric and non-parametric regression models, we first estimate the relationship between contemporaneous sea surface temperatures (SSTs) for the Pacific and Atlantic oceans and the local rainfed corn market. Next, we investigate the forecasting potential of future corn production conditional on information on current SSTs. We find strong evidence that climate determinants are important in determining current and future corn production, a key indicator of the climatic stress to which a large number of small farmers are subject in the Brazilian semi-arid. Additionally, corn production in the region is negatively correlated with federal government transfers meant to mitigate the impact of local droughts. These resources have been subject to lethargic bureaucracies, corruption and economic inefficiencies in general. The observation and forecasting of corn production can be invaluable in the design of more efficient, expeditious and transparent policies to mitigate the effects of droughts in the region.
    JEL: I38 Q11 O13
    Date: 2004
  16. By: Helen Lückge; Sonja Peterson
    Abstract: To meet their Kyoto targets under the Burden Sharing Agreement, most European countries plan to make use of the flexible project mechanisms “Clean Development Mechanism” (CDM) and “Joint Implementation” (JI). In addition, CDM and JI credits can be used by installations to fulfil their obligations in the upcoming European emissions trading scheme. This paper compiles information from a variety of sources to give an overview over the different options to acquire CDM and JI credits and the extent to which European governments and companies plan to make use of these options.
    Keywords: European Union, CDM and JI, Emissions trading
    JEL: Q48 Q54 Q58
    Date: 2004–11
  17. By: R. Andrew Muller; Stuart Mestelman; John Spraggon; Rob Godby
    Abstract: Using eight sessions (twenty-four ten-period markets) in a double ABA cross-over design, we demonstrate clear evidence of market power in double-auction emission trading markets (agents who are not constrained to only buy or sell). Conventional theory predicts that in half of the market-power environments monopsony should emerge and in half monopoly should emerge. Market-power outcomes are frequently observed, most often in the form of price discrimination, and most effectively by monopsonists.
    Date: 1999–12
  18. By: R. Andrew Muller
    Abstract: This paper examines the differences between standard “cap-and-trade” emissions trading plans and “credit” plans in which individual agents create credits by reducing emissions below a firmspecific baseline. The two are equivalent if the baseline is a fixed quantity, but not if the baseline is specified as a baseline emissions ratio times current output. In the latter case there is no exogenous constraint on aggregate emissions. It may be called the case of “(ratio-based) credit trading”. Examples include the Clean Development Mechanism (CDM) of the Kyoto Protocol and the Canadian Pilot Emissions Reduction Trading plan (PERT). Unlike the case of cap-and-trade, the theoretical properties of ratio-based credit trading plans are not well known. In the absence of a binding quantity constraint, it is even difficult to understand how an ERC plan can generate a positive price. This paper studies the difference between ratiobased credit trading and conventional “cap-and-trade” plans in the context of a very simple model. It also considers how the two plans might interact if, for example, credits from a credit plan could be applied to commitments under a quantity-based cap-and-trade plan, and applies its findings to current plans for credit trading, including PERT and the clean development mechanism. The paper demonstrates that ratio-based credit trading is more like a tax instrument than a quantity instrument. It shows that there is no incentive to trade in a ratio-based market in which all firms receive baselines computed using their “business as ususal” emission ratios. Combining ratio-based credit trading with “cap-and-trade” allowance markets effectively relaxes the quantity constraint in the cap-and-trade plan and reduces the price of traded allowances. In the long run, there will be no effective constraint on emissions. The results have strong implications for current policy. In particular, they suggest that mixing quantity-based and ratio-based emission trading plans is inappropriate.
    Date: 1999
  19. By: R. Andrew Muller
    Date: 1999
  20. By: Xavier Labandeira (rede & Department of Applied Economics. University of Vigo); Miguel Rodriguez (rede & Department of Applied Economics. University of Vigo)
    Abstract: Spanish emissions of carbon dioxide have grown by more than 40% in 2004 with respect to 1990. This is not compatible with the EU allocation of Kyoto-mandated CO2 reduction, even taking into account that Spanish emissions are allowed to rise by 15% in 2010. The reasons for this situation stem from a combination of economic growth and an inefficient energy domain, coupled with a total absence of climate change policies. In this paper, we use a static general equilibrium model to assess the effects of a sudden and intense (ie, with a limited time to carry out significant abatement) CO2 reduction by the Spanish economy. Our results show that the costs of immediate and medium-size reductions are not significant in the short run and could lead to the attaining of the EU agreed emissions level for Spain. However, delaying such action means that the degree of Spanish CO2 emission reduction is much higher and that economic costs are far more important.
    Keywords: Climate, energy, market
    JEL: P Q Z
    Date: 2004–12–02
  21. By: Xavier Labandeira (rede & Department of Applied Economics. University of Vigo); Jose M. Labeaga (Department of Economic Analysis 2. UNED); Miguel Rodriguez (rede & Department of Applied Economics. University of Vigo)
    Abstract: In this paper we present a microsimulation model to calculate the effects of hypothetical ex-ante price changes in the Spanish energy domain. The model rests on our prior estimation of a demand system which is especially designed for simultaneous analysis of different energy goods and uses household data from 1973 to 1995. Our objective is to obtain in-depth information on the behavioural responses by different types of households, which will allow us to determine the welfare effects of such price changes, their distribution across society and the environmental consequences within the residential sector. Although the model used is able to reproduce any type of price change, we illustrate the paper with an actual simulation of the effects of energy taxes that resemble a 50 Euro tax on CO2 (carbon dioxide) emissions. The results show a significant response by households, sizeable emission reductions, tax revenues, welfare changes and distributional effects. The simulated policy can thus be considered a feasible option to tackle some of the current and severe inefficiencies in Spanish energy and environmental domains.
    Keywords: Energy, taxation, demand, Spain; CO2
    JEL: D6 D7 H
    Date: 2004–12–02
  22. By: Ehrhart, Karl-Martin (Universitaet Karlsruhe); Hoppe, Christian (Universitaet Karlsruhe); Schleich, Joachim (Fraunhofer Institute for Systems and Innovations Research, Karlsruhe); Seifert, Stefan (Universitaet Karlsruhe, IWM)
    Abstract: An analysis of the available National Allocation Plans for the first period (2005–2007) of the EU emissions trading scheme (EU ETS) implies (i) that the total allocation to installations covered under the EU ETS is fairly generous and (ii) that most, if not all EU Member States ban the transfer of allowances (banking) into the second period (2008–2012). In this paper, we explore efficiency issues associated with such a generous allocation of allowances to the trading sectors and the ban on banking. It is argued that allocation to the trading sectors is higher than implied by a cost-minimisation approach. Moreover, due to the reduced level of flexibility a ban on banking increases overall compliance costs. In addition, results of a simulation game conducted with real company participants and with a student control group suggest that a generous primary allocation in the first phase and a ban on banking also lead to an inefficient choice of abatement measures within periods. New results of additional simulations imply that auctioning off a part of the total quantity of allowances and allowing for forward markets may result in more reliable price signals and more efficient outcomes.
    Date: 2004–12–03
  23. By: Schleich, Joachim (Fraunhofer Institute for Systems and Innovations Research, Karlsruhe); Ehrhart, Karl-Martin (Universitaet Karlsruhe); Hoppe, Christian (Universitaet Karlsruhe); Seifert, Stefan (Universitaet Karlsruhe, IWM)
    Abstract: Admitting banking in emissions trading systems reduces overall compliance costs by allowing for inter-temporal flexibility: cost savings can be traded over time. However, unless individual EU Member States (MS) decide differently, the transfer of unused allowances from the period of 2005–2007 into the first commitment period under the Kyoto Protocol, i.e. 2008–2012, will be prohib-ited. In this paper, we first explore the implications of such a ban on banking when initial emission targets are lenient. This analysis is based on a simulation which was recently carried out in Germany with companies and with a student control group. The findings suggest that an EU-wide ban on banking would lead to efficiency losses in addition to those losses which arise from the lack of inter-temporal flexibility. Second, we use simple game-theoretic considerations to argue that, under reasonable assumptions, such an EU-wide ban on banking will be the equilibrium outcome. Thus, to avoid a possible prisoners’ dilemma, MS should co-ordinate their banking decisions.
    Date: 2004–12–03
  24. By: Pierre-André Jouvet (GAINS et GREQAM); Philippe Michel (GREQAM et EUREQua); Gilles Rotillon (THEMA)
    Abstract: We study optimal growth and its decentralization in an overlapping generations model. The decentralization of an optimal path needs some specific taxes in addition to lump-sum transfers if there are externalities. The introduction of market of permits allows to neutralize the external environmental effects. We shows that there is a unique management of permits such that the equilibrium coincides with the optimal path : all permits should be auctioned i.e. no permits to firms. This conclusion is in contradiction with the usual pratice of grandfathering.
    Keywords: Optimal growth, environment, market of permits
    JEL: D61 D9 Q28
    Date: 2004–02

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