nep-ene New Economics Papers
on Energy Economics
Issue of 2006‒03‒11
twelve papers chosen by
Roger Fouquet
Imperial College, UK

  1. The British privatisation programme: a long term perspective By Robert MILLWARD
  2. Efficiency in Deregulated Electricity Markets: Offer Cost Minimization vs. Payment Cost Minimization Auction By Rimvydas Baltaduonis
  3. Efficient Electricity Portfolios for Switzerland and the United States By Boris Krey; Peter Zweifel
  4. Electricity Restructuring and Regulation in the Provinces: Ontario and Beyond By Donald N. Dewees
  5. Can monetary policy be helped by domestic oil price stabilization?, By Eduardo Loyo; Luciano Vereda
  6. Effects of the Tax on Retail Sales of Some Fuels on a regional economy: a computable general equilibrium approach By Francisco Javier De Miguel; Manuel Alejandro Cardenete; Jesús Pérez
  7. Policy Processes for Low Carbon Innovation in the UK: Successes, failures and lessons By Tim J. Foxon; Peter J. Pearson
  8. Endogenous structural change and climate targets. By Renaud Crassous; Jean-Charles Hourcade; Olivier Sassi
  9. Why economic growth dynamics matter in<br />assessing climate change damages: illustration<br />on extreme events By Stephane Hallegate; Jean-Charles Hourcade
  10. Leakage from climate policies and border tax adjustment:<br />lessons from a geographic model of the cement industry By Philippe Quirion; Damien Demailly
  11. "Globalization and Pollution Industries in East Asia" By Toru Iwami
  12. A future for Kyoto ? By Roger Guesnerie

  1. By: Robert MILLWARD
    Abstract: The British privatisations were concentrated on the infrastructur e industries of transport, communications and energy. It is impor tant to assess the efficiency impact in a long-term context. The Milan study goes some way towards this but even better is to comp are different countries of the Western world over the whole perio d since 1945. A distinction is made here between 1945-73 and the 1973-95 period, which followed the oil shocks and ushered in a ge neral phase of de-regulation and privatisation. It is suggested t hat factors like the reconstruction after the Second World War, t he process of catch-up and convergence in technologies and the re source endowments of different countries had much bigger effects on productivity levels and growth rates in the infrastructure ind ustries than the shift from nationalised to privatised regimes. T his article also, more briefly, critically evaluates two other el ements of the Milan study, the treatment of excess profits and of the move to more differentiated price structures.
    Keywords: Nationalization, Privatization, Great Britain
  2. By: Rimvydas Baltaduonis (University of Connecticut)
    Abstract: This study of the wholesale electricity market compares the efficiency performance of the auction mechanism currently in place in U.S. markets with the performance of a proposed mechanism. The analysis highlights the importance of considering strategic behavior when comparing different institutional systems. We find that in concentrated markets, neither auction mechanism can guarantee an efficient allocation. The advantage of the current mechanism increases with increased price competition if market demand is perfectly inelastic. However, if market demand has some responsiveness to price, the superiority of the current auction with respect to efficiency is not that obvious. We present a case where the proposed auction outperforms the current mechanism on efficiency even if all offers re ect true production costs. We also find that a market designer might face a choice problem with a tradeoff between lower electricity cost and production efficiency. Some implications for social welfare are discussed as well.
    Keywords: strategic behavior, multi-unit auction, efficiency, electricity
    JEL: C72 D44 D61 L94
    Date: 2006–03
  3. By: Boris Krey (Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich)
    Abstract: This study applies financial portfolio theory to determine efficient electricity-generating technology mixes for Switzerland and the United States. Expected returns are given by the (negative of the) rate of increase of power generation cost. Volatility of returns relates to the standard deviation of the cost increase associated with the portfolio, which contains Nuclear, Run of river, Storage hydro and Solar in the case of Switzerland, and Coal, Nuclear, Gas, Oil, and Wind in the case of the United States. Since shocks in generation costs are found to be correlated, the seemingly unrelated regression estimation (SURE) method is applied for filtering out the systematic component of the covariance matrix of the cost changes. Results suggest that at observed generation costs in 2003, the maximum expected return (MER) portfolio for Switzerland would call for a shift towards Nuclear and Solar, and therefore away from Run of river and Storage hydro. By way of contrast, the minimum variance (MV) portfolio mainly contains Nuclear power and Storage hydro. The 2003 MER portfolio for the United States contains Coal generated electricity and Wind, while the MV alternative combines Coal, Nuclear, Oil and Wind. Interestingly, Gas does not play any role in the determination of efficient electricity portfolios in the United States.
    Keywords: henergy electricity, portfolio theory, efficiency frontier, seemingly unrelated regression estimations (SURE)
    JEL: C32 G11 Q49
    Date: 2006–02
  4. By: Donald N. Dewees
    Abstract: Competitive electricity markets are artificial markets with extensive rules for all participants arising from the complex interconnections of the electricity network. Governments or regulatory agencies oversee the market design process and the operation and maintenance of the market, so market design is necessarily a political process. The conceptual design of the market must recognise the political forces that will operate on the market design process so that the political process will not thwart the intended outcome of the market as it has in some jurisdictions including Ontario. The limited ability of consumers to understand changes in the electricity sector in the short run poses a real constraint on what can be achieved politically. Letting the market set the price means that governments cannot ensure any particular future price level and both theory and experience tell us that prices may increase after restructuring (California, Ontario, Alberta). This makes it difficult to sell restructuring to consumers who will be interested in the price they pay and not much interested in abstractions like efficiency. Another challenge for electricity restructuring is that the starting points differ from one jurisdiction to another and the starting points matter. The problems are different if you begin with a crown monopoly than if you have investor-owned utilities; if expected prices are higher than recent prices rather than lower; if governments have been deeply involved in the electricity sector rather than distant from it; if the public has experience with stable electricity prices rather than fluctuating prices. Finally, the situation in neighbouring jurisdictions matters as well. Restructuring in a low-price jurisdiction surrounded by high prices will increase the prospect of price increases at home, while a high-price island is more likely to see its prices decline. If workable competition will be difficult to achieve at home, strong interties to neighbouring jurisdictions can improve competitive performance if the market is appropriately designed. Air pollution, like electricity, moves across borders, so one must assess and evaluate the pollution implications of competition and make any appropriate adjustments to the market design.
    Keywords: electricity restructuring, electric utilities, market design
    JEL: L94
  5. By: Eduardo Loyo (Department of Economics PUC-Rio); Luciano Vereda (Department of Economics PUC-Rio)
    Date: 2005–05
  6. By: Francisco Javier De Miguel (Department of Applied Economics, Universidad de Extremadura); Manuel Alejandro Cardenete (Department of Economics, Universidad Pablo de Olavide); Jesús Pérez (Department of Applied Economics, Universidad de Extremadura)
    Abstract: This paper simulates the effects on the economy of Extremadura that are produced by a new tax on retail sales of some fuels. A computable general equilibrium model involving various labour market scenarios is employed as a modelling framework. Model parameters are obtained by calibration, using a social accounting matrix for Extremadura updated to the year 2000. Further, we also include an additional simulation in which a hypothetical regional tax rate, to finance environmental policies, is considered. This second simulation assumes constant fiscal revenues. The results of the first simulation show that the effects of this tax are modest. The simulation shows household welfare losses, decreasing activity levels and generalised price reductions, except in production sectors more directly linked to the oil products sector. In addition, we also observe that this hypothetical additional regional fuel tax rate would reinforce the effects produced by the national tax rate.
    Keywords: Tax on retail sales of some fuels, computable general equilibrium models, social accounting matrices, fiscal policy.
    JEL: C68 D58 R13
    Date: 2006–03
  7. By: Tim J. Foxon (4CMR – Cambridge Centre for Climate Change Mitigation Research, Department of Land Economy, University of Cambridge.); Peter J. Pearson (Centre for Environmental Policy, Imperial College London, SW7 2AZ, UK.)
    Abstract: This paper analyses recent, current and potential future relations between policy processes and substantive outcomes in UK low carbon innovation policy. It examines the development of policy processes relating to the adoption and implementation of the Renewables Obligation and how these may affect the current and likely future success of the Obligation in promoting low carbon innovation. It looks at the new policy and institutional processes put in place in the 2003 Energy White Paper and argues that these are unlikely to provide the strategic long-term framework needed to realize the ambitious goals for UK energy policy set out in the White Paper. Finally, it outlines some suggestions for further development of policy processes to facilitate improved delivery of these goals, based on guiding principles for sustainable innovation policy processes, developed by the authors and colleagues.
    Keywords: Low carbon innovation policy, Renewables Obligation, guiding principles, sustainable innovation policy processes.
    Date: 2006
  8. By: Renaud Crassous (CIRED - Centre International de Recherche sur l'Environnement et le Développement - - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales;Ecole Nationale du Génie Rural des Eaux et des Forêts;Ecole Nationale des Ponts et Chaussées, ENGREF - Ecole Nationale du Génie Rural, des Eaux et des Forêts - - Ministere de l'Agriculture); Jean-Charles Hourcade (CIRED - Centre International de Recherche sur l'Environnement et le Développement - - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales;Ecole Nationale du Génie Rural des Eaux et des Forêts;Ecole Nationale des Ponts et Chaussées); Olivier Sassi (CIRED - Centre International de Recherche sur l'Environnement et le Développement - - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales;Ecole Nationale du Génie Rural des Eaux et des Forêts;Ecole Nationale des Ponts et Chaussées, ENPC - Ecole Nationale des Ponts et Chaussées - - Ecole Nationale des Ponts et Chaussées)
    Abstract: This paper envisages endogenous technical change as resulting from the interplay between the economic growth engine, consumption, technology and localization patterns. We perform numerical simulations with the recursive dynamic general equilibrium model IMACLIM-R to study how modeling induced technical change affects costs of CO2 stabilization. IMACLIM-R incorporates innovative specifications about final consumption of transportation and energy to represent critical stylized facts such as rebound effects and demand induction by infrastructures and equipments. Doing so brings to light how induced technical change may not only lower stabilization costs thanks to pure technological progress, but also triggers induction of final demand - effects critical to both the level of the carbon tax and the costs of policy given a specific stabilization target. Finally, we study the sensitivity of total stabilization costs to various parameters including both technical assumptions as accelerated turnover of equipments and non-energy choices as alternative infrastructure policies.
    Keywords: induced technical change; structural change; climate policy; carbon tax;transportation; infrastructures
    Date: 2006–02–28
  9. By: Stephane Hallegate (CIRED - Centre International de Recherche sur l'Environnement et le Développement - - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales;Ecole Nationale du Génie Rural des Eaux et des Forêts;Ecole Nationale des Ponts et Chaussées, ENPC - Ecole Nationale des Ponts et Chaussées - Ecole Nationale des Ponts et Chaussées); Jean-Charles Hourcade (CIRED - Centre International de Recherche sur l'Environnement et le Développement - - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales;Ecole Nationale du Génie Rural des Eaux et des Forêts;Ecole Nationale des Ponts et Chaussées)
    Abstract: Extreme events are one of the main channels through which climate and socio-<br />economic systems interact and it is likely that climate change will modify their<br />probability distributions. The long-term growth models used in climate change as-<br />sessments, however, cannot capture the eects of such short-term shocks. To inves-<br />tigate this issue, a non-equilibrium dynamic model (NEDyM) is used to assess the<br />macroeconomic consequences of extreme events. In the model, dynamic processes<br />multiply the extreme event direct costs by a factor 20. Half of this increase comes<br />from short-term processes, that long-term growth models cannot capture. The model<br />exhibits also a bifurcation in GDP losses: for a given distribution of extremes, there<br />is a value of the ability to fund reconstruction below which GDP losses increases<br />dramatically. This bifurcation may partly explain why some poor countries that<br />experience repeated natural disasters cannot develop. It also shows that changes<br />in the distribution of extremes may entail signicant GDP losses and that climate<br />change may force a specic adaptation of the economic organization. These results<br />show that averaging short-term processes like extreme events over the yearly time<br />step of a long-term growth model can lead to inaccurately low assessments of the<br />climate change damages.
    Keywords: Dynamics; Extreme events; Economic impacts; Climate Change
    Date: 2006–02–28
  10. By: Philippe Quirion (CIRED - Centre International de Recherche sur l'Environnement et le Développement - - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales;Ecole Nationale du Génie Rural des Eaux et des Forêts;Ecole Nationale des Ponts et Chaussées); Damien Demailly (CIRED - Centre International de Recherche sur l'Environnement et le Développement - - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales;Ecole Nationale du Génie Rural des Eaux et des Forêts;Ecole Nationale des Ponts et Chaussées)
    Abstract: We present a spatial international trade model, GEO, which computes transportation costs by<br />not treating markets as dimensionless points and explicitly represents capacity shortages and<br />investment decisions in new production capacities. We link it to CEMSIM, a partial<br />equilibrium model of the world cement industry developed by the IPTS. We assume that the<br />Kyoto Protocol Annex B countries (except the USA and Australia), create a CO2 tax at 15<br />euros per tonne. This policy entails significant emissions reductions (around 20%) in these<br />countries. A significant leakage occurs, with an emissions increase in the rest of the world of<br />around 20% of the emissions reduction in Annex B-USA&Australia. We thus run two<br />scenarios combining a CO2 tax with border-tax adjustments (BTA). With the more ambitious<br />BTA tested, not only is there no leakage, but emissions in the rest of the world decrease<br />slightly. However, compared to business-as-usual, non-Annex B price-competitiveness and<br />production decrease a little and these countries loose some market shares, so they could<br />attack this system as distorting competition in favour of Annex B countries. A less ambitious<br />BTA is thus tested, which cannot be criticised on this ground and prevents almost all leakage.<br />The only drawback of both BTA policies is that the cement price in Annex BUSA&<br />Australia increases a little more than without BTA, further impacting the cement<br />consumers in these countries.
    Keywords: Cement; leakag;, spillover; climate change mitigation;Kyoto Protocol; border-tax adjustment;<br />international trade; transportation cost
    Date: 2006–02–28
  11. By: Toru Iwami (Faculty of Economics, University of Tokyo)
    Abstract: In this paper, we investigate what the East Asian data tell us about the "pollution haven hypothesis." In the region, pollution goods are not traded so much directly, and their production is not clearly correlated with inward FDI and openness of the country in question. Although production of pollution goods is indirectly related to manufacturing exports as materials and intermediate goods, domestic consumption exerts larger impact on the production than exports. These facts imply that pollution industries are not so much influenced by the "globalization," suggesting indirectly also that a gap in environmental regulations do not lead to an increased scale of foreign trade and FDI. To the question of how FDI inflows and openness contribute to energy efficiency and labor productivity, we find a positive effect of FDI on the labor productivity in low and middle-income countries, although its effect on energy efficiency is rather vague.
    Date: 2006–01
  12. By: Roger Guesnerie
    Abstract: This text is based on the English translation of extracts from a report to an advisory economic group to the French Prime Minister (Conseil d'Analyse Economique). This report was presented on July 2002 and published in 2003, (Guesnerie(2003). These extracts have been chosen and reorganised to provide an assessment of the future of the Kyoto protocol, as emphasized in the title. The sections successively treat: the present flaws of the Kyoto protocol, the improvement in design that can be thought of, the issues underlying the durability of Kyoto-like arrangements. The main lessons of the analysis are stressed again in conclusion.
    Date: 2006

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