nep-ene New Economics Papers
on Energy Economics
Issue of 2007‒01‒23
twenty papers chosen by
Roger Fouquet
Imperial College, UK

  1. Over-Allocation or Abatement? A Preliminary Analysis of the Eu Ets Based on the 2005 Emissions Data By Barbara Buchner; Denny Ellerman
  2. Why Worry About Climate Change? A Research Agenda By Richard S.J. Tol
  3. Climate Change, Insurability of Large-scale Disasters and the Emerging Liability Challenge By Howard C. Kunreuther; Erwann O. Michel-Kerjan
  4. The Internalization of Externalities in The Production of Electricity: Willingness to Pay for the Attributes of a Policy for Renewable Energy By Alberto Longo; Anil Markandya; Marta Petrucci
  5. How well does Learning-by-doing Explain Cost Reductions in a Carbon-free Energy Technology? By Gregory F. Nemet
  6. International Technology Spillovers in Climate-Economy Models: Two Possible Approaches By Enrica De Cian
  7. Technology Transfers and the Clean Development Mechanism in a North-South General Equilibrium Model By Linda Sahlén; Thomas Aronsson; Kenneth Backlund
  8. Costs of Reducing Greenhouse Gas Emissions: A Case Study of India’s Power Generation Sector By Manish Gupta
  9. Economy-Wide Estimates of the Implications of Climate Change: A Joint Analysis for Sea Level Rise and Tourism By Francesco Bosello; Andrea Bigano; Roberto Roson; Richard S.J. Tol
  10. Climate Change and Water Resources – An International Perspective By Marianne Keudel
  11. Heterogeneity, climate change and stability of international fiscal harmonization By François Gusdorf; Abdelhakim Hammoudi
  12. Costs of alternative environmental policy instruments in the presence of industry compensation requirements By Bovenberg,Lans; Goulder,Lawrence H.; Jacobson,Mark R.
  13. The EMEC model: Version 2.0 By Östblom, Göran; Berg, Charlotte
  14. A Meta-analysis of the Price Elasticity of Gasoline Demand. A System of Equations Approach By Martijn Brons; Peter Nijkamp; Eric Pels; Piet Rietveld
  15. The Role of Risk Aversion and Lay Risk in the Probabilistic Externality Assessment for Oil Tanker Routes to Europe By Andrea Bigano; Mariaester Cassinelli; Anil Markandya; Fabio Sferra
  16. Gazprom contraint par son environnement pourra-t-il, sans réforme, assurer le développement de l'industrie gazière russe ? By Catherine Locatelli
  17. Energy Regulation, Roll Call Votes and Regional Resources: Evidence from Russia By Theocharis N. Grigoriadis; Benno Torgler
  18. Hourly Electricity Prices in Day-Ahead Markets By Huisman, R.; Huurman, C.; Mahieu, R.J.
  19. Bidding Behavior when One Bidder and the Auctioneer Are Vertically Integrated Implications for the Partial Deregulation of EU Electricity Markets By Silvester van Koten
  20. Liberalisation of European energy markets By CPB, in collaboration with ZEW, Mannheim

  1. By: Barbara Buchner (Fondazione Eni Enrico Mattei); Denny Ellerman (Massachusetts Institute of Technology)
    Abstract: This paper provides an initial analysis of the EU ETS based on the installation-level data for verified emissions and allowance allocations in the first trading year. Those data, released on May 15, 2006, and subsequent updates revealed that CO2 emissions were about 4% lower than the allocated allowances. The main objective of the paper is to shed light on the extent to which over-allocation and abatement have taken place in 2005. We propose a measure by which over-allocation can be judged and provide estimates of abatement based on emissions data and indicators of economic activity as well as trends in energy and carbon intensity. Finally, we discuss the insights and implications that emerge from this tentative assessment.
    Keywords: Climate Change, Emission Trading, Allocation, Environmental Effects
    JEL: D61 O1 Q51 Q54
    Date: 2006–11
  2. By: Richard S.J. Tol (Vrije Universiteit, Carnegie Mellon University and Economic and Social Research Institute)
    Abstract: Estimates of the marginal damage costs of carbon dioxide emissions suggest that, although climate change is a problem and some emission reduction is justified, very stringent abatement does not pass the cost-benefit test. However, current estimates of the economic impact of climate change are incomplete. Some of the missing impacts are likely to be positive and others negative, but overall the uncertainty seems to concentrate on the downside risks and current estimates of the damage costs may have a negative bias. The research effort on the economic impacts of climate change is minute, and should be strengthened, with a particular focus on the quantification of uncertainties; estimating missing impacts, interactions between impacts and higher-order effects; the valuation of biodiversity loss; the implications of extreme climate scenarios and violent conflict; and climate change in the very long term.
    Keywords: Climate Change, Impacts, Valuation, Cost-benefit Analysis
    JEL: Q54
    Date: 2006–11
  3. By: Howard C. Kunreuther; Erwann O. Michel-Kerjan
    Abstract: This paper focuses on the interaction between uncertainty and insurability in the context of some of the risks associated with climate change. It discusses the evolution of insured losses due to weather-related disasters over the past decade, and the key drivers of the sharp increases in both economic and insured catastrophe losses over the past 20 years. In particular we examine the impact of development in hazard-prone areas and of global warming on the potential for catastrophic losses in the future. In this context we discuss the implications for insurance risk capital and the capacity of the insurance industry to handle large-scale events. A key question that needs to be addressed is the factors that determine the insurability of a risk and the extent of coverage offered by the private sector to provide protection against extreme events where there is significant uncertainty surrounding the probability and consequences of a catastrophic loss. We discuss the concepts of insurability by focusing on coverage for natural hazards, such as earthquakes, hurricanes and floods. The paper also focuses on the liability issues associated with global climate change, and possible implications for insurers (including D&O), given the difficulty in identifying potential defendants, tracing harm to their actions and apportioning damages among them. The paper concludes by suggesting ways that insurers can help mitigate future damages from global climate change by providing premium reductions and rate credits to companies investing in risk-reducing measures.
    JEL: H23 H75 K32
    Date: 2007–01
  4. By: Alberto Longo (Queen’s University Belfast and University of Bath); Anil Markandya (University of Bath and Fondazione Eni Enrico Mattei); Marta Petrucci (University of Bath)
    Abstract: This paper investigates the willingness to pay of a sample of residents of Bath, England, for a hypothetical program that promotes the production of renewable energy. Using choice experiments, we assess the preferences of respondents for a policy for the promotion of renewable energy that (i) contributes to the internalization of the external costs caused by fossil fuel technologies; (ii) affects the security of energy supply; (iii) has an impact on the employment in the energy sector; (iv) and leads to an increase in the electricity bill. Responses to the choice questions show that our respondents are in favour of a policy for renewable energy and that they attach a high value to a policy that brings private and public benefits in terms of climate change and energy security benefits. Our results therefore suggest that consumers are willing to pay a higher price for electricity in order to internalize the external costs in terms of energy security, climate change and air pollution caused by the production of electricity.
    Keywords: Non Market Valuation, Choice Experiments, Willingness to Pay, Renewable Energy, Energy Security, Greenhouse Gases Emissions
    JEL: Q42 Q48 Q51
    Date: 2006–11
  5. By: Gregory F. Nemet (University of California)
    Abstract: The incorporation of experience curves has enhanced the treatment of technological change in models used to evaluate the cost of climate and energy policies. However, the set of activities that experience curves are assumed to capture is much broader than the set that can be characterized by learning-by-doing, the primary connection between experience curves and economic theory. How accurately do experience curves describe observed technological change? This study examines the case of photovoltaics (PV), a potentially important climate stabilization technology with robust technology dynamics. Empirical data are assembled to populate a simple engineering-based model identifying the most important factors affecting the cost of PV over the past three decades. The results indicate that learning from experience only weakly explains change in the most important cost-reducing factors— plant size, module efficiency, and the cost of silicon. They point to other explanatory variables to include in future models. Future work might also evaluate the potential for efficiency gains from policies that rely less on ‘riding down the learning curve’ and more on creating incentives for firms to make investments in the types of cost-reducing activities quantified in this study.
    Keywords: Learning-by-doing, Experience Curves, Learning Curves, Climate Policy
    JEL: O31 Q42 Q48 Q55
    Date: 2006–11
  6. By: Enrica De Cian (Fondazione Eni Enrico Mattei)
    Abstract: This paper analyzes two possible methodologies of modeling international technology spillovers in a climate-economy CGE model. Technological change, by affecting productivity, energy and carbon intensity, eventually influences the amount of CO2 emissions, the costs and the timing of the policies targeted at their reduction. Technological change is here defined so as to include also the diffusion and adoption phase. In an increasingly integrated world, new products and technologies developed in one region will eventually diffuse internationally. The two approaches described in this paper are based on two mechanisms used to model technological change in climate models: learning curves, total factor productivity and the autonomous energy efficient improvement parameter. This paper considers spillovers mediated by international trade in capital goods. In particular, it looks at how imports machinery and equipments from the OECD countries can affect the technology variables related to CO2 emissions: learning rates in the first approach, productivity, energy and carbon intensity in the second one.
    Keywords: Climate Policy, International Trade, Learning Curves, International Technology Spillovers, Biased Technical Change
    JEL: F18 Q54 Q55
    Date: 2006–11
  7. By: Linda Sahlén (Umeå University); Thomas Aronsson (Umeå University); Kenneth Backlund (Umeå University)
    Abstract: This paper analyzes the potential welfare gains of introducing a technology transfer from Annex I to non-Annex I in order to mitigate greenhouse gas emissions. Our analysis is based on a numerical general equilibrium model for a world economy comprising two regions, North (Annex I) and South (non-Annex I). As our model allows for labor mobility between the formal and informal sectors in the South, we are also able to capture additional aspects of how the transfer influences the Southern economy. In a cooperative equilibrium, a technology transfer from the North to the South is clearly desirable from the perspective of a ‘global social planner’, since the welfare gain for the South outweighs the welfare loss for the North. However, if the regions do not cooperate, then the incentives to introduce the technology transfer appear to be relatively weak from the perspective of the North; at least if we allow for Southern abatement in the pre-transfer Nash equilibrium. Finally, by adding the emission reductions associated with the Kyoto agreement to an otherwise uncontrolled market economy, the technology transfer leads to higher welfare in both regions.
    Keywords: Climate Policy, Technology Transfer, Kyoto Protocol, General Equilibrium, Clean Development Mechanism
    JEL: D58 D62 Q52
    Date: 2006–11
  8. By: Manish Gupta (National Institute of Public Finance and Policy)
    Abstract: If India were to participate in any international effort towards mitigating CO2 emissions, the power sector which is one of the largest emitters of CO2 in the country would be required to play a major role. In this context the study estimates the marginal abatement costs, which correspond to the costs incurred by the power plants to reduce one unit of CO2 from the current level. The study uses an output distance function approach and its duality with the revenue function to derive these costs for a sample of thermal plants in India. Two sets of exercises have been undertaken. The average shadow prices of CO2 for the sample of thermal plants for the period 1991-92 to 1999-2000 was estimated to be respectively Rs.3380.59 and Rs.2401.99 per ton for the two models. These shadow prices can be used for designing environmental policies and market-based instruments for controlling pollution in the power sector in India.
    Keywords: Marginal Abatement Costs, Distance Function, CO2 Emissions, Shadow Prices, Power Generation Sector
    JEL: Q40
    Date: 2006–11
  9. By: Francesco Bosello (Fondazione Eni Enrico Mattei and Ca’Foscari University of Venice); Andrea Bigano (Fondazione Eni Enrico Mattei and REF, Ricerche per l'Economia e la Finanza); Roberto Roson (Fondazione Eni Enrico Mattei and Ca’Foscari University of Venice); Richard S.J. Tol (Vrije Universiteit)
    Abstract: Climate change impacts on human life have well defined and different origins, nevertheless in the determination of their final effects, especially those involving social-economic responses, interactions among impacts are likely to play an important role. This paper is one of the first attempts to disentangle and highlight the role of these interactions. It focuses on the economic assessment of two specific climate change impacts: sea-level rise and changes in tourism flows. By using a CGE model the two impacts categories are first analyzed separately and then jointly. Comparing the results it is shown that, even though qualitatively joint effects follow the outcomes of the disjoint exercises, quantitatively impact interactions do play a significant role. Moreover it has been also possible to disentangle the relative contribution of each single impact category to the final result. In the case under scrutiny demand shocks induced by changes in tourism flows outweigh the supply side shock induced by the loss of coastal land.
    Keywords: Climate Change, Sea Level Rise, Tourism, Computable General Equilibrium Models
    JEL: C68 D58 Q25
    Date: 2006–11
  10. By: Marianne Keudel
    Abstract: Climate change and its consequences are the focus of many environmental policies in the European Union but also in other countries. Whereas in the US marketable instruments like permit trading have already been implemented since the 1980s, the EU first implemented permit trading for CO2 emissions in 2005. Climate change also influences the availability of water resources; water levels of rivers in the EU are assumed to decrease in the next decades. Decreasing water levels, in turn, heavily influence the quality of these water resources. In some countries the instrument of permit trading is also applied to the regulation of water resources (quantity and quality). This paper gives an overview of existing systems in order to show how such trading systems can create incentives for the efficient use of resources by means of pricing.
    Keywords: river basin management, water trading, water quality trading
    JEL: Q25 Q53
    Date: 2007–01
  11. By: François Gusdorf (CIRED - Centre international de recherche sur l'environnement et le développement - [CIRAD : UMR56][CNRS : UMR8568] - [Ecole des Hautes Etudes en Sciences Sociales][Ecole Nationale des Ponts et Chaussées][Ecole Nationale du Génie Rural des Eaux et des Forêts]); Abdelhakim Hammoudi
    Abstract: This paper analyses harmonization on fuel taxes between two coalitions. Harmonization is considered as a tool to mitigate greenhouse gas emissions, and reduce environmental costs. Domestic fuel producers can sell abroad, and their profits influence national governments in the negotiations. If all countries are identical, harmonization is environmental friendly provided environmental marginal damages are high. It is also economically profitable, but may be unstable if one of the coalitions is small enough. In this case, however, financial transfers between coalitions can stabilize harmonization. Nevertheless, countries can be heterogeneous with respect to the existence of a domestic producer. Heterogeneity introduces a new instability: not only the size, but also the composition of coalitions matters. Furthermore, the level of environmental damages also influences the stability of harmonization. In this case, intra- and inter-coalition financial transfers are necessary but not sufficient to stabilize harmonization.
    Keywords: Fiscal harmonization; Climate Change; Coalitions; Stability.
    Date: 2007–01–09
  12. By: Bovenberg,Lans; Goulder,Lawrence H.; Jacobson,Mark R. (Tilburg University, Center for Economic Research)
    Abstract: This paper explores how the costs of meeting given aggregate targets for pollution emissions change with the imposition of the requirement that key pollution-related industries be compensated for potential losses of profit from the pollution regulation. Using analytically and numerically solved equilibrium models, we compare the incidence and costs of emissions taxes, fuel (intermediate input) taxes, performance standards and mandated technologies in the absence and presence of this compensation requirement. Compensation is provided either through industry tax credits or industry-specific cuts in capital tax rates. We decompose the added costs from the compensation requirement into (1) an increase in "intrinsic abatement cost," reflecting a lowered efficiency of pollution abatement, and (2) a "lump-sum compensation cost" that captures the efficiency costs of financing the compensation. The compensation requirement affects these components differently, depending on the policy instrument involved and the required extent of pollution abatement. As a result, it can change the cost-rankings of the different instruments. In particular, when compensation is provided through tax credits, the lump-sum compensation cost is higher under the emissions tax than under the command-andcontrol policies (performance standards and mandated technologies) - a reflection of the higher compensation requirements under the emissions tax. When the required pollution reduction is modest, imposing the compensation requirement causes the emissions tax to lose its status as the least costly instrument and to become more costly than command and control policies. In contrast, when required abatement is extensive, the emissions tax again becomes the most-cost effective instrument because of its advantages in terms of lower intrinsic abatement cost.
    Keywords: environmental instrument choice;pollution control;compensation requirements; emissions abatement costs
    JEL: Q58 H23 H21
    Date: 2006
  13. By: Östblom, Göran (National Institute of Economic Research); Berg, Charlotte (National Institute of Economic Research)
    Abstract: The present paper introduces a new version of an applied general equilibrium model of the Swedish economy: Environmental Medium Term Economic Model (EMEC). The model is used at NIER for analysing economic implications for households and firms of the Swedish environmental policy. The economy and the environment interact in the model and thus, we can analyse the economic implica-tions of various environmental policy measures, such as a CO2-tax, a CO2-ceiling and CO2-trading. The model captures also ancillary benefits of climate policy for NOx, SO2, PM10 and PM20. This new version of EMEC, in addition, analyses the effects of road user charges and the economic impact of environmental policy measures on six types of households, as transport demand is represented in a much more detail and as households are distributed, by disposal income and residence. Furthermore, the model distinguishes 26 industries, 33 composite commodities, 26 consumer goods, two kinds of labour and eight pollutants. The model produces results for endogenous variables, which can be interpreted fully in terms of the model’s theory, data and the assumptions underlying the exogenous variables.
    Keywords: CGE-model; Sectors; Pollutants; Factors of production; Substitution; Sweden
    Date: 2006–11–01
  14. By: Martijn Brons (Vrije Universiteit Amsterdam); Peter Nijkamp (Vrije Universiteit Amsterdam); Eric Pels (Vrije Universiteit Amsterdam); Piet Rietveld (Vrije Universiteit Amsterdam)
    Abstract: Automobile gasoline demand can be expressed as a multiplicative function of fuel efficiency, mileage per car and car ownership. This implies a linear relationship between the price elasticity of total fuel demand and the price elasticities of fuel efficiency, mileage per car and car ownership. In this meta-analytical study we aim to investigate and explain the variation in empirical estimates of the price elasticity of gasoline demand. A methodological novelty is that we use the linear relationship between the elasticities to develop a meta-analytical estimation approach based on a system of equations. This approach enables us to combine observations of different elasticities and thus increase our sample size. Furthermore it allows for a more detailed interpretation of our meta-regression results. The empirical results of the study demonstrate that the system of equations approach leads to more precise results (i.e., lower standard errors) than a standard! meta-analytical approach. We find that, with a mean price elasticity of -0.53, the demand for gasoline is not very price sensitive. The impact a change in the gasoline price on demand is mainly driven by a response in fuel efficiency and car ownership and to a lesser degree by changes in the mileage per car. Furthermore, we find that study characteristics relating to the geographic area studied, the year of the study, the type of data used, the time horizon and the functional specification of the demand equation have a significant impact on the estimated value of the price elasticity of gasoline demand.
    Keywords: Meta-analysis; Price elasticities; Gasoline demand; System of equations
    JEL: C30 C42 C51 L91 Q40 Q48
    Date: 2006–11–29
  15. By: Andrea Bigano (Fondazione Eni Enrico Mattei); Mariaester Cassinelli (Fondazione Eni Enrico Mattei); Anil Markandya (Fondazione Eni Enrico Mattei and University of Bath); Fabio Sferra (Fondazione Eni Enrico Mattei)
    Abstract: Oil spills are a major cause of environmental concern, in particular for Europe. However, the traditional approach to the evaluation of the expected external costs of these accidents fails to take into full account the implications of their probabilistic nature. By adapting a methodology originally developed for nuclear accidents to the case of oil spills, we extend the traditional approach to the assessment of the welfare losses borne by potentially affected individuals for being exposed to the risk of an oil spill. The proposed methodology differs from the traditional approach in three respects: it allows for risk aversion; it adopts an ex-ante rather than an ex-post perspective; it allows for subjective oil spill probabilities (held by the lay public) higher than those assessed by the experts in the field. In order to illustrate quantitatively this methodology, we apply it to the hypothetical (yet realistic) case of an oil spill in the Aegean Sea. We assess the risk premiums that potentially affected individuals would be willing to pay in order to avoid losses to economic activities such as tourism and fisheries, and non-use damages resulting from environmental impacts on the Aegean coasts. In the scenarios analysed, the risk premiums on expected losses for tourism and fisheries turn out to be substantial when measured as a percentage of expected losses; by contrast, they are quite small for the case of damages to the natural environment.
    Keywords: Oil Spills, Probabilistic Externalities, Risk Aversion, Lay Risk Assessment, Mediterranean
    JEL: Q51 Q53 L91
    Date: 2006–11
  16. By: Catherine Locatelli (LEPII - Laboratoire d'Economie de la Production et de l'Intégration Internationale - [CNRS : FRE2664] - [Université Pierre Mendès-France - Grenoble II])
    Abstract: La Russie avec Gazprom comme principale compagnie est un acteur majeur de l'industrie gazière mondiale. Ses réserves sont considérables mais d'importantes incertitudes voient le jour quant au développement de long terme de sa production. Les explications résident pour l'essentiel dans les conditions de valorisation du gaz sur le marché interne de la Russie mais aussi de la CEI. Elles sont d'ordre économique et institutionnel.
    Date: 2007–01–11
  17. By: Theocharis N. Grigoriadis (The European Union Delegation to Russia); Benno Torgler (University of California)
    Abstract: This paper investigates the relative impact of regional energy production on the legislative choices of Russian Duma deputies on energy regulation between 1994 and 2003. We apply Poole’s optimal classification method of roll call votes using an ordered probit model to explain energy law reform in the first decade of Russia’s democratic transition. Our goal is to analyze the relative importance of home energy on deputies’ behavior, controlling for other factors such as party affiliation, electoral mandate, committee membership and socio-demographic parameters. We observe that energy resource factors have a considerable effect on deputies’ voting behavior. On the other hand, we concurrently find that regional economic preferences are constrained by the public policy priorities of the federal center that continue to set the tone in energy law reform in post-Soviet Russia.
    Keywords: Energy Regulation, Energy Roll Law Reform, Energy Resources, Roll Call Votes, Legislative Politics, State Duma, Russia
    JEL: Q40 D72 K23 P27 P37 P31 R11
    Date: 2006–11
  18. By: Huisman, R.; Huurman, C.; Mahieu, R.J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: This paper focuses on the characteristics of hourly electricity prices in day-ahead markets. In these markets, quotes for day-ahead delivery of electricity are submitted simultaneously for all hours in the next day. The same information set is used for quoting all hours of the day. The dynamics of hourly electricity prices does not behave as a time series process. Instead, these prices should be treated as a panel in which the prices of 24 cross-sectional hours vary from day to day. This paper introduces a panel model for hourly electricity prices in day-ahead markets and examines their characteristics. The results show that hourly electricity prices exhibit hourly specific mean-reversion and that they oscillate around an hourly specific mean price level. Furthermore, a block structured cross-sectional correlation pattern between the hours is apparent.
    Keywords: Energy markets;Day-ahead electricity;Electricity prices;Panel models;
    Date: 2007–01–15
  19. By: Silvester van Koten
    Abstract: When a bidder (referred to as the privileged bidder) is residual claimant to a part of the revenue from an auction with two bidders whose valuations are independently and identically distributed, bidding incentives are changed. Specifically, the privileged bidder will bid more aggressively to increase the auction revenue. Indeed, the privileged bidder is more likely to win the auction and the good is sold for a higher price. However, since the auction is now inefficient, welfare is decreased. These results are of interest for regulators of the EU electricity industry. The extant EU regulatory framework allows for profits from new cross-border transmission lines (socalled interconnectors) to be unregulated and for incumbent Vertically Integrated Utilities (VIUs) to have ownership of generating and transmission activities. When electricity generators have to secure transmission rights in an auction, the VIU, because of its combined ownership of generation and transmission activities, is in the position of a privileged bidder. The VIU will secure a higher profit, while competing electricity generators will earn less because they are less likely to gain transmission rights and, in any case, pay a higher price for it.
    Keywords: Asymmetric auctions, bidding behavior, electricity markets, regulation,vertical integration.
    JEL: L43 L51 L94 L98
    Date: 2006–12
  20. By: CPB, in collaboration with ZEW, Mannheim
    Abstract: The European electricity and gas markets have been going through a process of liberalisation since the early 1990s. This process has changed the sector from a regulated structure of, predominantly, publicly owned monopolists controlling the entire supply chain, into a market where private and public generators and retailers compete on a regulated and unbundled system of transport infrastructure. This report assesses the evidence of the effects of liberalisation on efficiency, security of energy supply and environmental sustainability.
    Keywords: Liberalisation; energy; efficiency; security of supply; environmental policy
    JEL: L5 L94 L95 L98 Q4 Q5
    Date: 2006–12

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