nep-ene New Economics Papers
on Energy Economics
Issue of 2007‒10‒06
seventeen papers chosen by
Roger Fouquet
Imperial College, UK

  1. Public Attitudes Toward America’s Energy Options: Report of the 2007 MIT Energy Survey By Stephen Ansolabehere
  2. Long-Run Equilibrium Modeling of Alternative Emissions Allowance Allocation Systems in Electric Power Markets By Schulkin, J.Z.; Hobbs, B.F.; Pang, J.
  3. Distributional effects of price reforms in the Italian utility markets By Raffaele Miniaci; Carlo Scarpa; Paola Valbonesi
  4. Eco-driving? A discrete choice experiment on valuation of car attributes By Högberg, Martina
  5. Is China’s Growth Sustainable? By James Roumasset; Kimberly Burnett; Hua Wang
  6. Technologies, Markets and Challenges for Development of the Canadian Oil Sands Industry By Romain H. Lacombe; John E. Parsons
  7. Oil Shocks and Optimal Monetary Policy By Montoro Carlos
  8. Regulating Carbon Dioxide Capture and Storage By M.A. de Figueiredo; H.J. Herzog; P.L. Joskow; K.A. Oye; D.M. Reiner
  9. Pareto Optimality in the Extraction of Fossil Fuels and the Greenhouse Effect: A Note By Hans-Werner Sinn
  10. Assessment of U.S. Cap-and-Trade Proposals By S. Paltsev; J. Reilly; H. Jacoby; A. Gurgel; G. Metcalf; A. Sokolov; J. Holak
  11. Distribution Matters — Taxes vs. Emissions Trading in Post Kyoto Climate Regimes By Sonja Peterson; Gernot Klepper
  12. The "Bali Convention" : Flexibility of Targets and Instruments Inevitable By Claudia Kemfert
  13. International Emissions Trading Scheme and European Emissions Trading Scheme : what linkages ?. By Natacha Raffin; Katheline Schubert
  14. Public Policies against Global Warming By Hans-Werner Sinn
  15. Temporal and spatial homogeneity in air pollutants panel EKC estimations: Two nonparametric tests applied to Spanish provinces By Ordás Criado, Carlos
  16. Climate Change, Mortality, and Adaptation: Evidence from Annual Fluctuations in Weather in the US By Olivier Deschênes; Michael Greenstone
  17. Time and Location Differentiated NOX Control in Competitive Electricity Markets Using Cap-and-Trade Mechanisms By Katherine C. Martin; Paul L. Joskow; A. Denny Ellerman

  1. By: Stephen Ansolabehere
    Abstract: The prospects of global warming and potential shortages of oil have brought energy back to the forefront of the list of national, indeed, global, problems that governments, corporations and society must address. In 2002, as part the MIT study on The Future of Nuclear Power, the first MIT Energy survey considered public attitudes toward nuclear power in light of other sources of electric power. That survey found that the two key drivers behind public preferences about energy sources are general environmental harm and cost of electricity. In February, 2007, I replicated the energy survey. What has changed over the last five years is a noticeable decline in the popularity of oil and a noticeable but quite modest increase in support for nuclear power. Oil has lost much of its luster. Americans now strongly wish to reduce the use of oil, and they view this energy source less favorably than any other source of power. Coal, seen as moderately priced but very harmful to the environment, also remains quite unpopular. Nuclear power, five years ago, was viewed similarly badly. It now seems to have gained support and is approaching natural gas in terms of favorability.
    Date: 2007–03
  2. By: Schulkin, J.Z.; Hobbs, B.F.; Pang, J.
    Abstract: A question in the design of carbon dioxide trading systems is how allowances are to be initially allocated: by auction, by giving away fixed amounts, or by allocating based on output, fuel, or other decisions. The latter system can bias investment, operations, and pricing decisions, and increase costs relative to other systems. A nonlinear complementarity model is used to investigate long-run equilibria that would result under alternative systems for power markets characterized by time varying demand and multiple generation technologies. Existence of equilibria is shown under mild conditions. Solutions show that allocating allowances to new capacity based on fuel use or generator type can distort generation mixes, invert the operating order of power plants, and inflate consumer costs. The distortions can be smaller for tighter CO2 restrictions, and are somewhat mitigated if there are also electricity capacity markets or minimum-run restrictions on coal plants. Key words: Emissions trading, allowance allocations, electricity, air pollution, auction, grandfathering, cost-effectiveness, greenhouse gases, climate change, global warming, carbon dioxide, generation investment.
    JEL: C61 L94 Q4 Q53
    Date: 2007–09
  3. By: Raffaele Miniaci (Università di Brescia); Carlo Scarpa (Università di Brescia); Paola Valbonesi (Università di Padova)
    Abstract: In this paper we analyse some distributional effects of the reforms of water and energy services in Italy. We first document the new regulation setting in these services, illustrating the dynamics of utility prices and of household expenditure in the period 1998-2005. We then propose a way to measure the affordability of public utilities, in order to investigate how many households would incur a potentially excessive burden, if they consumed a minimum quantity of utility services. Finally, we calculate this index on data from the ‘Survey on Family Budgets’. Our results show how the affordability of utility bills varies from region to region depending on climate, income, family endowment and size. The analysis – also based on a counterfactual exercise – finds that so far, utility reforms do not seem to have produced any negative effects on weaker households.
    Keywords: Affordability, Public Utilities, Regulation, Gas, Electricity, Water
    JEL: D12 L51 L97
    Date: 2007–09
  4. By: Högberg, Martina (Swedish Energy Agency)
    Abstract: To elicit the value that car consumers place upon environmental concerns when purchasing a car, a certain type of Discrete Choice Modelling called Choice Experiment was used. The Choice Experiment includes the four car attributes safety, carbon dioxide emissions, acceleration and annual cost. The survey was sent to a random sample of 1500 people in Sweden between 25 and 50 years of age in October 2006. The data collected was incorporated in a binomial logit model from which the coefficients of the utility function for cars were estimated. Both the estimated values of Willingness to Pay and the Marginal Rates of Substitution gave indications that the private goods safety and acceleration are higher valued than a genuine public bad such as carbon dioxide emissions. The result also showed that the design of the Choice Experiment can have impact on the values obtained.
    Keywords: Willingness to Pay; Discrete Choice Experiment; Environmental Valuation
    JEL: C42 Q50
    Date: 2007–09–27
  5. By: James Roumasset (Department of Economics, University of Hawaii at Manoa); Kimberly Burnett (Department of Economics, University of Puget Sound); Hua Wang (World Bank)
    Abstract: A central pillar of the sustainability movement is the call to include environmental accounting in standard measures of economic performance. This increased transparency would, in principle, mitigate the temptation of economic managers and policy makers to increase growth in material consumption at the expense of the environment. Moreover, as Repetto (1989) and others have argued, deducting depreciation of produced capital from NNP but not deducting depreciation of natural capital is inconsistent and debases NNP as a possible indicator of welfare. Based on the evidence available, it appears that while GNNP is substantially less than NNP, these adjustments do not adversely compromise existing estimates of economic growth for China.
    Keywords: sustainable development, China, genuine saving, SOx, NOx, TSP, resource depletion, natural capital, Environmental Kuznets Curve, green net national product
    JEL: O13 Q01 Q2 Q3 Q4 Q5
    Date: 2007–09–23
  6. By: Romain H. Lacombe; John E. Parsons
    Abstract: This paper provides an overview of the current status of development of the Canadian oil sands industry, and considers possible paths of further development. We outline the key technology alternatives, critical resource inputs and environmental challenges and stgrategic options both at the company and government level. We develop a model to calculate the supply cost of bitumen and synthetic crude oil using the key technologies. Using the model we evaluate the sensitivity of the supply costs to the critical model inputs.
    Date: 2007–06
  7. By: Montoro Carlos (Banco Central de Reserva del Perú and LSE)
    Abstract: This paper investigates how monetary policy should react to oil shocks in a microfounded model with staggered price-setting and oil as a non-produced input in the production function. We extend Benigno and Woodford (2005) to obtain a second order approximation to the expected utility of the representative household when the steady state is distorted and the economy is hit by oil price shocks. The main result is that oil price shocks generate a trade-off between inflation and output stabilisation when oil has low substitutability in production. Therefore, it becomes optimal to the monetary authority to stabilise partially the effects of oil shocks on inflation and some inflation is desirable. We also find, in contrast to Benigno and Woodford (2005), that this trade-off remains even when we eliminate the effects of monopolistic distortions from the steady state. Our results also shed light on how technological improvements which reduces the dependence on oil, also reduce the impact of oil shocks on the economy. This can explain why oil shocks have lower impact on inflation in the 2000s in contrast to the 1970s. Since oil has become easier to substitute with other renewable resources, the impact of oil shocks has been dampened.
    Keywords: Optimal Monetary Policy, Welfare, Second Order Solution, Oil Price Shocks, Endogenous Trade-off.
    JEL: D61 E61
    Date: 2007–08
  8. By: M.A. de Figueiredo; H.J. Herzog; P.L. Joskow; K.A. Oye; D.M. Reiner
    Abstract: This essay examines several legal, regulatory and organizational issues that need to be addressed to create an effective regulatory regime for carbon dioxide capture and storage (“CCS”). Legal, regulatory, and organizational issues will need to be resolved for the industrial organization of CO2 transportation and storage, storage safety and integrity issues, and liability. Although there are some gaps in the current regulatory system as applied to CCS, we find that many of the currently identifiable issues have been successfully resolved in other contexts.
    Date: 2007–04
  9. By: Hans-Werner Sinn
    Abstract: This note generalizes the Solow-Stiglitz efficiency condition for natural resources to the problem of fossil fuel extraction with a greenhouse effect. The generalized optimality condition suggests that the greenhouse effect implies overextraction in the sense of leaving future generations a wrongly composed wealth portfolio with too few natural resources relative to man-made capital. This judgment is independent of society's ethical preferences concerning the well-being of future generations.
    JEL: O13 Q32 Q54
    Date: 2007–09
  10. By: S. Paltsev; J. Reilly; H. Jacoby; A. Gurgel; G. Metcalf; A. Sokolov; J. Holak
    Abstract: The MIT Emissions Prediction and Policy Analysis model is applied to an assessment of a set of cap-and-trade proposals being considered by the U.S. Congress in spring 2007. The bills specify emissions reductions to be achieved through 2050 for the standard six-gas basket of greenhouse gases. They fall into two groups: one specifies emissions reductions of 50% to 80% below 1990 levels by 2050; the other establishes a tightening target for emissions intensity and stipulates a time path for a "safety valve" limit on the emission price that approximately stabilizes U.S. emissions at the 2008 level. A set of three synthetic emissions paths are defined that span the range of stringency of these proposals, and these "core" cases are analyzed for their consequences in terms of emissions prices, effects on energy markets, welfare cost, the potential revenue generation if allowances are auctioned and the gains if permit revenue were used to reduce capital or labor taxes. Initial period prices for the first group of proposals, in carbon dioxide equivalents, are estimated between $30 and $50 per ton CO2-e depending on where each falls in the 50% to 80% range, with these prices rising by a factor of four by 2050. Welfare costs are less than 0.5% at the start, rising in the most stringent case to near 2% in 2050. If allowances were auctioned these proposals could produce revenue between $100 billion and $500 billion per year depending on the case. Emissions prices for the second group, which result from the specified safety-valve path, rise from $7 to $40 over the study period, with welfare effects rising from near zero to approximately a 0.5% loss in 2050. Revenue in these proposals depends on how many allowances are freely distributed. To analyze these proposals assumptions must be made about mitigation effort abroad, and simulations are provided to illuminate terms-of-trade effects that influence the emissions prices and welfare effects, and even the environmental effectiveness, of U.S. actions. Sensitivity tests also are provided of several of the design features imposed in the "core" scenarios including the role of banking, the specification of less than complete coverage of economic sectors, and the development of international permit trading. Also, the effects of alternative assumptions about nuclear power development are explored. Of particular importance in these simulations is the role of biofuels, and analysis is provided of the implications of these proposals for land use and agriculture. Finally, the U.S. proposals, and the assumptions about effort elsewhere, are extended to 2100 to allow exploration of the potential role of these bills in the longer-term challenge of reducing climate change risk. Simulations using the MIT Integrated System Model show that the 50% to 80% targets are consistent with global goals of atmospheric stabilization at 450 to 550 ppmv CO2 but only if other nations, including the developing countries, follow.
    Date: 2007–04
  11. By: Sonja Peterson; Gernot Klepper
    Abstract: The policy instruments for emissions reductions will be an integral part of a Post Kyoto Climate Regime. In this paper we compare a harmonized international carbon tax to a cap and trade system with different allocation rules for the emission caps. The caps are based either on the requirement for equal percentage reductions in all countries or the “contraction and convergence” proposal that leads to converging per capita emission rights. The quantitative analysis is based on simulations with the CGE model DART. The harmonized carbon tax tends to favor industrialized countries but is less favorable to developing countries. The welfare effects of a cap and trade system depend crucially on the allocation rule for emission rights. The “contraction and convergence” approach leads to welfare gains for countries like China, India and Subsaharan Africa whereas it imposes welfare losses upon industrialized countries which are larger than those under other cap and trade schemes or a tax scenario. Independent from the allocation rule that is used regions exporting fossil fuels experience strong welfare losses from the reduction in the demand for fossil fuels and the fall in prices that results from the imposition of the international climate policies.
    Keywords: Post Kyoto, emission targets, emission trading, taxes, distribution
    JEL: H22 H23 H87 D58 Q48 Q52
    Date: 2007–09
  12. By: Claudia Kemfert
    Abstract: The Kyoto Protocol is one first important step towards a global greenhouse gas emissions reduction strategy. In order to avoid irreversible climate changes and huge economic damage, not just some but all of the responsible nations should agree on a joint proposal to reduce emissions. Sharing the burden fairly would mean that those nations with high emissions per capita should reduce them more than countries with low emissions per capita. However, a fair burden sharing should also take into account early action and economic and social conditions. Most of the countries, especially those with high economic growth, fear large economic losses if emissions reduction targets are very high. Especially fast-growing nations such as China and India suspect negative consequences if climate policy takes a dominant role. The post-Kyoto negotiations can only be successful if flexibility of targets and instruments is considered. The next UN climate conference, at the end of 2007 in Bali, is an important starting point for a so-called "Bali Convention". This convention should take into account different emissions reduction options and flexible emissions reduction targets. Germany's Chancellor Merkel supports a world per capita emissions target; Europe should find soon a fair burden sharing between the EU member states and start negotiations with 30 % emissions reduction in order to make clear how serious EU is to reduce emissions. The APEC nations favour an energy intensity reduction target. The emissions intensity of a nation can be reduced if CO2-free technologies are widely applied. Nations with a large share of CO2 emissions resulting from high fossil-fuel usage or high methane emissions from energy production or agriculture usually favour flexible indexed targets. The "Bali Convention" should define such flexible targets to take into account national conditions and visions. It is most important that countries agree on binding targets, either concrete emissions reduction targets or indexed targets such as emissions intensity or per capita emissions. The key to success is flexibility of targets and instruments.
    Date: 2007
  13. By: Natacha Raffin (Centre d'Economie de la Sorbonne); Katheline Schubert (Centre d'Economie de la Sorbonne)
    Abstract: Simultaneity between commitment periods (2008-2012) of both International and European Emissions Trading schemes may generate distortions in terms of burden distribution among sectors. There will be two levels of trading (a country and an entity level), which both need to be consistent with one another, despite of their different designs. To reach international targets, European governments will adopt an additional policy. It consists in implementing a tax on emissions of non-covered sectors. The tax rates depend on the effort realized within the European market. We propose a modeling of this two-level environmental policy, focusing on the levels of tax rates in each case of linkage. We obtain empirical estimations of the efforts that could be demanded to non-covered sectors and of the price(s) of carbon.
    Keywords: Kyoto Protocol, EU-ETS, co-existence of domestic and international emissions trading systems, carbon price, environmental policy.
    JEL: Q53 Q58 Q28
    Date: 2007–07
  14. By: Hans-Werner Sinn
    Abstract: Judged by the principle of intertemporal Pareto optimality, insecure property rights and the greenhouse effect both imply overly rapid extraction of fossil carbon resources. A gradual expansion of demand-reducing public policies -- such as increasing ad-valorem taxes on carbon consumption or increasing subsidies for replacement technologies -- may exacerbate the problem as it gives resource owners the incentive to avoid future price reductions by anticipating their sales. Useful policies instead involve sequestration, afforestation, stabilization of property rights and emissions trading. Among the public finance measures, constant unit carbon taxes and source taxes on capital income for resource owners stand out.
    JEL: H23 O13 Q32 Q54
    Date: 2007–09
  15. By: Ordás Criado, Carlos
    Abstract: Although panel data have been used intensively by a wealth of studies investigating the GDP-pollution relationship, the poolability assumption used to model these data is almost never addressed. This paper applies a strategy to test the poolability assumption with methods robust to functional misspecification. Nonparametric poolability tests are performed to check the temporal and spatial homogeneity of the panel and their results are compared with the conventional F-tests for a balanced panel of 48 Spanish provinces on four air pollutant emissions (CH4, CO, CO2 and NMVOC) over the 1990-2002 period. We show that temporal homogeneity may allow the pooling of the data and drive to well-defined nonparametric and parametric cross-sectional U-inverted shapes for all air pollutants. However, the presence of spatial heterogeneity makes this shape compatible with different timeseries patterns in every province - mainly increasing or decreasing depending on the pollutant. These results highlight the extreme sensitivity of the income-pollution relationship to region- or country-specific factors.
    Keywords: Environmental Kuznets Curve; Air pollutants; Non/Semiparametric estimations; Poolability tests
    JEL: C23 Q53 C14 O40
    Date: 2007–08–31
  16. By: Olivier Deschênes; Michael Greenstone
    Abstract: This paper produces the first large-scale estimates of the US health related welfare costs due to climate change. Using the presumably random year-to-year variation in temperature and two state of the art climate models, the analysis suggests that under a "business as usual" scenario, climate change will lead to an increase in the overall us annual mortality rate ranging from 0.5% to 1.7% by the end of the 21st century. These overall estimates are statistically indistinguishable from zero, although there is evidence of statistically significant increases in mortality rates for some subpopulations, particularly infants. As the canonical Becker-Grossman health production function model highlights, the full welfare impact will be reflected in health outcomes and increased consumption of goods that preserve individuals' health. Individuals' likely first compensatory response is increased us of air conditioning; the analysis indicates that climate change would increase US annual residential energy consumption by a statistically significant 15% to 30% ($15 to $35 billion in 2006 dollars) at the end of the century. It seems reasonable to assume that the mortality impacts would be larger without the increased energy consumption. Further, the estimated mortality and energy impacts likely overstate the long-run impacts on these outcomes, since individuals can engage in a wider set of adaptations in the longer run to mitigate costs. Overall, the analysis suggests that the health related welfare costs of higher temperatures due to climate change are likely to be quite modest in the US.
    Date: 2007–06
  17. By: Katherine C. Martin; Paul L. Joskow; A. Denny Ellerman
    Abstract: Due to variations in weather and atmospheric chemistry, the timing and location of nitrogen oxide (NOX) reductions determine their effectiveness in reducing ground-level ozone, which adversely impacts human health. Electric generating plants are the primary stationary sources of NOX in most regions of the United States. In the Eastern U.S. they are subject to a summertime NOX cap and trade program that is not well matched to the time and locational impacts of NOX on ozone formation. We hypothesize that the integration of weather and atmospheric chemistry forecasting, a cap and trade system in which the “exchange rates” for permits can be varied by time and location based on these forecasts, and its application to a competitive wholesale electricity market, can achieve ozone standards more efficiently. To demonstrate the potential for reductions in NOX emissions in the short run, we simulate the magnitude of NOX reductions that can be achieved at various locations and times as a consequence of redispatch of generating units in the “classic” PJM region taking supply-demand balance constraints and network congestion into account. We report simulations using both a zonal model and an optimal power flow model. We also estimate the relationship between the level NOX emission prices, competitive market responses to different levels of NOX prices, and the associated reductions in NOx emissions. The estimated maximum potential reductions, which occur at NOX prices of about $125,000/ton, are about 8 tons (20%) hourly in peak electricity demand hours and about 10 tons (50%) in average demand hours. We find that network constraints have little effect on the magnitude of the reductions in NOX emissions.
    Date: 2007–04

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