nep-ene New Economics Papers
on Energy Economics
Issue of 2008‒03‒08
sixteen papers chosen by
Roger Fouquet
Imperial College, UK

  1. Russian- Chinese relations : towards an energy partnership By Olga Garanina
  2. Latin versus European Power: A Tale of Two Market Reforms By Mennel, Tim; Viecens, Maria Fernanda
  3. A Robust Multivariate Long Run Analysis of European Electricity Prices By Matteo Pelagatti; Bruno Bosco; Lucia Parisio; Fabio Baldi
  4. Utilities deprivation dynamics and energy sector reforms in Europe By Ambra Poggi; Massimo Florio
  5. O PAC e o Setor Elétrico: Desafios para o Abastecimento do Mercado Brasileiro (2007- 2008) By Bolívar Pêgo; Carlos àlvares da Silva Campos Neto
  6. Understanding Sectoral Labor Market Dynamics: An Equilibrium Analysis of the Oil and Gas Field Services Industry By Patrick Kline
  7. Identification of Segments of Thermo Energy Plants with a Latent Class Model By Carlos Pestana Barros
  8. Ethanol, Mandates, and Drought: Insights from a Stochastic Equilibrium Model of the U.S. Corn Market By Lihong Lu McPhail; Bruce A. Babcock
  9. Land Allocation Effects of the Global Ethanol Surge: Predictions from the International FAPRI Model By Fabiosa, Jacinto F.; Beghin, John C.; Dong, Fengxia; Elobeid, Amani; Tokgoz, Simla; Yu, Tun-Hsiang (Edward)
  10. The Clean Development Mechanism and the International Diffusion of Technologies: An Empirical Study By Matthieu Glachant; Antoine Dechezleprêtre; Yann Ménière
  11. Banking Permits: Economic Efficiency and Distributional Effects By Valentina Bosetti; Carlo Carraro; Emanuele Massetti
  12. A Permit Allocation Contest for a Tradable Pollution Permit Market By Ian A. MacKenzie,; Nick Hanley; Tatiana Kornienko
  13. Technology Spillovers and Stability of International Climate Coalitions By Miyuki Nagashima; Rob Dellink
  14. On the Sequential Choice of Tradable Permit Allocations By Ian A. MacKenzie,
  15. Can Climate Change Mitigation Policy Benefit the Israeli Economy? A Computable General Equilibrium Analysis By Ruslana Palatnik; Mordechai Shechter
  16. Climate Change Impacts and Adaptation Strategies In Italy. An Economic Assessment By Alessandra Sgobbi; Carlo Carraro

  1. By: Olga Garanina (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : UMR5252 - Université Pierre Mendès-France - Grenoble II)
    Abstract: This paper aims to investigate the Russian-Chinese energy relations in the context of evolution of bilateral strategic relations since 1991.The research is focused on Russia and encompasses three main aspects: strategic approach of Russian-Chinese relations, Russian hydrocarbons production and export potential and prospects for the Eastern Russia. The paper is based on qualitative analysis. It shows that the framework of bilateral relations is globally favourable for creation of costly energy transport infrastructures. The quest for diversification of Chinese energy supplies contributes to the promotion of Russian hydrocarbons exports towards Asia, the latter contributing to diversify Russian energy exports traditionally sent to Europe. However, the modalities of these projects are submitted to the Russian state interests. Moreover, while natural gas reserves are sufficient to meet the Chinese demand, oil production prospects in the East of Russia are uncertain at a long-term perspective.
    Keywords: trade relationships ; energy policy ; energy resources ; hydrocarbon ; energy ; energy supply ; Russia ; China
    Date: 2007–11
  2. By: Mennel, Tim; Viecens, Maria Fernanda
    Abstract: This paper compares electricity market reforms in the European Union with reforms in Chile and Brazil. The paradigm of competitive market structures for the electricity sector, as developed in the economics literature, is outlined: competitive markets in generation and retailing and an independent regulator of the natural monopoly in transmission and generation. We present the institutional framework as well as the development of electricity markets in the European Union, Chile and Brazil and discuss in how far they comply with the textbook paradigm. Considerable differences emerge: While the European Union follows a path of full liberalization, facing, however, great difficulties in achieving unbundling of vertically integrated electricity companies and transnational competition, Chile and Brazil have only partially liberalized their electricity sector, enacting regulation to ensure household consumer protection and security of supply.
    Date: 2007
  3. By: Matteo Pelagatti (University of Milan-Bicocca); Bruno Bosco (Università degli Studi di Milano-Bicocca); Lucia Parisio (Università degli Studi di Milano-Bicocca); Fabio Baldi (Università degli Studi di Milano-Bicocca and Ref. Ricerche per l’economia e la finanza)
    Abstract: This paper analyses the interdependencies existing in wholesale European electricity prices. The results of a multivariate long run dynamic analysis of weekly median prices reveal the presence of a strong although not perfect integration among some neighboring markets considered in the sample and the existence of common long-term dynamics of electricity prices and gas prices but not oil prices. The existence of long-term dynamics among gas prices and electricity prices may prove to be important for long-term hedging operations to be conducted even in markets where there are no electricity derivatives.
    Keywords: European Electricity Prices, Cointegration, Interdependencies, Equilibrium Correction Model, Oil Prices
    JEL: C15 C32 D44 L94 Q40
    Date: 2007–11
  4. By: Ambra Poggi; Massimo Florio
    Abstract: In the late 1990s many European countries started comprehensive restructuring of their energy industries, the typical ingredients of the reforms are full or partial privatization, vertical disintegration, liberalization. In this paper we focus on the way in which energy sector reforms affect social affordability. The aim of this paper is to analyze the effects of energy reforms on the household probability of experiencing utilities deprivation (that is, to be unable to pay scheduled utility bills) in seven European Countries: Denmark, Belgium, France, Ireland, Italy, Netherlands and Spain. The period of analysis is 1994-2001. We also explore the dynamics of utilities deprivations focusing on the causes behind deprivation persistence. We differentiate between household heterogeneity and true state dependence. Then, controlling for observed and unobserved heterogeneity, we use the magnitude of average partial effects to investigate the relevance of any state dependence and the impact of energy sector reforms on the probability of experiencing utilities deprivations and on state dependence. We find evidence that vertical disintegration in the energy sector and privatization increase the household probability of experiencing utilities deprivation. Moreover, vertical disintegration also increases the household persistence in the status of deprivation.
    Keywords: deprivation, utilities, privatization, liberalization, vertical disintegration, true state persistence.
    JEL: L97 I31 C23 C25
    Date: 2007
  5. By: Bolívar Pêgo; Carlos àlvares da Silva Campos Neto
    Abstract: Este texto tem como objetivo geral descrever o Programa de Aceleração do Crescimento (PAC), fazer uma análise recente da evolução do setor elétrico brasileiro, assim como do PAC enquanto instrumento de crescimento do setor elétrico. Como objetivo específico analisa se o crescimento da oferta de energia elétrica inserida no PAC é suficiente para atender o crescimento da demanda de 2007-2010. Para a análise do objetivo específico foram criados dois cenários de crescimento da oferta e da demanda de energia elétrica, tendo ambos como base a capacidade instalada de 100 mil MW: i) cenário 1, com dados do Ministério de Minas e Energia (MME); e ii) cenário 2, com dados do PAC (2007-2010). O resultado da análise constata que o abastecimento do mercado de energia elétrica para os próximos anos não está compatível com o crescimento da oferta explicitada no PAC. Os dois cenários estão muito próximos, e a incompatibilidade fica mais explícita quando se estima que a elasticidade-renda da demanda é de 1,3 ao ano Isto implica uma necessidade de crescimento da oferta de 6,5 mil MW ao ano, totalizando 26 mil MW no período, desde que o PIB cresça a 5% ao ano. Apesar da relevância dos investimentos previstos no PAC, eles não são suficientes para eliminar um possível risco de insuficiência da oferta de energia elétrica no Brasil, mesmo considerando que não haverá atraso no cronograma de suas obras. Portanto, a garantia de abastecimento do mercado até 2013 está correndo sério risco, tendo em vista o aumento crescente do déficit de geração, particularmente para os anos de 2010 e 2011, os quais são reconhecidos pelo próprio governo como anos críticos. Dados da Empresa de Pesquisa Energética (EPE) apresentam um risco de déficit de 4,5% em 2010, e de 10% (o dobro do que o mercado de energia aceita como limite) em 2011. This paper has as generality objective to describe the Program of Acceleration of Growth (PAC) to make a recent analysis of the evolution of the Brazilian electric sector and the PAC as instrument of growth of electric sector. As specific objective it analyzes if the growth of offers of electric energy, inserted in the PAC, is enough to take care of the growth of the demand 2007-2010. For the analysis two scenes of growth had been created of offer and demand of electric energy, both having as base the installed capacity of 100 thousand MW: i) scene 1, with data of the Ministry of Mines and Energy MME; and ii) scene 2 with data of the PAC (2007-2010). The result of the analysis evidences that the supplying of the market of electric energy for the next years is not compatible with the growth of offers inserted in the PAC. The two scenes are very next and the incompatibility is more explicit when esteem that the elasticity income of the demand is of 1,3 to the year, what it implies a necessity of growth of offers of 6,5 thousand MW to the year, totalizing 26 thousand MW in the period, since that the GIP grows 5% to the year. Although the relevance of the investments foreseen in the PAC, they are not enough to eliminate a possible risk on insufficiency of offer of electric energy in Brazil, exactly considering that she will not have delay in the chronogram of its workmanships. Therefore, the guarantee of supplying of the market up to 2013 is running serious risk in view of the increasing increase of the generation deficit, particularly for the years of 2010 and 2011, where the proper government recognizes that they will be critical years. Data of the Energetic Research Interprise EPE present a risk of deficit of 4,5% in 2010 and 10% (the double of what the market of accepted energy as limit) in 2011.
    Date: 2008–02
  6. By: Patrick Kline (Cowles Foundation, Yale University)
    Abstract: This paper examines the response of employment and wages in the US oil and gas field services industry to changes in the price of crude petroleum using a time series of quarterly data spanning the period 1972-2002. I find that labor quickly reallocates across sectors in response to price shocks but that substantial wage premia are necessary to induce such reallocation. The timing of these premia is at odds with the predictions of standard models-wage premia emerge quite slowly, peaking only as labor adjustment ends and then slowly dissipating. After considering alternative explanations, I argue that a dynamic market clearing model with sluggish movements in industry wide labor demand is capable of rationalizing these findings. I proceed to structurally estimate the parameters of the model by minimum distance and find that simulated impulse responses match key features of the estimated dynamics. I also provide auxiliary evidence corroborating the implied dynamics of some important unobserved variables. I conclude with a discussion of the strengths and weaknesses of the model and implications for future research.
    Keywords: Labor market dynamics, Labor market equilibrium
    JEL: J20 J40 J60
    Date: 2008–03
  7. By: Carlos Pestana Barros
    Abstract: This paper identifies different groups in a cost function framework of thermo energy plants belonging to EDP-Electricity of Portugal. In particular, we have clustered the sample - comprising data for years 1987 to 2006 - into two groups. To do so, we have implemented a stochastic frontier latent class model, a procedure that also permits us to analyze also the efficiency of the thermo energy plants with respect to their own frontiers. The results reveal that some of the plants could improve their efficiency levels substantially.
    Keywords: cost efficiency; latent class model; thermo energy plants; stochastic frontier.
    Date: 2008–02
  8. By: Lihong Lu McPhail; Bruce A. Babcock (Center for Agricultural and Rural Development (CARD); Midwest Agribusiness Trade Research and Information Center (MATRIC))
    Abstract: The outlook for U.S. corn markets is inextricably linked to what happens to the U.S. ethanol industry, which depends, in turn, on the level of government subsidies and mandates. We develop a stochastic partial equilibrium model to simulate outcomes for the corn market for the 2008/09 marketing year to gain insight into these linkages. The model includes five stochastic variables that are major contributors to corn price volatility: planted acreage, corn yield, export demand, gasoline prices, and capacity of the ethanol industry. Our results indicate that integration of gasoline and corn markets has increased corn price volatility and that the passage of the expanded ethanol mandates in the Energy Independence and Security Act (EISA) has had modest effects on corn prices. Model results indicate an expected average marketing year price of $4.97 per bushel and a price volatility of 17.5% without the 10 billion gallon EISA mandate but with maintenance of the $0.51-per-gallon tax credit. Imposition of the mandate increases the expected price by 7.1% and price volatility by 12.1%. The effects of the mandate are modest, as ethanol production would average 9.5 billion gallons without the mandate because of high gasoline prices. The mandate is binding with a probability of 37.8%, which indicates that an additional tax or subsidy will be needed to ensure that the mandate is met. High corn prices caused by drought can cause the mandate to bind. Fixing 2008 corn yields at extreme drought levels increases expected corn prices to $6.59 per bushel without a mandate and to $7.99 per bushel with the EISA mandate. An average additional subsidy of $0.73 per gallon of ethanol would be needed to ensure that the mandate is met in this drought scenario. Elimination of the current blenders tax credit would result in the mandate not being met in all cases. On average, a subsidy of $0.41 per gallon would ensure that ethanol production is at least 10 billion gallons in the 2008/09 marketing year.
    Keywords: EISA mandate, ethanol, price volatility of corn, stochastic equilibrium.
    Date: 2008–03
  9. By: Fabiosa, Jacinto F.; Beghin, John C.; Dong, Fengxia; Elobeid, Amani; Tokgoz, Simla; Yu, Tun-Hsiang (Edward)
    Abstract: We quantify the emergence of biofuel markets and its impact on U.S. and world agriculture for the coming decade using the multi-market multi-commodity international FAPRI model. The model incorporates the tradeoffs between biofuel, feed, and food production and consumption and international feedback effects of the emergence through world commodity prices and trade. We examine land allocation by type of crop, and pasture use for countries growing feedstock for ethanol (corn, sorghum, wheat, sugarcane, and other grains) and major crops competing with feedstock for land resources such as oilseeds. We shock the model with exogenous changes in ethanol demand, first in the United States, then in Brazil, China, EU, and India, and compute shock multipliers for land allocation decisions for crops and countries of interest. The multipliers show at the margin how sensitive land allocation is to the growing demand for ethanol. Land moves away from major crops and pasture competing for resources with feedstock crops. Because of the high U.S. tariff on ethanol, higher U.S. demand for ethanol translates into a U.S. ethanol production expansion. The latter has global effects on land allocation as higher coarse grains prices transmit worldwide. Changes in U.S. coarse grain prices also affect U.S. wheat and oilseeds prices, which are all transmitted to world markets. In contrast, expansion in Brazil ethanol use and production chiefly affects land used for sugarcane production in Brazil and to a lesser extent in other sugar-producing countries, but with small impact on other land uses in most countries. Keywords: Acreage, area, biofuel, corn, crops, ethanol, FAPRI model, feedstock, land, sugar, sugarcane. JEL Code: Q42 Q17 Q15
    Keywords: Acreage, area, biofuel, corn, crops, ethanol, FAPRI model, feedstock, land, sugar, sugarcane.
    JEL: Q1
    Date: 2008–03–03
  10. By: Matthieu Glachant (CERNA École des mines de Paris); Antoine Dechezleprêtre (CERNA École des mines de Paris); Yann Ménière (CERNA École des mines de Paris)
    Abstract: The Clean Development Mechanism (CDM) is expected to stimulate the North-South transfer of climate-friendly technologies. This paper provides an assessment of the technology transfers that take place through the CDM using a unique data set of 644 registered projects. It provides a detailed description of the transfers (frequency, type, by sector, by host country, etc.). It also includes an econometric analysis of their drivers. We show that transfer likeliness increases with the size of the projects. The transfer probability is 50% higher in projects implemented in a subsidiary of Annex 1 companies while the presence of an official credit buyer has a lower – albeit positive – impact. The analysis also yields interesting results on how technological capabilities of the host country influence technology diffusion in the CDM.
    Keywords: Kyoto Protocol, Clean Development Mechanism, International Technology Transfer
    JEL: Q5 Q55
    Date: 2007–12
  11. By: Valentina Bosetti (Fondazione Eni Enrico Mattei); Carlo Carraro (Fondazione Eni Enrico Mattei, University of Venice, CEPR, CESifo and CEPS); Emanuele Massetti (Fondazione Eni Enrico Mattei and Catholic University)
    Abstract: Most analyses of the Kyoto flexibility mechanisms focus on the cost effectiveness of “where” flexibility (e.g. by showing that mitigation costs are lower in a global permit market than in regional markets or in permit markets confined to Annex 1 countries). Less attention has been devoted to “when” flexibility, i.e. to the benefits of allowing emission permit traders to bank their permits for future use. In the model presented in this paper, banking of carbon allowances in a global permit market is fully endogenised, i.e. agents may decide to bank permits by taking into account their present and future needs and the present and future decisions of all the other agents. It is therefore possible to identify under what conditions traders find it optimal to bank permits, when banking is socially optimal, and what are the implications for present and future permit prices. We can also explain why the equilibrium rate of growth of permit prices is likely to be larger than the equilibrium interest rate. Most importantly, this paper analyses the efficiency and distributional consequences of allowing markets to optimally allocate emission permits across regions and over time. The welfare and distributional effects of an optimal intertemporal emission trading scheme are assessed for different initial allocation rules. Finally, the impact of banking on carbon emissions, technological progress, and optimal investment decisions is quantified and the incentives that banking provides to accelerate technological innovation and diffusion are also discussed. Among the many results, we show that not only does banking reduce abatement costs, but it also increases the amount of GHG emissions abated in the short-term. It should therefore belong to all emission trading schemes under construction.
    Keywords: Emission Trading, Banking
    JEL: C72 H23 Q25 Q28
    Date: 2008–01
  12. By: Ian A. MacKenzie, (CER-ETH Center of Economic Research at ETH Zurich, Switzerland); Nick Hanley (Department of Economics, University of Stirling, Stirling, UK); Tatiana Kornienko (Department of Economics, University of Edinburgh, Edinburgh, UK)
    Abstract: In this paper we advocate a new initial allocation mechanism for a tradable pollution permit market. We outline a Permit Allocation Contest (PAC) that distributes permits to firms based on their rank relative to other firms. This ranking is achieved by ordering firms based on an observable 'external action' where the external action is an activity or characteristic of the firm that is independent of their choice of emissions in the tradeable permit market. We show that this mechanism efficiently allocates permits and, as a result, the tradeable permit market is cost-effective. We determine the symmetric equilibrium strategy of each firm in choosing their external action and find the choice is influenced by the firm's cost structure and the regulator's choice of permit allocation schedule (distribution of permits to the market). Furthermore, we investigate the factors that determine the regulator's choice of optimal permit allocation schedules.
    Keywords: Rank-order contests, pollution permits, initial allocation
    JEL: D44 Q25
    Date: 2008–03
  13. By: Miyuki Nagashima (Wageningen University); Rob Dellink (Wageningen University and Institute for Environmental Studies, VU University of Amsterdam)
    Abstract: Cooperation in international environmental agreements appears difficult to attain because of strong free-riding incentives. This paper explores how different technology spillover mechanisms among regions can influence the incentive structures to join and stabilise an international agreement. We use an applied modelling framework (STACO) that enables us to investigate stability of partial climate coalitions. Technology spillovers to coalition members increase their incentives to stay in the coalition and reduce abatement costs, which leads to larger global payoffs and a lower global CO2 stock. Several theories on the impact of technology spillovers are evaluated by simulating a range of alternative specifications. We find that while spillovers are a good instrument to improve stability of bilateral agreements, they cannot overcome the strong free rider incentives that are present in larger coalitions. This conclusion is robust against the specification of technology spillovers.
    Keywords: Climate Change Modelling, International Environmental Agreements, Non-cooperative Game Theory, Technology Spillovers
    JEL: C72 O33 Q54
    Date: 2007–11
  14. By: Ian A. MacKenzie, (CER-ETH Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: This paper investigates the sequential announcement of domestic emissions caps by regulators in a federal or international-based tradable pollution permit market for a transboundary pollutant. A leader-follower framework is used to analyse the consequences of regulators sequentially announcing domestic allocation caps. We find the sequential choice of domestic allocation caps is sub-optimal and depends on the follower's reaction to the leader's choice. Furthermore, the marginal damage and the degree to which allocations are substitutes or complements affects whether the leader changes from being a net permit buyer (seller) of permits to a seller (buyer).
    Keywords: Initial allocation, international tradable permit market, leader-follower
    JEL: D78 L13 Q28
    Date: 2008–03
  15. By: Ruslana Palatnik (Fondazione Eni Enrico Mattei); Mordechai Shechter (Natural Resource & Environmental Research Center)
    Abstract: The growing attention to global warming due to greenhouse gas (GHG) emissions in the process of fossil fuel--based energy production is expressed in the Kyoto Protocol, which prescribes, on average, a 7 percent reduction in GHG emissions for developed countries. Although Israel was not included in the list of the obligated countries ("Annex A"), it should consider the economic implications of participating in the emission reduction effort, as such a commitment becomes highly feasible following the Bali roadmap which oblige a successor to the Kyoto Protocol to launch negotiations including all parties to the UNFCCC on a future framework, stressing the role of cooperative action and of common though differentiated responsibility. This study aimed to quantify the economy-wide consequences for Israel of meeting the targets of the Kyoto Protocol, employing a Computable General Equilibrium (CGE) model of the Israeli economy. Initially, to this end, we constructed a social accounting matrix (SAM) to serve as a benchmark by combining physical energy and emission data and economic data from various sources. The efficacy of decentralized economic incentives for CO2 emission reduction, such as carbon taxes on emissions and auctioned emission permits, was assessed in terms of their impact on economic welfare. In addition, we tested for the ensuing so-called double dividend. Two distinct cases were analyzed. In the first one, we tested a revenue-neutral environmental policy which proportionally cut pre-existing taxes. Labour supply was assumed to be exogenously fixed. The results showed that, although significant CO2 emission reduction can be achieved, followed by modest economic cost, no double dividend could be discerned. Next, in order to check for the employment double dividend (lower CO2 emissions and lower unemployment), we introduced labor market imperfections, with the aim of cutting income tax. The results of this case indicate that an employment double dividend is possible under a rather standard set of assumptions. Moreover, for higher substitutability between the energy composite input and the labor-capital one, an even “strong” form of double dividend can be obtained. We performed several sensitivity analyses with respect to the modeled production function, which re-confirmed the finding that higher substitution possibilities lead to lower welfare costs 3 associated with a given emission reduction target. We qualify this general result by also showing that the opposite holds when the emission tax rate is held constant, rather than reduced. It may be concluded on the basis of this analysis that a double dividend may be an achievable goal under a GHG emission reduction policy in the case of economies such as Israel. The CGE approach applied in this research is adopted for the first time to the Israeli economy and should contribute to better informed debate on environmental policy in Israel.
    Keywords: Computable General Equilibrium, Climate Change, Environmental Policy, Double Dividend, Israel
    JEL: D58 H23 Q43 Q48 Q52
    Date: 2008–01
  16. By: Alessandra Sgobbi (Fondazione Eni Enrico Mattei); Carlo Carraro (University of Venice, Fondazione Eni Enrico Mattei, CEPR, CEPS, CMCC and CESifo)
    Abstract: In this paper, the economic value of the impacts of climate change is assessed for different Italian economic sectors and regions. Sectoral and regional impacts are then aggregated to provide a macroeconomic estimate of variations in GDP induced by climate change in the next decades. Autonomous adaptation induced by changes in relative prices and in stocks of natural and economic resources is fully taken into account. The model also considers international trade effects. Results show that in Italy aggregate GDP losses induced by climate change are likely to be small. However, some economic sectors (e.g. tourism) and the alpine regions will suffer significant economic damages.
    Keywords: Impacts, Climate Change, Adaptation, GDP Losses, Tourism
    JEL: O13 Q43 Q5 R13
    Date: 2008–01

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