nep-ene New Economics Papers
on Energy Economics
Issue of 2008‒03‒15
fifteen papers chosen by
Roger Fouquet
Imperial College, UK

  1. Electricity Markets and Energy Security: Friends or Foes? By Brennan, Timothy J.
  2. Policies to Reduce Emissions from Deforestation and Degradation (REDD) in Tropical Forests: An Examination of the Issues Facing the Incorporation of REDD into Market-Based Climate Policies By Myers, Erin C.
  3. Using ex post data to estimate the hurdle rate of abatement investments - an application to sulfur emissions from the Swedish pulp and paper industry and energy sector By Åsa Löfgren; Katrin Millock; Céline Nauges
  4. Perspektiven der Nutzung von Methanhydraten als Energieträger – Eine Bestandsaufnahme By Markus Groth
  5. U.S. Climate Policy Developments By Toshi Arimura; Dallas Burtraw; Alan J. Krupnick; Karen L. Palmer
  6. Spatial Development and Energy Consumption By Safirova, Elena A.; Houde, Sébastien; Harrington, Winston
  7. Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change By Searchinger, Timothy; Heimlich, Ralph; Houghton, R. A.; Dong, Fengxia; Elobeid, Amani; Fabiosa, Jacinto F.; Tokgoz, Simla; Hayes, Dermot J.; Yu, Tun-Hsiang (Edward)
  8. Carbon Credits for Avoided Deforestation By Sedjo, Roger A.; Sohngen, Brent
  9. China’s New Development Strategy: Environment and Energy Security By Khan, Haider
  10. Innovation and Diffusion of Environmental Technology: Industrial NOx Abatement in Sweden under Refunded Emission Payments By Last Name, First Name
  11. The Relationship between Crude and Refined Product Market: The Case of Singapore Gasoline Market using MOPS Data By Rao, Gyaneshwar
  12. Legally Separated Joint Ownership of Bidder and Auctioneer: Illustrated by the Partial Deregulation of the EU Electricity Markets By Silvester van Koten
  13. The Impact of Climate Change on the Balanced-Growth-Equivalent: An Application of FUND By David Anthoff; Richard S. J. Tol
  14. Labor Supply and Growth Effects of Environmental Policy under Technological Risk By Christiane Clemens; Karen Pittel

  1. By: Brennan, Timothy J. (Resources for the Future)
    Abstract: For a host of economic, geopolitical, and environmental reasons, the security of energy supplies has moved to the forefront of U.S. policy concerns. Here, I address the extent to which the U.S. electricity sector is affected by these factors and, in turn, whether increased electricity competition exacerbates them. After defining four dimensions of energy security that might pertain to electricity, I examine the role of global energy markets on that sector. Oil is currently used to generate only a small fraction of U.S. electricity supplies, although as recently as the late 1970s it generated about one-sixth of the total. Oil markets can affect electricity indirectly via substitution with natural gas. Competition in electricity markets should improve energy security by adding redundancy, but competition is threatened by unanticipated price increases, peak-load management, and risks associated with separating competitive generation from regulated transmission and distribution. Other complications include residential aversion to competition, residual market power, and the aspiration to reduce demand through conservation policies. The central security issue has been and remains the degree of conflict between competition and central control necessary to maintain reliability of the grid.
    Keywords: electricity markets, electricity market restructuring, energy policy, energy security
    JEL: L94 Q48 L51
    Date: 2007–11–12
  2. By: Myers, Erin C. (Resources for the Future)
    Abstract: Deforestation and forest degradation account for 20 percent of annual total greenhouse gas (GHG) emissions. The vast majority of these forestry emissions come from deforestation in developing countries. Currently, there is significant dialogue at the international level about how to integrate reducing emissions from deforestation and degradation (REDD) into the existing climate change regime through market-based incentives. This paper examines the issues that arise when trying to create an economically and environmentally robust market-based REDD policy. The paper begins with an overview of the role of forests in climate change, and is followed by an examination of design elements that will affect the integrity of a REDD policy, including issues of scope, monitoring, baselines, leakage, stakeholder interests, permanence and liability, and the potential impact of REDD credits on the carbon market. The paper closes with an overview of the issues facing developing countries that would host REDD activities.
    Keywords: avoided deforestation, RED, REDD, reducing emissions from deforestation and degradation, climate change, market-based policy mechanisms, land use, land-use change and forestry, UNFCCC, Kyoto, emissions, CO2, GHG
    JEL: Q00 Q23 Q54 Q57
    Date: 2007–12–01
  3. By: Åsa Löfgren (Göteborg University - Department of Economics); Katrin Millock (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Ecole d'économie de Paris - Paris School of Economics - Université Panthéon-Sorbonne - Paris I); Céline Nauges (LERNA-INRA - Toulouse School of Economics)
    Abstract: We propose a method for estimating hurdle rates for firms' investments in pollution abatement technology, using ex post data. The method is based on a structural option value model where the future price of polluting fuel is the major source of uncertainty facing the firm. The econometric procedure is illustrated using a panel of firms from the Swedish pulp and paper industry, and the energy and heating sector from 2000 to 2003. The results indicate a hurdle rate of investment of 2.9 in the pulp and paper industry and 3.4 in the energy and heating sector.
    Keywords: Option value, fuel price uncertainty, investment decision, pollution abatement, panel data, pulp and paper industry, energy and heating sector.
    Date: 2008–03
  4. By: Markus Groth (Centre for Sustainability Management, Leuphana University of Lüneburg)
    Abstract: Methane hydrates are the largest existing carbon resource, and their broad geographic distribution, especially in comparison to oil and conventional gas, make them a promising future source of energy. On the other hand, there is a danger of forcing the greenhouse effect in the event of a release of methane in the atmosphere as well as causing a destabilisation of the oceanic sediments. Also the technical difficulties in the extraction of methane are not yet fully resolved. Nevertheless, the research on methane hydrates has been forced both based on political as well as economic considerations in recent years and methane hydrates have practical advantages, which make them a noteworthy transitional solution on the way to a renewable energy based future energy supply. The knowledge of the potentials and risks of methane hydrates, however, is still poor; especially in the German-speaking public and policy. This deficiency will be solved by a focused analysis of the current state of research and an outlook, based on the most important findings.
    Date: 2008–02–12
  5. By: Toshi Arimura (Resources for the Future); Dallas Burtraw; Alan J. Krupnick; Karen L. Palmer
    Abstract: This paper outlines recent developments in U.S. climate policies. Although the United States does not participate in the Kyoto Mechanism, a number of climate policies are being implemented at state level as well as at the federal level. First, we report and compare the federal cap and trade proposals in the 110th Congress. Then, the paper illustrates the current situations of state level climate policies, such as the Regional Greenhouse Gas Initiative in the northeastern states or AB32 in California. We analyze these proposals from the viewpoint of technology policies and impacts on international markets. It is found that technology policies play important roles in the cap and trade proposals and that there is a great expectation for carbon capture and sequestration (CCS) technology. In terms of the impacts on international markets, several federal proposals as well as regional programs permit trading in international markets. As emission targets become more stringent in the future, U.S. GHG emitters are more likely to interact with these markets. Thus, despite the lack of U.S. participation in the Kyoto Protocol, U.S. markets will be linked to foreign markets, at least, in an indirect way.
    Keywords: United States, climate policy, cap and trade, the Kyoto mechanism, technology policy
    JEL: K32 Q48 Q54 Q58
    Date: 2007–10–31
  6. By: Safirova, Elena A. (Resources for the Future); Houde, Sébastien; Harrington, Winston
    Abstract: Previous literature has suggested that the urban form (i.e., city size, density, and center distribution pattern) influences urban energy consumption. It has been argued that more dense development is likely to result in more energy-efficient and sustainable cities. However, very little is known about the precise magnitude of possible energy savings from more compact urban form. Moreover, practically no research has been done to investigate which urban policies are likely to be effective in making cities more energy efficient and to quantify those potential energy savings. In this paper we discuss the potential effectiveness of urban policies at improving energy efficiency. First, we analyze several abstract scenarios suggested by the literature to see whether making a previously dispersed city more compact would result in improved energy efficiency. Then we model realistic transportation and land-use policies and examine whether those policies are likely to reduce energy consumption in the urban context.
    Keywords: energy consumption, urban form, general equilibrium, land use, transportation, government policy
    JEL: D58 H23 Q48 R13 R14 R40 R5
    Date: 2007–12–19
  7. By: Searchinger, Timothy; Heimlich, Ralph; Houghton, R. A.; Dong, Fengxia; Elobeid, Amani; Fabiosa, Jacinto F.; Tokgoz, Simla; Hayes, Dermot J.; Yu, Tun-Hsiang (Edward)
    Abstract: Most prior studies have found that substituting biofuels for gasoline will reduce greenhouse gases because biofuels sequester carbon through the growth of the feedstock. These analyses have failed to count the carbon emissions that occur as farmers worldwide respond to higher prices and convert forest and grassland to new cropland to replace the grain (or cropland) diverted to biofuels. By using a worldwide agricultural model to estimate emissions from land-use change, we found that corn-based ethanol, instead of producing a 20% savings, nearly doubles greenhouse emissions over 30 years and increases greenhouse gases for 167 years. Biofuels from switchgrass, if grown on U.S. corn lands, increase emissions by 50%. This result raises concerns about large biofuel mandates and highlights the value of using waste products.
    Date: 2008–03–13
  8. By: Sedjo, Roger A. (Resources for the Future); Sohngen, Brent
    Abstract: Several important issues need to be addressed to make avoided deforestation (AD) a feasible option for climate change policy. Traditional questions associated with land-based sequestration options have largely been discussed in terms of project-based approaches to carbon sequestration. For country-level commitments these concepts remain important, but we argue in this paper that they can and should be addressed differently. In order to address AD, it is useful to begin by outlining the international climate control regimes under which AD could be included as an option. Two general alternatives are discussed - an arrangement that is a linear extension of the current Kyoto Protocol but that involves more countries with specific emission reduction targets, and an alternative expanded arrangement that requires that essentially all countries have greenhouse gas emission targets. We consider how AD would fit into these two general types of international agreements and address questions related to baselines, additionality, permanence, and leakage. We conclude that the key issues related to including deforestation in either of these arrangements revolve around measuring, monitoring (e.g., additionality), and the development of efficient incentives by countries to alter their land-use regimes.
    Keywords: avoided deforestation, carbon, sequestration, credits, climate, warming
    JEL: Q00 Q23 Q54 Q57
    Date: 2007–10–31
  9. By: Khan, Haider
    Abstract: This paper analyzes China's development strategy by focusing on both global and regional approaches to solving problems of energy security and ecological imbalance by addressing specifically the problems of China’s energy security. PRC’s growing energy dependence has become a major concern for both economic and national security policymakers in that country. The ambitious goal of modernization of the economy along the lines of the other newly industrialized economies(NIEs) of Asia has succeeded only too well, and it is difficult to reorient economic priorities. If examined rigorously, such an economic strategic assumption can be seen to entail the goal of creating further technological capabilities. In particular, China seems to be firmly committed to the creation of a largely self-sustaining innovation system as part of a knowledge-based economy of the future . Such innovation systems, called positive feedback loop innovation systems or POLIS have been created by advanced countries, and NIEs such as South Korea and Taiwan are proceeding to create these as well. But this will add to its energy burden and further dependence on the US as the power which controls the key sea lanes. Only a strategic reorientation to building a self-sustaining POLIS and appropriate regional cooperation institutions can lead to the way out of the current dilemma for China. Fortunately, such a model of POLIS which is distributionally and ecologically sensitive can be built for China and applied strategically to lead towards a sustainable development trajectory. However, time is of the essence. Given the path dependence of development unless strategic disengagement from the existing path followed by a strategic engagement with the alternative strategy is begun within the next five years, it may well be too late. The stakes are indeed very high. A more detailed strategy paper based on the key ideas from the alternative strategy outlined here with concrete quantitative scenarios and feasibility studies along the lines of models sketched in the appendix ( and other, more detailed models) will go some distance towards giving the appropriate analytical foundations for the policy makers. The preliminary results confirm the predictions regarding fossil fuel-based energy shortage and lead towards a serious consideration of alternative energy sources. Achieving the twin goals of energy security and ecological balance are challenging but not impossible for China. Serious policy research can be used effectively if there is the political will to do so. The goal of regional cooperation is also achievable if patient negotiations in good faith can start in earnest. In particular, cooperation with other Asian economies, particularly Japan, Indonesia, Viet Nam and India will be crucial.This paper has sketched out the complexities of cooperation and conflict between China and Japan. Future work will address the problems of Regional cooperation for China in the East, South and South Asian context as well as in the context of Africa and Latin America.
    Keywords: China; Development Strategy; Energy; Environment; POLIS; Innovation System; Regional Cooperation
    JEL: Q32 D62 C68 O53 O13
    Date: 2008
  10. By: Last Name, First Name (Resources for the Future)
    Abstract: In this paper we study the process of technical change in the case of pollution abatement from large stationary sources that have been regulated by a very forceful refunded emission payment policy. Thanks to the high costs of emitting nitrogen oxides (NOx), considerable progress has been made in lowering aggregate emissions. This paper seeks to disaggregate average industry improvements to study how much of it is due to innovation (improvement of best practice through investments as well as learning by doing) and how much is due to the spread and adoption of technology. We find both factors very important. Innovation has been rapid: the best firms have cut emissions on the order of 70 percent. Nevertheless, reductions have been even more rapid for the majority of firms, such that the disparity in emission coefficients has also been reduced significantly as the median firms have caught up with best practice.
    Keywords: nitrogen oxides, NOx, R&D, innovation, technology diffusion, environmental policy instrument, technical change
    JEL: Q55 Q53 L51
    Date: 2008–02–27
  11. By: Rao, Gyaneshwar
    Abstract: Economic theory suggests that refined and crude oil prices should be interrelated as the refined products are a derivative of the crude product and hence the prices of the two categories must have a long run relationship. However any short term feedbacks between the two markets are also of interest. Any feedbacks which are significant between the markets will greatly improve our understanding of how the complex oil markets work and that the workings of both the markets are not as independent as some would want to believe. The Johansen and Julius VCEM technique and Granger causality tests using co-integrating methodology show there is a basis to conclude that there is a uni-directional causality running from crude market to the refined product market, confirming a long run relationship between the markets.
    Keywords: Crude Prices; Refined Prices; Long Run Relationship; Granger causality; Mean of Platts (MOPS)
    JEL: Q40 Q49 C22
    Date: 2008–03–09
  12. By: Silvester van Koten
    Abstract: In the EU electricity industry, many Vertically Integrated Utilities (VIUs) have ownership both of electricity generators and of transmission, hence VIU-owned or allied generators often are bidders in auctions for VIU-owned transmission. In Van Koten (2006) I show that welfare suffers and the holding company benefits – through increased auction revenue – from more aggressive bidding by the allied bidder and that it does not make a difference whether transmission is legally separated from the VIU or not. Here I analyze the regulatory measure of also legally separating the allied generator from the VIU; this measure effectively transforms the VIU into a holding company and prevents the “VIU” from influencing day-to-day decision-making of the “VIU”-owned generator and bans cross-subsidization between divisions. I show that such a measure may not improve welfare; the holding company can formulate a simple compensation scheme that does not violate the restrictions imposed by legal separation but induces the manager of the allied generator to bid more aggressively, thereby increasing the profits of the holding company and decreasing welfare, as in Van Koten (2006).
    Keywords: Asymmetric auctions, bidding behavior, electricity markets, strategic delegation, regulation, vertical integration.
    JEL: L22 L43 L51 L94 L98
    Date: 2007–12
  13. By: David Anthoff (International Max Planck Research School on Earth System Modelling, Hamburg, Germany, Research Unit Sustainability and Global Change, Hamburg University and Centre for Marine and Atmospheric Science, Hamburg, Germany); Richard S. J. Tol (Economic and Social Research Institute (ESRI))
    Abstract: The Stern Review added balanced growth equivalences (BGE) to the economic climate change research agenda. We first propose rigorous definitions of the BGE for multiple regions and under uncertainty. We show that the change in the BGE is independent of the assumed scenario of per capita income. For comparable welfare economic assumptions as the Stern Review, we calculate lower changes in BGE between a business as usual scenario and one without climate impacts with the model FUND than the Stern Review found with the model PAGE. We find that optimal mitigation policies give even lower changes in BGE and argue that those policy choices should be the focus of the research effort rather than total damage estimates. Sensitivity analyses show that the Stern Review chose parameters that imply high impact estimates. However, for regionally disaggregated welfare functions, we find changes in BGE that are orders of magnitude higher than the results from the Stern Review, both for total damage as for optimal policy analysis. With regional disaggregation and high risk aversion, fat tails and with that very high welfare losses emerge.
    Keywords: Impacts of climate change, balanced growth equivalent, Stern Review
    Date: 2008–03
  14. By: Christiane Clemens (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Karen Pittel (ETH Zürich)
    Abstract: This paper analyzes the effects of technological risk on long–run growth when labor supply is elastic and production gives rise to a pollution externality. For the social planner as well as for the market economy we show that the randomness of production as well as the endogeneity of labor supply matter with respect to the equilibrium solution. The direction in which changes in the model parameters as well as changes of policy instruments influence labor supply and growth depends crucially on the volatility of output.
    Keywords: stochastic growth, pollution, abatement, elastic labor supply
    JEL: Q5 O4 D8 D9
    Date: 2008–03
  15. By: Ed Balsdon (Department of Economics, San Diego State University)
    Abstract: It is frequently asserted in the environment/development literature that severe poverty causes the neglect of worthwhile investments, resulting in deforestation and other resource degradation. While microeconomic theory does suggest a relationship between poverty and the evaluation of investments, the environmental impact is not so simple. This paper develops a dynamic theory of “shifting cultivation,” with special attention to an environmental impact variable: the length of time a given field is cultivated before a shift to the next. The model indicates that poverty reduction will lead in some ways to accelerated extraction of a natural resource, but also to a longer extraction period. The results therefore provide support for claims of an indirect environmental benefit from the primary goal of alleviating rural poverty. The impact of discount rates, prices, and other parameters are also explored.
    Date: 2007–05

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