nep-ene New Economics Papers
on Energy Economics
Issue of 2008‒04‒15
eighteen papers chosen by
Roger Fouquet
Imperial College, UK

  1. Climate Economics: A Meta-Review and Some Suggestions By Geoffrey Heal
  2. Instrument Choice in Environmental Policy By Parry, Ian W.H.; Goulder, Lawrence H.
  3. Timing of innovation policies when carbon emissions are restricted: an applied general equilibrium analysis By Tom-Reiel Heggedal and Karl Jacobsen
  4. Functions of innovation systems as a framework to understand sustainable technological change: empirical evidence for earlier claims By Marko P. Hekkert; Simona O. Negro
  5. Environmental policy in dynamic models with pollution by consumers: The greening and blackening of preferences By Barthel, Jens
  6. Regulating Greenhouse Gases: Emissions Intensity Limits, A Hybrid Policy, and Offsets By Elizabeth Anne Wilman
  7. Estimation of substitution elasticities for CGE models By Azusa OKAGAWA; Kanemi BAN
  8. Controlling the Cost of Controlling the Climate: The Irish Government's Climate Change Strategy By Colm McCarthy; Sue Scott
  9. 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
  10. Germany's Solar Cell Promotion: Dark Clouds on the Horizon By Manuel Frondel; Nolan Ritter; Christoph M. Schmidt
  11. The Economics of Biofuels By Brännlund, Runar; Kriström, Bengt; Lundgren, Tommy; Marklund, Per-Olov
  12. Promoting Biofuels: Implications for Developing Countries By Jörg Peters; Sascha Thielmann
  13. Gasoline Prices Jump Up on Mondays: An Outcome of Aggressive Competition? By Oystein Foros; Frode Steen
  14. Identifying the Rebound - Evidence from a German Household Panel By Manuel Frondel; Jörg Peters; Colin Vance
  15. Welfare and Competition Effects of Electricity Interconnection between Great Britain and Ireland By Laura Malaguzzi Valeri
  16. Quantifying Multiscale Inefficiency in Electricity Markets By Olga Y. Uritskaya; Apostolos Serletis
  17. Combining a Demand System with the Household Production Approach. Modelling Energy Demand in Selected European Countries By Kurt Kratena; Michael Wüger
  18. Regulation of Energy Prices in Russia By Kari E.O. Alho

  1. By: Geoffrey Heal
    Abstract: What have we learned from the outpouring of literature as a result of the Stern Review of the Economics of Climate Change? A lot. We have explored the model space and the parameter space much more thoroughly, though there are still unexplored regions. While there are aspects of the Stern Review's analysis with which we can disagree, it seems fair to say that it has catalyzed a fundamental rethinking of the economic case for action on climate change. We are now in a position to give some conditions that are sufficient to provide a case for strong action on climate change, but need more work before we have a fully satisfactory account of the relevant economics. In particular we need to understand better how climate change affects natural capital - the natural environment and the ecosystems comprising it - and how these affect human welfare.
    JEL: D8 D9 Q01
    Date: 2008–04
  2. By: Parry, Ian W.H. (Resources for the Future); Goulder, Lawrence H.
    Abstract: We examine the extent to which various environmental policy instruments meet major evaluation criteria, including cost-effectiveness, distributional equity, minimization of risk in the presence of uncertainty, and political feasibility. Instruments considered include emissions taxes, tradable emissions allowances, subsidies for emissions reductions, performance standards, technology mandates, and research and development subsidies. Several themes emerge. First, no single instrument is clearly superior along all the criteria. Second, significant trade-offs arise in the choice of instrument; for example, assuring a reasonable degree of distributional equity often will require a sacrifice of cost-effectiveness. Third, it is possible and sometimes desirable to design hybrid instruments that combine features of various instruments in their “pure” form. Fourth, for many pollution problems, more than one market failure may be involved, which may justify (on efficiency grounds, at least) employing more than one instrument. Finally, potential overlaps and undesirable interactions among environmental policy instruments are sometimes a matter of concern.
    Keywords: emissions control instruments, cost-effectiveness, distributional burden, induced innovation
    JEL: Q58 H23 Q54
    Date: 2008–04–01
  3. By: Tom-Reiel Heggedal and Karl Jacobsen (Statistics Norway)
    Abstract: This paper studies the timing of subsidies for environmental research and development (R&D) and how innovation policy is influenced by the costs of emissions. We use a dynamic computable general equilibrium (CGE) model with both general R&D and specific environmental R&D. We find two results that are important when subsidizing environmental R&D in order to target inefficiencies in the research markets. Firstly, the welfare gain from subsidies is larger when the costs of emissions are higher. This is because a high carbon tax increases the social (efficient) investment in environmental R&D, in excess of the private investment in R&D. Secondly, the welfare gain is greater when there is a falling time profile of the rate of subsidies for environmental R&D, rather than a constant or increasing profile. The reason is that the innovation externalities are larger in early periods.
    Keywords: Applied general equilibrium; endogenous growth; research and development; carbon emissions.
    JEL: E62 H31 O38 Q55
    Date: 2008–04
  4. By: Marko P. Hekkert; Simona O. Negro
    Abstract: Understanding the emergence of innovation systems is recently put central in research analysing the process of technological change. Especially the key-activities that are important for the build up of an innovation system receive much attention. These are labeled ‘functions of innovation systems’. In most cases the authors apply this framework without questioning its validity. This paper builds on five empirical studies, related to renewable energy technologies, to test whether the functions of innovation systems framework is a valid framework to analyse processes of technological change. We test the claim that a specific set of functions is suitable. We also test whether the claim made in previous publications that the interactions between system functions accelerate innovation system emergence and growth is valid. Both claims are confirmed.
    Date: 2008–04
  5. By: Barthel, Jens
    Abstract: The paper discusses questions resulting from a study of the interaction of a change of preferences and environmental policy. In a model with pollution as a side effect of consumption environmental policy is introduced in the form of a consumption tax with or without a subsidy on eco-friendly investments. In simulations we observe the dynamic behavior of models before and after sudden changes of exogenous variables. These shocks are jumps in the preference structure of individuals towards more environmental-friendly or consumption-friendly attitudes. Additionally we examine the effect of a lagged reaction of the policy agents.
    Keywords: Environmental Policy Instruments;Preference Change
    JEL: C61 H23 Q58
    Date: 2007–10–23
  6. By: Elizabeth Anne Wilman
    Abstract: Emissions intensity caps, which have gained popularity for regulating greenhouse gas emissions, limit emissions as a proportion of output. The objective is to index allowed emissions to output, avoiding a higher than expected marginal abatement cost when output is expanding. In aggregate, it is possible to set an emissions intensity cap and translate it into an absolute cap for the purpose of emissions trading. However, individual intensity limits are also used, and are part of some emission trading programs. Without the restrictive assumption that output is unresponsive to changes in price or cost, it is not possible to set individual intensity limits that will achieve economic efficiency. This inefficiency also compromises the welfare gains achievable through true cost saving abatement options, such as cheap offsets. A hybrid price-quantity regulation can better promote economic efficiency, while preserving the political appeal of a permit system with gratis initial allocation. It can also avoid a high marginal abatement cost without conceding the gains achievable through cheaper abatement technologies. Nevertheless, individual intensity caps can be part of a piecemeal approach to economic efficiency. If conditionally efficient intensity caps are already in place, the transition to a hybrid system is relatively straightforward.
    JEL: Q52 Q58 D61
    Date: 2008–01–13
  7. By: Azusa OKAGAWA (Graduate School of Economics, Osaka University); Kanemi BAN (Graduate School of Economics, Osaka University)
    Abstract: Many studies of climate policy are based on computable general equilibrium (CGE) modeling. The simulation results and conclusions reached by these models depend on the size of the parameters specified. In particular, the substitution elasticities between production factors have a major influence. Therefore, in order to obtain reliable simulation results we should employ empirical evidence gathered on the substitution elasticities. Unfortunately, in many instances, the lack of econometric analysis means we must specify these key parameters based on existing work or borrow them from prominent modeling exercises. In this study, we estimate nested constant elasticity of substitution (CES) production functions using panel data for OECD countries to help improve the reliability of CGE models for climate policy. Our results show higher values for substitution elasticities closely related to energy inputs for energy-intensive industries and lower values for other industries compared to the conventional values often used in existing models. With the new parameters estimated, we find that conventional parameters could overestimate the necessary carbon price by 44%, and obtain evidence of different distributions of CO2 emission reduction costs across industries.
    Keywords: Substitution elasticities, CGE modeling, Climate policy
    JEL: D58 Q43 Q54
    Date: 2008–04
  8. By: Colm McCarthy (University College Dublin); Sue Scott (Economic and Social Research Institute (ESRI))
    Keywords: climate change
    Date: 2008–03
  9. By: Åsa Löfgren (Göteborg University - Department of Economics); Katrin Millock (Centre d'Economie de la Sorbonne et Paris School of Economics); 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.
    JEL: C33 D81 O33 Q48 Q53
    Date: 2008–03
  10. By: Manuel Frondel; Nolan Ritter; Christoph M. Schmidt
    Abstract: This article demonstrates that the large feed-in tariffs currently guaranteed for solar electricity in Germany constitute a subsidization regime that, if extended to 2020, threatens to reach a level comparable to that of German hard coal production, a notoriously outstanding example of misguided political intervention. Yet, as a consequence of the coexistence of the German Renewable Energy Sources Act (EEG) and theEUEmissions Trading Scheme (ETS), the increased use of renewable energy technologies does not imply any additional emission reductions beyond those already achieved by ETS alone. Similarly disappointing is the net employment balance, which is likely to be negative if one takes into account the opportunity cost of this form of solar photovoltaic support. Along the lines of the International Energy Agency (IEA 2007:77), we therefore recommend the immediate and drastic reduction of the magnitude of the feed-in tariffs granted for solar-based electricity. Ultimately, producing electricity on this basis is among the most expensive greenhouse gas abatement options.
    Keywords: Energy policy, energy security, learning effects
    JEL: Q28 Q42 Q48
    Date: 2008–03
  11. By: Brännlund, Runar (Department of Economics, Umeå University); Kriström, Bengt (Department of Forest Economics); Lundgren, Tommy (Umeå School of Business); Marklund, Per-Olov (Department of Economics, Umeå University)
    Abstract: Biofuels are increasingly being regarded as an energy source with potential to address problems in several areas, such as those found in the areas of climate change, environmental degradation, energy supply and energy security. We take a look at biofuels through the lens of modern resource economics and begin our survey by asking the question: Why biofuels? We delimit ourselves to biofuels for transportation (e.g. ethanol and biodiesel). We then review some of the literature in the field and put forward a framework for analysis drawn mainly from the green accounting literature. The literature review indicates that the effects of policies promoting conversion from fossil fuels to biofuels are not necessarily welfare improving. Our theoretical framework provided sheds some light on why this might be the case. We propose policies that not only penalize emissions of CO2 from all sources, but also stimulate biomass growth. We end by identifying issues for further research.
    Keywords: Biofuels; ethanol; green accounting; energy demand
    JEL: Q42 Q54
    Date: 2008–03–31
  12. By: Jörg Peters; Sascha Thielmann
    Abstract: Interest in biofuels is growing worldwide as concerns about the security of energy supply and climate change are moving into the focus of policy makers. With the exception of bioethanol from Brazil, however, production costs of biofuels are typically much higher than those of fossil fuels.As a result,promotion measures such as tax exemptions or blending quotas are indispensable for ascertaining substantial biofuel demand.With particular focus on developing countries, this paper discusses the economic justification of biofuel promotion instruments and investigates their implications. Based on data from India and Tanzania, we find that substantial biofuel usage induces significant financial costs. Furthermore, acreage availability is a binding natural limitation that could also lead to conflicts with food production.Yet, if carefully implemented under the appropriate conditions, biofuel programs might present opportunities for certain developing countries.
    Keywords: Renewable energy, environmental policy, government policy, economic development
    JEL: O38 Q42 Q56
    Date: 2008–01
  13. By: Oystein Foros (Norwegian School of Economics and Business Administration); Frode Steen (Norwegian School of Economics and Business Administration)
    Abstract: This paper examines Norwegian gasoline pump prices using daily station-specific observations from March 2003 to March 2006. Whereas studies that have analysed similar price cyclees in other countriees find support for the Edgeworth cycle theory (Maskin and Tirole, 1988), we demonstrate that Norwegian gasoline price cycles involve a form of coordinated behavior. We also show that gasline prices follow a fixed weekly pattern, with prices increasing significantly every Monday at noon, and that gasoline companies appear to use the recommended retail price as a coordination device with a fixed link between the retail and recommended prices. Moreover, the weekly pattern changed in April 2004; whereas Thursday had been the high-price day, Monday now became the high-price day. The price-cost margin also increased significantly after the weekly pattern changed in April 2004.
    Keywords: gasoline prices, coordinated behavior
    Date: 2008–03
  14. By: Manuel Frondel; Jörg Peters; Colin Vance
    Abstract: Using a panel of household travel diary data collected in Germany between 1997 and 2005, this study assesses the effectiveness of fuel efficiency improvements by econometrically estimating the rebound effect, which measures the extent to which higher efficiency causes additional travel. Following a theoretical discussion outlining three alternative definitions of the rebound effect, the econometric analysis generates corresponding estimates using panel methods to control for the effects of unobservables that could otherwise produce spurious results. Our results, which range between 57% and 67%, indicate a rebound that is substantially larger than obtained in other studies, calling into question the efficacy of policies targeted at reducing energy consumption via technological efficiency.
    Keywords: Automobile travel, rebound effect, panel models
    JEL: D13 Q41
    Date: 2007–11
  15. By: Laura Malaguzzi Valeri (Economic and Social Research Institute (ESRI))
    Abstract: This study analyzes the effects of additional interconnection on welfare and competition in the Irish electricity market. I simulate the wholesale electricity markets of Great Britain and the island of Ireland for 2005. I find that in order for the two markets to be integrated in 2005, additional interconnection would have to be large. However, the amount of interconnection decreases for high costs of carbon, since this causes the markets to become more similar. Irish consumers obtain most of the welfare gains of interconnection. As the amount of interconnection increases, there are also positive effects on competition in Ireland, the less competitive of the two markets. Finally, it is unlikely that private investors will pay for the construction of the interconnector since they are unable to extract all its welfare benefits.
    Keywords: interconnection, electricity, Ireland
    JEL: L94 Q40
    Date: 2008–03
  16. By: Olga Y. Uritskaya; Apostolos Serletis
    Abstract: One of the basic features of efficient markets is the absence of correlations between price increments over any time scale leading to random walk-type behavior of prices. In this paper, we propose a new approach for measuring deviations from the efficient market state based on an analysis of scale-dependent fractal exponent characterizing correlations at different time scales. The approach is applied to two electricity markets, Alberta and Mid Columbia (Mid-C), as well as to the AECO Alberta natural gas market (for purposes of providing a comparison between storable and non-storable commodities). We show that price fluctuations in all studied markets are not efficient, with electricity prices exhibiting complex multiscale correlated behavior not captured by monofractal methods used in previous studies.
    JEL: C22 L91 L94
    Date: 2008–01–20
  17. By: Kurt Kratena (WIFO); Michael Wüger (WIFO)
    Abstract: This paper sets up a model of private consumption for selected EU countries with special emphasis on the impact of energy efficiency on energy demand. Starting point for the analysis is the idea that consumers' demand is a combination of a demand for "services" with a technological component. Demand for services is derived from utility maximisation or cost minimisation and actual energy (commodity) demand stems from a household production process. The model indirectly takes into account the impact of capital stocks and technology on energy demand and all the different links between services and goods demand. That allows for describing more channels of impacts on consumption expenditure for energy and non-energy than in traditional consumption models. Exogenous key variables that can be modified in order to calculate different scenarios are prices of energy and non-energy goods, and the exogenous capital stock (infrastructure) or user costs of capital. Simulations of revenue neutral energy taxation with changes in capital stocks for heating and transport are carried out.
    Keywords: Energy Demand Consumption Models Household Production Process Energy Taxation
    Date: 2008–02–27
  18. By: Kari E.O. Alho
    Abstract: ABSTRACT : Russia prices its energy commodities domestically much lower than the prices prevailing in the international market. Using a general equilibrium framework, we analyse reasons for why Russia should or should not use such a price regulation. First, being a major exporter of energy commodities and having considerable monopolistic market power, the country is able to use its supply in order to influence the international energy prices. A rational way to channel this rent to the domestic non-energy sector and to domestic consumers is through a lower, i.e., competitive, domestic price on energy than that in the world market. Second, we introduce the classic infant-industry argument with positive intertemporal spillovers through learning-by-doing linked to current production. These spill-overs are likely to be relevant for manufacturing in a transition economy, which argument creates a further reason for a deviation in the pricing of energy to domestic industrial producers from the world market prices. However, an empirical consideration of these results and the estimation of the learning-by-doing curve suggest that the first effect can in principle be sizeable, while the second is only marginal and that, overall, Russia is currently subsidising its domestic energy prices clearly too much. Further, we conclude that the country should not subsidise its domestic consumers more than its domestic industry, as it does in reality. We also derive the optimal domestic energy tax and show that it is modest in comparison to its current rate. The optimal pricing policy could therefore have a marked positive effect on the international supply of energy by Russia.
    Keywords: energy, Russia, international and domestic prices
    Date: 2008–03–26

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