nep-ene New Economics Papers
on Energy Economics
Issue of 2008‒06‒21
sixteen papers chosen by
Roger Fouquet
Imperial College, UK

  1. Tradable Rights to Emit Air Pollution By Burtraw, Dallas; Evans, David A.
  2. Green Corridors: Linking Interregional Transmission Expansion and Renewable Energy Policies By Vajjhala, Shalini; Paul, Anthony; Sweeney, Richard; Palmer, Karen
  3. Säänneltyä joustavuuutta: hankemekanismit kansainvälisessä ilmastopolitiikassa By Heikki Marjosola
  4. Prognose des CO2-Zertifikatepreisrisikos By Henry Dannenberg; Wilfried Ehrenfeld
  5. Short-Run Price and Welfare Impacts of Federal Ethanol Policies By McPhail, Lihong Lu; Babcock, Bruce A.
  6. It never rains but it pours: Modelling the persistence of spikes in electricity prices By T M Christensen; A S Hurn; K A Lindsay
  7. Impact of Government Expenditure on Growth: The Case of Azerbaijan By Junko Koeda; V. Kramarenko
  8. Paving the Way for U.S. Climate Leadership: The Case for Executive Agreements and Climate Protection Authority By Purvis, Nigel
  9. Cost-Benefit Analysis of Climate Change: Stern Revisited By Paul Baer; Clive L Spash
  10. Emissions trading with updated grandfathering. Entry/exit considerations and distributional effects By Knut Einar Rosendahl and Halvor Briseid Storrøsten
  11. Australia’s Resource Use Trajectories By Heinz Schandl; Franzi Poldy; Graham M Turner; Thomas G Measham; Daniel Walker; Nina Eisenmenger
  12. Iranian Economy in the Twentieth Century: A Global Perspective By Esfahani, H.S.; Pesaran, M.H.
  13. Economic Theory and Electrical public Utilities Organization in the first part of the twentieth century: French and US Experiences By Frédéric Marty
  14. An Hourly Periodic State Space Model for Modelling French National Electricity Load By V. Dordonnat; S.J. Koopman; M. Ooms; A. Dessertaine; J. Collet
  15. Inclusion of Agriculture and Forestry in a Domestic Emissions Trading Scheme: New Zealand's Experience to Date By Suzi Kerr; Andrew Sweet;
  16. "Bayesian Estimation of Demand Functions under Block Rate Pricing" By Koji Miyawaki; Yasuihro Omori; Akira Hibiki

  1. By: Burtraw, Dallas (Resources for the Future); Evans, David A.
    Abstract: The use of cap-and-trade to regulate air pollution promises to achieve environmental goals at lower cost than traditional prescriptive approaches. Cap-and-trade has been applied to various air pollutants including sulfur dioxide, nitrogen oxides, and volatile organic compounds in the United States and carbon dioxide in the European Union. This corresponds to what is likely to become the most expensive environmental undertaking in history—the effort to reduce the heating of the planet. However, the efficacy of a cap-and-trade policy for carbon dioxide depends in large part on the design of the program. In addition to the level of the cap, the most important decision facing policymakers will be the initial allocation of emissions allowances. The method used to allocate tradable emissions allowances will have significant influence on the distributional impact and efficiency of the program.
    Keywords: cap-and-trade, emission allowances, allocation, auction, grandfathering, climate change, global warming, carbon dioxide
    JEL: Q52 Q53 Q54
    Date: 2008–03–17
  2. By: Vajjhala, Shalini (Resources for the Future); Paul, Anthony; Sweeney, Richard; Palmer, Karen
    Abstract: A variety of recent policy measures have been advanced to promote interregional power transmission investment in the United States; among these are the designation of corridors on federal lands in western states and the identification of national interest electric transmission corridors across the country. Although these corridors have been put forward as critical policy interventions to modernize an aging transmission system, their effectiveness could be undermined by parallel policies, such as renewable portfolio standards (RPSs), designed to alter the landscape for new investment in generation capacity. This paper presents the results of a scenario analysis of the relationship between the interregional power grid and renewables policies to evaluate 1) the effects of state and national RPS policies on interregional power flows and 2) the impacts of transmission expansion on the locations and types of new, renewable sources for electricity capacity additions. Using the RFF Haiku Electricity Market Model, we find that the locations of transmission corridors could have a significant impact on the location, type, and marginal cost of generation in the future. Conversely, a national RPS would induce interregional power flows across the country significantly different from those that would prevail in the absence of such a policy. In particular, a national RPS would promote western renewables and shift power flows to the East. Under either a set of state-level RPS policies or a national RPS, the majority of power flowing into California will come from the Pacific Northwest, not from the Southwest, which is where corridors are most abundant. Additionally, a national RPS could motivate more than 10 GW of new biomass capacity in the Southeast, but grid expansion could shift 6 GW of this capacity to the Plains states and western wind.
    Keywords: energy corridors, transmission grid, renewable electricity, RPS
    JEL: Q42 Q48
    Date: 2008–03–01
  3. By: Heikki Marjosola
    Abstract: ABSTRACT : Kyoto Protocol’s Project-Based Mechanisms (Clean Development Mechanism, CDM and Joint Implementation, JI) add flexibility to international climate cooperation and emission trading schemes. The mechanisms reduce the costs of achieving the emission targets directly (cheaper implementation of the emissions reducing projects abroad) and indirectly (emission units earned increase the liquidity of the markets). While the carbon market has been running, some of the problems of the project-based markets have transpired. The CDM projects have centered largely on the biggest and richest developing countries, which also pollute a lot. The smaller developing countries that are more unstable and do not have as developed institutional capacity, are not as intriguing for risk-averting international capital. Though many developing countries are hosting CDM-projects, the centering of the market seems to feed itself. The reforms of the CDM market regulation try to decelerate this tendency (for example programmatic CDM, and new financing mechanisms). Industrialized countries also try to persuade the biggest developing countries to accept an emission target. Thereby they would no longer compete with developing countries, but with industrialized countries likely to host JI-projects. The development of the EU ETS is important from the point of view of project-based markets. In the future, the EU ETS will be governed more as a federate system under harmonized rules. The underlying problem of the international system, however, is the artificial dichotomy of the world into industrialized and developing countries. In the Emissions Trading Schemes, the different developing stages of the countries, regions and industrial operators can be considered much more efficiently. Linking of the already existing schemes provides a necessary step towards a more global and comprehensive Emissions Trading Scheme.
    Keywords: project-based mechanisms, CDM, JI, flexibility, emissions trading schemes, linking
    Date: 2008–06–13
  4. By: Henry Dannenberg; Wilfried Ehrenfeld
    Abstract: Modeling the price risk of CO2 certificates is one important aspect of integral corporate risk management related to emissions trading. The paper presents a risk model which may be the basis for evaluating the risk of emission certificate prices. We assume that the certificate price is determined by the expected marginal CO2 abatement costs prevailing at the current trade period and stochastically fluctuates around the respective level as returned from the mean reversion process. Due to uncertainties about future environmental states we suppose that within one trade period, erratic changes in the expected marginal abatement costs may occur leading to shifts in the price level. The aim of the work is to model the erratic changes of the expected reversion level and to estimate the parameters of the mean reversion process.
    Keywords: risk, carbon dioxide, emissions trading, EUA, CO2 certificate price, mean reversion process
    JEL: D81 G32 L59 Q54 Q56 Q58
    Date: 2008–06
  5. By: McPhail, Lihong Lu; Babcock, Bruce A.
    Abstract: High commodity prices have increased interest in the impacts of federal ethanol policies. We present a stochastic, short-run structural model of U.S. corn, ethanol, and gasoline markets to estimate the price and welfare impacts of alternative policies on producers and consumers of corn, ethanol, and gasoline. The three federal policies that we consider are the Renewable Fuels Standard, the blenders tax credit, and the tariff on imported ethanol. Our model examines the impact of these policies on prices during the 2008/09 marketing year. Our results show that in the short run, a change in U.S. ethanol policies would not have a large, immediate impact on corn prices. Eliminating any one of the policies would reduce average corn prices by less than 4%. Removal of all three programs would decrease average corn prices by 14.5%. The reason why the changes are relatively modest is that existing U.S. ethanol plants will only shut down if their variable cost of production is not covered. Changes in ethanol policies would have large distributional impacts. Corn growers, ethanol producers, and fuel consumers have a large incentive to maintain high ethanol consumption. Gasoline producers have a large incentive to reduce ethanol production and imports. Livestock producers have a large short-run incentive to reduce domestic ethanol production.
    Keywords: ethanol policy, stochastic equilibrium model, welfare analysis.
    Date: 2008–06–06
  6. By: T M Christensen (QUT); A S Hurn (QUT); K A Lindsay (Glasgow)
    Abstract: During periods of market stress, electricity prices can rise dramatically. This paper treats these abnormal episodes or price spikes as count events and attempts to build a model of the spiking process. In contrast to the existing literature, which either ignores temporal dependence in the spiking process or attempts to model the dependence solely in terms of deterministic variables (like seasonal and day of the week effects), this paper argues that persistence in the spiking process is an important factor in building an effective model. A Poisson autoregressive framework is proposed in which price spikes occur as a result of the latent arrival and survival of system stresses. This formulation captures the salient features of the process adequately, and yields forecasts of price spikes that are superior to those obtained from na¨ıve models which do not account for persistence in the spiking process.
    Keywords: Electricity Prices, Extreme Events, Poisson Regressions, Poisson Autoregressive Model
    JEL: C14 C52
    Date: 2008–06–12
  7. By: Junko Koeda; V. Kramarenko
    Abstract: This paper evaluates a fiscal scenario based on the assumption of a rapid scaling-up of expenditure to be followed by a rapid scaling-down in the context of Azerbaijan's current temporary oil production boom. To this end, it relies on a review of historical precedents and a neoclassical growth model. Based on both strands of analysis, the paper suggests that the evaluated fiscal scenario poses significant risks to growth sustainability.
    Keywords: Working Paper , Azerbaijan , Government expenditures , Economic growth , Public investment , Oil revenues ,
    Date: 2008–05–05
  8. By: Purvis, Nigel
    Abstract: The United States should classify new international agreements to protect the Earth’s climate system as executive agreements rather than as treaties. Unlike treaties, which require the advice and consent of two-thirds of the Senate, executive agreements are entered into either solely by the President based on previously delegated constitutional, treaty, or statutory authorities, or by the President and Congress together pursuant to a new statute. The President and Congress should handle the most significant climate change agreements as congressional–executive agreements, which require approval by a simple majority of both houses of Congress. Handling climate agreements as congressional–executive agreements would speed the development of a genuinely bipartisan U.S. climate change foreign policy, improve coordination between the executive and legislative branches, strengthen the hand of U.S. climate negotiators to bring home good agreements, increase the prospects for U.S. participation in those agreements, protect U.S. competitiveness, and spur international climate action. More specifically, Congress should enact “Climate Protection Authority,” which would define U.S. negotiating objectives in a statute and require the President to submit concluded congressional–executive agreements to Congress for final approval. This approach should apply both to the new global climate change agreement being negotiated in the United Nations by the United States and the rest of the international community and to other future arrangements with a smaller number of major emitting nations.
    Keywords: Climate change, global warming, U.S. foreign policy, international affairs, executive agreements, treaties
    Date: 2008–04–15
  9. By: Paul Baer; Clive L Spash (CSIRO Sustainable Ecosystems, Australia)
    Abstract: This paper explores the challenges facing orthodox economic approaches to assessing climate control as if it were appraisal of an investment project. Serious flaws are noted in the work of economists with especial attention to the UK Government report by Stern and colleagues. The opinions expressed in this paper are those of the authors and may not be taken to reflect the views CSIRO or the Australian Government.
    Keywords: enhanced greenhouse effect, global CBA, Stern Report
    JEL: Q51 Q54 Q58 D61 D62 D81 D90
    Date: 2008–05
  10. By: Knut Einar Rosendahl and Halvor Briseid Storrøsten (Statistics Norway)
    Abstract: Allocation of free emissions allowances may distort firms' incentives or have adverse distributional effects. Nevertheless, Böhringer and Lange (2005) show that in a closed emissions trading scheme with a fixed number of firms, a first-best outcome can be achieved if the base year for allocation is continually updated (i.e. updated grandfathering). In this paper we examine whether updated grandfathering alters the entry and exit conditions for firms compared to pure grandfathering, and how the distributional effects are affected. We find that updated grandfathering functions surprisingly similar to pure grandfathering: First, the incentives to entry and exit are identical under the two regimes. Second, the total value of free quotas to existing firms, based on emissions before the system starts, is identical under pure and updated grandfathering. In both cases, higher prices under updated grandfathering exactly match the shorter time period with free allowances. The only difference occurs when there is some combination of auction and pure or updated grandfathering, in which case the total value of free quotas will always be highest under pure grandfathering. Entry and exit incentives are still the same.
    Keywords: Emission trading; Allocation of quotas; Quota prices
    JEL: H21 Q28
    Date: 2008–06
  11. By: Heinz Schandl; Franzi Poldy; Graham M Turner; Thomas G Measham; Daniel Walker; Nina Eisenmenger (CSIRO Sustainable Ecosystems, Australia)
    Abstract: Australia’s export oriented large natural resources sectors of agriculture and mining, the ways in which large scale services such as nutrition, water, housing, transport and mobility, and energy are organized, as well as the consumption patterns of Australia’s wealthy urban households, create a unique pattern of overall resource use in Australia. In an attempt to contribute to a new environmental information system compatible with economic accounts, we represent Australia’s resource use by employing standard biophysical indicators for resource use developed within the OECD context. We are looking at the last three decades of resource use and the economic, social and environmental implications. We also discuss scenarios of future resource use patterns based on a stocks and flows model of the Australian economy. We argue that current extractive economic patterns have contributed to the recent economic boom in Australia but will eventually lead to negative social and environmental outcomes. While there is currently little evidence of political support for changing the economic focus on export-oriented agriculture and mining industries, there is significant potential for improvements in socio-technological systems, and room for more sustainable household consumption.
    Keywords: natural resources, resource use patterns and dynamics, physical accounting, resource productivity, social and environmental impacts of resource use, Australia
    Date: 2008–05
  12. By: Esfahani, H.S.; Pesaran, M.H.
    Abstract: This paper examines the economic transformation of Iran in a global context through the Twentieth Century. At the start of that century, the Iranian economy had long remained stagnant, poor, and largely agrarian, with a marginal role in the world economy. By the turn of 21st century, Iran had transformed into a complex and relatively large economy with a non-negligible impact on many parts of the world. While the initial conditions and the evolution of domestic institutions and resources played major roles in the pace and nature of that transformation, relations with the rest of the world had crucial influences as well. This paper focuses on the latter forces, while taking account of their interactions with domestic factors in shaping the particular form of economic development in Iran. We study the ways in which the development of the Iranian economy has been affected by international price movements and by the ebbs and flows of trade, investment, and economic growth in the rest of the world. In considering these effects, we also analyze the role of domestic political economy factors and policies in enhancing or hindering the ability of domestic producers to respond to external challenges and opportunities.
    Keywords: Development and Growth, Political Economy, Oil Prices and the Iranian Economy.
    JEL: N15 O11 O53
    Date: 2008–03
  13. By: Frédéric Marty (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR6227 - Université de Nice Sophia-Antipolis, OFCE - Observatoire français des conjonctures économiques - FNSP)
    Abstract: The purpose of the paper is to highlight the role of economists in the institutional building of the electric systems in the first part of the twentieth century. It aims at showing how the organization of electricity sector and its regulation were largely the fruits of the economists’ works not only at a theoretical point of view, but also trough their individual commitment in the public regulation building. <br />Economists participate to the electricity sector re-organization by their academic researches and by their intervention in the new legislative framework building or directly in the firms’ management. Both US experience of private regulated firms and French experience of a public-owned monopoly testimony of such commitment.<br />Through these two examples, the communication will aim at putting into relief the dynamics between scholar debates and electricity sector reforms and the links between economic history and history of economic thought. Finally, the purpose will be to highlight to what extent these two historical experiences and the related economics debates can help us in the current European reform.
    Keywords: electricity, regulation, economic theory
    Date: 2008–06–09
  14. By: V. Dordonnat (VU University Amsterdam); S.J. Koopman (VU University Amsterdam); M. Ooms (VU University Amsterdam); A. Dessertaine (Electricité de France, Clamart, France); J. Collet (Electricité de France, Clamart, France)
    Abstract: We present a model for hourly electricity load forecasting based on stochastically time-varying processes that are designed to account for changes in customer behaviour and in utility production efficiencies. The model is periodic: it consists of different equations and different parameters for each hour of the day. Dependence between the equations is introduced by covariances between disturbances that drive the time-varying processes. The equations are estimated simultaneously. Our model consists of components that represent trends, seasons at different levels (yearly, weekly, daily, special days and holidays), short-term dynamics and weather regression effects including nonlinear functions for heating effects. The implementation of our forecasting procedure relies on the multivariate linear Gaussian state space framework and is applied to national French hourly electricity load. The analysis focuses on two hours, 9 AM and 12 AM, but forecasting results are presented for all twenty-four hours. Given the time series length of nine years of hourly observations, many features of our model can be readily estimated including yearly patterns and their time-varying nature. The empirical analysis involves an out-of sample forecasting assessment up to seven days ahead. The one-day ahead forecasts from fourty-eight bivariate models are compared with twenty-four univariate models for all hours of the day. We find that the implied forecasting function strongly depends on the hour of the day.
    Keywords: Kalman filter; Maximum likelihood estimation; Seemingly Unrelated Regression Equations; Unobserved Components; Time varying parameters; Heating effect
    JEL: C22 C32 C52 C53
    Date: 2008–01–17
  15. By: Suzi Kerr (Motu Economic and Public Policy Research); Andrew Sweet;
    Abstract: No country has previously attempted to include either agriculture or forestry in an emissions trading system. The New Zealand government is planning to include both. This paper describes how they plan to do it, what some of the critical issues have been and some of the outstanding challenges. If New Zealand can resolve these issues and so can create a strong system, this could create a precedent for many others. Policy development is actively progressing as this paper is written. This paper does not definitively cover the issues but records our thinking at a moment in time and provides a framework for more in-depth analysis.
    Keywords: Emissions trading, New Zealand, agriculture, public policy
    JEL: Q54 Q58
    Date: 2008–02
  16. By: Koji Miyawaki (Graduate School of Economics, University of Tokyo); Yasuihro Omori (Faculty of Economics, University of Tokyo); Akira Hibiki (cNational Institute for Environmental Studies and Department of Social Engineering, Tokyo Institute of Technology)
    Abstract: This article proposes a Bayesian estimation method of demand functions under block rate pricing, focusing on increasing one. Under this pricing structure, price changes when consumption exceeds a certain threshold and the consumer faces a utility maximization problem subject to a piecewise-linear budget constraint. We apply the so-called discrete/continuous choice approach to derive the corresponding demand function. Taking a hierarchical Bayesian approach, we implement a Markov chain Monte Carlo simulation to estimate the demand function. Moreover, a separability condition is explicitly considered to obtain proper estimates. We find, however, that the convergence of the distribution of simulated samples to the posterior distribution is slow, requiring an additional scale transformation step for parameters to the Gibbs sampler. The model is also extended to allow random coefficients for panel data and spatial correlation for spatial data. These proposed methods are applied to estimate the Japanese residential water and electricity demand function.
    Date: 2008–06

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