nep-ene New Economics Papers
on Energy Economics
Issue of 2008‒06‒27
nine papers chosen by
Roger Fouquet
Imperial College, UK

  1. Why Catalonia will see its energy metabolism increase in the near future: an application of MuSIASEM By Jesús Ramos Martín; S. Cañellas-Bolta
  2. Time-Varying Effects of Oil Supply Shocks on the US Economy By C. BAUMEISTER; G. PEERSMAN
  3. Optimal CO2 abatement and technological change. Should emission taxes start high in order to spur R&D? By Mads Greaker and Lise-Lotte Pade
  4. Energy Tax Incentives and the Alternative Minimum Tax By Curtis Carlson; Gilbert E. Metcalf
  5. Lessons from the South African Electricity Crisis By Kate Bayliss
  6. Market Power in Power Markets: Evidence from Forward Prices of Electricity By Bent Jesper Christensen; Thomas Elgaard Jensen; Rune Mølgaard
  7. A Vector Autoregressive Model for Electricity Prices Subject to Long Memory and Regime Switching By Niels Haldrup; Frank S. Nielsen; Morten Ørregaard Nielsen
  8. A Comparison of Results From MRIO and Interregional Computable General Equilibrium (CGE) Analyses of the Impacts of a Positive Demand Shock on the ‘CO2 Trade Balance’ Between Scotland and the Rest of the UK By Michelle Gilmartin; Kim Swales; Karen Turner
  9. The Design of Permit Schemes and Environmental Innovation By Grischa Perino

  1. By: Jesús Ramos Martín (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona); S. Cañellas-Bolta (Consell Assessor per al Desenvolupament Sostenible, Generalitat de Catalunya)
    Abstract: This paper applies the so-called Multi-Scale Integrated Analysis of Societal and Ecosystem Metabolism (MuSIASEM) to the economy of the Spanish region of Catalonia. By applying Georgescu-Roegen’s fund-flow model, it arrives at the conclusion that within a context of the end of cheap oil, the current development model based on the growth of low productivity sectors such as services and construction must change. The change is needed not only because of the increasing scarcity of affordable energy carriers, or because of the increasing environmental impact that the present development represents, but also because of an ageing population that demands labour productivity gains. This will imply industry requiring more energy consumption per worker in order to increase its productivity, and therefore its competitiveness. Thus, we conclude that energy intensity, and exosomatic energy metabolism of Catalonia will increase dramatically in the near future unless major conservation efforts are implemented in both the household and transport sectors.
    Keywords: Catalonia, exosomatic energy, energy metabolism, economic development, hierarchical levels, multi-scale, integrated analysis
    JEL: O11 O13 O52 Q01 Q57 Q58
    Date: 2008–06
    Abstract: Using a Time-Varying Parameters Bayesian Vector Autoregression model, we investigate how the dynamic effects of oil supply shocks on the US economy have changed over time. In contrast to previous studies, we identify oil supply shocks with sign restrictions which are derived from a simple supply and demand model of the global oil market. First, we find a remarkable structural change in the oil market itself, i.e. a typical oil supply shock is characterized by a much smaller impact on world oil production and a greater effect on the real price of crude oil over time. A steepening of the oil demand curve is the only possible explanation for this stylized fact. Accordingly, similar physical disturbances in oil production now have a significantly higher leverage effect on oil prices resulting in a stronger impact on real GDP and consumer prices. Second, we document that the contribution of oil supply shocks to fluctuations in the real price of oil has decreased considerably over time, implying that current oil price fluctuations are more demand driven. Third, oil supply disturbances seem to have played a significant but non-exclusive role in the 1974/75 and early 1990s recessions but were of minor importance in the 1980/81 and millennium slowdowns. Finally, while oil supply shocks explain little of the "Great Inflation", their relative importance for CPI inflation variability has somewhat increased over time.
    Keywords: Oil prices, vector auto regressions, time-varying coefficients
    JEL: E31 E32 Q43
    Date: 2008–04
  3. By: Mads Greaker and Lise-Lotte Pade (Statistics Norway)
    Abstract: Many European politicians argue that since technological development is needed to solve the climate problem, the EU should take the lead and set tougher emission targets than what is required by the Kyoto protocol. Moreover, emission trading with other countries outside EU should be limited so as to keep emission quota prices high. However, the policy of spurring R&D by setting high emission taxes today is not suggested by the literature on climate change and R&D. In this paper we investigate this result further by modeling innovation activity explicitly. In our model both the amount of R&D and the amount of CO2 abatement are decided in a decentralized way by the market as a response to an emission tax. Moreover, we introduce three distinct failures in the market for new innovations; monopolistic pricing behavior, insufficient patent protection and dynamic knowledge spillovers. Our findings suggest that governments should under some circumstances set a higher carbon tax today if we have technological change driven by R&D than if we have pure exogenous technological change. Based on numerical simulations these circumstances are i) "a standing on shoulders" type of externality in R&D or ii) weak patent protection.
    Keywords: Climate policy; technological change; emission tax
    JEL: Q28 D21 C68
    Date: 2008–06
  4. By: Curtis Carlson; Gilbert E. Metcalf
    Abstract: We take a first look at limitations on the use of energy-related tax credits contained in the General Business Credit (GBC) due to limitations within the regular corporate income tax as well as the AMT. Between 2000 and 2005, firms were unable to use all energy-related tax credits due to GBC limitations in the regular tax. The AMT has a smaller but still pronounced impact on the ability of firms to use these credits. Finally, we provide some illustrative calculations to demonstrate how the AMT can lead to very different levelized costs of producing electricity from a wind power project.
    JEL: H20 H23 Q48
    Date: 2008–06
  5. By: Kate Bayliss (Independent Consultant, Brighton, United Kingdom)
    Abstract: South Africa is suffering an electricity crisis. Blackouts have been widespread and the impact disastrous. Electricity supply is predicted to constrain growth for at least the next five years. How could this have occurred when until recently South Africa had a surplus of cheap electricity? This One Pager explores the causes. (...)
    Keywords: Lessons from the South African Electricity Crisis
    Date: 2008–06
  6. By: Bent Jesper Christensen; Thomas Elgaard Jensen; Rune Mølgaard (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: We examine the forward market for electricity for indications of misuse of market power, using a unique data set on OTC price indications posted by Elsam A/S, the dominant producer in Western Denmark, which is one of the price areas under the Nordic power exchange Nord Pool. The Danish Competition Council (the regulatory government agency) has ruled that Elsam has used its dominant position to obtain excessive spot prices over a period from July 2003 through December 2006. We show that significant forward premia exist, and that they are related both to spot market volatility and misuse of market power in the spot market, indicating that misuse of market power in the forward market accompanied that which took place in the spot market, according to this ruling. This is consistent with the hypothesis that Elsam used the forward market to disguise its spot market manipulation. The findings are consistent across forward premium regressions and structural forward pricing models.
    Keywords: Electricity, forward prices, market power
    JEL: G13 L12
    Date: 2007–10–26
  7. By: Niels Haldrup; Frank S. Nielsen; Morten Ørregaard Nielsen (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: A regime dependent VAR model is suggested that allows long memory (fractional integration) in each of the regime states as well as the possibility of fractional cointegra- tion. The model is relevant in describing the price dynamics of electricity prices where the transmission of power is subject to occasional congestion periods. For a system of bilat- eral prices non-congestion means that electricity prices are identical whereas congestion makes prices depart. Hence, the joint price dynamics implies switching between essen- tially a univariate price process under non-congestion and a bivariate price process under congestion. At the same time it is an empirical regularity that electricity prices tend to show a high degree of fractional integration, and thus that prices may be fractionally cointegrated. An empirical analysis using Nord Pool data shows that even though the prices strongly co-move under non-congestion, the prices are not, in general, fractional cointegrated in the congestion state.
    Keywords: Cointegration, electricity prices, fractional integration, long memory, Markov switching
    JEL: C32
    Date: 2007–10–03
  8. By: Michelle Gilmartin (Department of Economics, University of Strathclyde); Kim Swales (Department of Economics, University of Strathclyde); Karen Turner (Department of Economics, University of Strathclyde)
    Abstract: In previous work we have applied the environmental multi-region input-output (MRIO) method proposed by Turner et al (2007) to examine the ‘CO2 trade balance’ between Scotland and the Rest of the UK. In McGregor et al (2008) we construct an interregional economy-environment input-output (IO) and social accounting matrix (SAM) framework that allows us to investigate methods of attributing responsibility for pollution generation in the UK at the regional level. This facilitates analysis of the nature and significance of environmental spillovers and the existence of an environmental ‘trade balance’ between regions. While the existence of significant data problems mean that the quantitative results of this study should be regarded as provisional, we argue that the use of such a framework allows us to begin to consider questions such as the extent to which a devolved authority like the Scottish Parliament can and should be responsible for contributing to national targets for reductions in emissions levels (e.g. the UK commitment to the Kyoto Protocol) when it is limited in the way it can control emissions, particularly with respect to changes in demand elsewhere in the UK. However, while such analysis is useful in terms of accounting for pollution flows in the single time period that the accounts relate to, it is limited when the focus is on modelling the impacts of any marginal change in activity. This is because a conventional demand-driven IO model assumes an entirely passive supply-side in the economy (i.e. all supply is infinitely elastic) and is further restricted by the assumption of universal Leontief (fixed proportions) technology implied by the use of the A and multiplier matrices. In this paper we argue that where analysis of marginal changes in activity is required, a more flexible interregional computable general equilibrium approach that models behavioural relationships in a more realistic and theory-consistent manner, is more appropriate and informative. To illustrate our analysis, we compare the results of introducing a positive demand stimulus in the UK economy using both IO and CGE interregional models of Scotland and the rest of the UK. In the case of the latter, we demonstrate how more theory consistent modelling of both demand and supply side behaviour at the regional and national levels affect model results, including the impact on the interregional CO2 ‘trade balance’.
    Keywords: CGE modelling, MRIO, CO2 trade balance, environmental responsibility
    JEL: D57 D58 R15 Q56
    Date: 2008–06
  9. By: Grischa Perino (University of Heidelberg, Department of Economics)
    Abstract: Most real world emission permit schemes are in effect hybrid instruments that feature both quantity and price controls. While the effects of price bounds are well understood for issues such as uncertain abatement costs it has not been investigated how such bounds affect time-consistency of environmental regulation and research incentives. The present paper analyzes these issues for two types of innovation. While price bounds increase static efficiency they reduce incentives to innovate. Commitment on details of a scheme’s design might be necessary to avoid the latter.
    Keywords: Environmental Regulation, Hybrid Instruments, Innovation, Time-inconsistency
    JEL: Q55 H23 O33 L51
    Date: 2008–06

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