nep-ene New Economics Papers
on Energy Economics
Issue of 2008‒09‒20
thirteen papers chosen by
Roger Fouquet
Imperial College, UK

  1. Delayed Participation of Developing Countries to Climate Agreements: Should Action in the EU and US be Postponed? By Carlo Carraro; Valentina Bosetti; Alessandra Sgobbi; Massimo Tavoni
  2. A semiparametric factor model for electricity forward curve dynamics By Borak, Szymon; Weron, Rafal
  3. Delayed Action and Uncertain Targets. How Much Will Climate Policy Cost? By Carlo Carraro; Valentina Bosetti; Alessandra Sgobbi; Massimo Tavoni
  4. Measuring Tax Incidence: A Natural Experiment in the Hybrid Vehicle Market By Melissa Boyle; Victor Matheson
  5. Heavy-tails and regime-switching in electricity prices By Weron, Rafal
  6. Forecasting spot electricity prices: A comparison of parametric and semiparametric time series models By Weron, Rafal; Misiorek, Adam
  7. A Theoretical Model for the Extraction and Refinement of Natural Resources By Antonio Roma; Davide Pirino
  8. Productivity Dispersion across Plants, Emission Abatement, and Environmental Policy By Li, Zhe
  9. A Dynamic Analysis of Human Welfare in a Warming Planet By Humberto Llavador; John E. Roemer; Joaquim Silvestre
  10. Volatility transmission and volatility impulse response functions in European electricity forward markets By Yannick LE PEN; Benoît SEVI
  11. WP n. 17 - MIncreasing Market Interconnection: an analysis of the Italian Electricity Spot Market By Federico Boffa; Viswanath Pingali
  12. Monocentric analysis of restricting the budget share of housing alone or with transportation By Nicolas Coulombel
  13. Tradeoffs among Free-flow Speed, Capacity, Cost, and Environmental Footprint in Highway Design By Chen Feng Ng; Kenneth Small

  1. By: Carlo Carraro (Department of Economics, University Of Venice Cà Foscari); Valentina Bosetti (Fondazione Eni Enrico Mattei and CMCC); Alessandra Sgobbi (Fondazione Eni Enrico Mattei and CMCC); Massimo Tavoni (Fondazione Eni Enrico Mattei, Catholic University of Milan and CMCC)
    Abstract: This paper analyses the cost implications for climate policy in developed countries if developing countries are unwilling to adopt measures to reduce their own GHG emissions. First, we assume that a 450 CO2 (550 CO2e) ppmv stabilisation target is to be achieved and that Non Annex1 (NA1) countries decide to delay their GHG emission reductions by 30 years. What would be the cost difference between this scenario and a case in which both developed and developing countries start reducing their emissions at the same time? Then, we look at a scenario in which the timing of developing countries’ participation is uncertain and again we compute the costs of climate policy in developed and developing countries. We find that delayed participation of NA1 countries has a negative impact on climate policy costs. Economic inefficiencies can be as large as 10-25 TlnUSD. However, this additional cost wanes when developing countries are allowed to trade emission reductions from their baseline emission paths during the 30-year delay period. Thus, irrespective of whether NA1 countries are immediately assigned an emission reduction target or not, they should nonetheless be included in a global carbon market. Technology deployment is also affected by the timing of developing countries’ mitigation measures. Delayed NA1-country participation in a climate agreement would scale down the deployment of coal with CCS throughout the century. On the other hand, innovation in the form of energy R&D investments would be positively affected, since it would become crucial in developed countries. Finally, uncertainty about the timing of NA1-country participation does not modify the optimal abatement strategy for developed countries and does not alter policy costs as long as a global carbon market is in place.
    Keywords: Delayed Action, Climate Policy, Stabilisation Costs, Uncertain Participation
    JEL: C72 H23 Q25 Q28
    Date: 2007
  2. By: Borak, Szymon; Weron, Rafal
    Abstract: In this paper we introduce the dynamic semiparametric factor model (DSFM) for electricity forward curves. The biggest advantage of our approach is that it not only leads to smooth, seasonal forward curves extracted from exchange traded futures and forward electricity contracts, but also to a parsimonious factor representation of the curve. Using closing prices from the Nordic power market Nord Pool we provide empirical evidence that the DSFM is an efficient tool for approximating forward curve dynamics.
    Keywords: power market; forward electricity curve; dynamic semiparametric factor model
    JEL: C51 Q40 G13
    Date: 2008–07–10
  3. By: Carlo Carraro (Department of Economics, University Of Venice Cà Foscari); Valentina Bosetti (Fondazione Eni Enrico Mattei and CMCC); Alessandra Sgobbi (Fondazione Eni Enrico Mattei and CMCC); Massimo Tavoni (Fondazione Eni Enrico Mattei, Catholic University of Milan and CMCC)
    Abstract: Despite the growing concern about actual on-going climate change, there is little consensus about the scale and timing of actions needed to stabilise the concentrations of greenhouse gases. Many countries are unwilling to implement effective mitigation strategies, at least in the short-term, and no agreement on an ambitious global stabilisation target has yet been reached. It is thus likely that some, if not all countries, will delay the adoption of effective climate policies. This delay will affect the cost of future policy measures that will be required to abate an even larger amount of emissions. What additional economic cost of mitigation measures will this delay imply? At the same time, the uncertainty surrounding the global stabilisation target to be achieved crucially affects short-term investment and policy decisions. What will this uncertainty cost? Is there a hedging strategy that decision makers can adopt to cope with delayed action and uncertain targets? This paper addresses these questions by quantifying the economic implications of delayed mitigation action, and by computing the optimal abatement strategy in the presence of uncertainty about a global stabilisation target (which will be agreed upon in future climate negotiations). Results point to short-term inaction as the key determinant for the economic costs of ambitious climate policies. They also indicate that there is an effective hedging strategy that could minimise the cost of climate policy under uncertainty, and that a short-term moderate climate policy would be a good strategy to reduce the costs of delayed action and to cope with uncertainty about the outcome of future climate negotiations. By contrast, an insufficient short-term effort significantly increases the costs of compliance in the long-term.
    Keywords: Uncertainty, Climate Policy, Stabilisation Costs, Delayed Action
    JEL: C72 H23 Q25 Q28
    Date: 2007
  4. By: Melissa Boyle (Department of Economics, College of the Holy Cross); Victor Matheson (Department of Economics, College of the Holy Cross)
    Abstract: This study measures the economic incidence of the hybrid vehicle tax credit implemented in the Energy Policy Act of 2005. By comparing hybrids to gasoline-powered counterparts as the credit is phased out and expires, we are able to isolate the impact of the credit on the market price of hybrid vehicles. We conclude that hybrid prices increase by $0.75 on average for every additional dollar of credit. Thus, the majority of the subsidy accrues to manufacturers, potentially encouraging producers to increase the variety and availability of hybrid models on the market.
    Keywords: Automobiles, tax incidence, hybrids, taxation
    JEL: H22 L62 Q48 Q53
    Date: 2008–09
  5. By: Weron, Rafal
    Abstract: In this paper we first analyze the stylized facts of electricity prices, in particular, the extreme volatility and price spikes which lead to heavy-tailed distributions of price changes. Then we calibrate Markov regime-switching (MRS) models with heavy-tailed components and show that they adequately address the aforementioned characteristics. Contrary to the common belief that electricity price models ‘should be built on log-prices’, we find evidence that modeling the prices themselves is more beneficial and methodologically sound, at least in case of MRS models.
    Keywords: Electricity spot price; Heavy-tails; Spikes; Markov regime-switching; Pareto distribution
    JEL: C51 Q40
    Date: 2008–05–09
  6. By: Weron, Rafal; Misiorek, Adam
    Abstract: This empirical paper compares the accuracy of 12 time series methods for short-term (day-ahead) spot price forecasting in auction-type electricity markets. The methods considered include standard autoregression (AR) models, their extensions – spike preprocessed, threshold and semiparametric autoregressions (i.e. AR models with nonparametric innovations), as well as, mean-reverting jump diffusions. The methods are compared using a time series of hourly spot prices and system-wide loads for California and a series of hourly spot prices and air temperatures for the Nordic market. We find evidence that (i) models with system load as the exogenous variable generally perform better than pure price models, while this is not necessarily the case when air temperature is considered as the exogenous variable, and that (ii) semiparametric models generally lead to better point and interval forecasts than their competitors, more importantly, they have the potential to perform well under diverse market conditions.
    Keywords: Electricity market; Price forecast; Autoregressive model; Nonparametric maximum likelihood; Interval forecast; Conditional coverage.
    JEL: C53 C22 Q40
    Date: 2008–06–10
  7. By: Antonio Roma; Davide Pirino
    Abstract: The modelling of production in microeconomics has been the subject of heated debate. The controversial issues include the substitutability between production inputs, the role of time and the economic consequences of irreversibility in the production process. A case in point is the use of Cobb-Douglas type production functions. This approach completely ignores the physical process underlying the production of a good. We examine these issues in the context of the production of a basic commodity (such as copper or aluminium). We model the extraction and the refinement of a valuable substance which is mixed with waste material, in a way which is fully consistent with the physical constraints of the process. The resulting analytical description of production unambiguously reveals that perfect substitutability between production inputs fails if a corrected thermodynamic approach is used. We analyze the equilibrium pricing of a commodity extracted in an irreversible way. The thermodynamic model allows for the calculation of the ”energy yield” (energy return on energy invested) of production alongside a financial (real) return in a two-period investment decision. The two investment criteria correspond in our economy to a different choice of numeraire and means of payment and corresponding views of the value of energy resources. Under an energy numeraire, energy resources will naturally be used in a more parsimonious way
    JEL: D24 E42 O13
    Date: 2008–08
  8. By: Li, Zhe
    Abstract: Empirical studies suggest systematic relationships between plant’s productivity and plant’s emissions and emission-abatement costs. This paper demonstrates that productivity dispersion across plants is an important factor that influences the transmission of environmental policy. Within a general equilibrium framework, I model heterogeneous polluting plants by allowing them to be differing in productivity and to choose optimally a discrete emission-reduction technology taking into account both the costs of reducing emissions and the competition in the goods market. An emission-reduction policy affects the distribution of plants with the advanced abatement technology and relocates resources and market shares across plants. As a result, the aggregate effects of an environmental policy depend on the degree of productivity dispersion. Using Canadian data, I show quantitatively that the aggregate effects of an environmental policy significantly affected by the degree of productivity dispersion both in the transition periods and in the long-run steady-state equilibrium.
    JEL: Q52 E00 Q58
    Date: 2008–09–14
  9. By: Humberto Llavador; John E. Roemer; Joaquim Silvestre
    Abstract: Anthropogenic greenhouse gas (GHG) emissions have caused atmospheric concentrations with no precedents in the last half a million years, inducing serious uncertainties about future climates and their effects on human welfare. Recent climate science supports the view that the climate stabilization will require very low GHG emissions in the future. We ask: Is a path of low emissions compatible with sustainable levels of human welfare? With steady growth in human quality of life? Addressing these questions requires both defining welfare criteria and empirically estimating the possible paths of the economy. We specify and calibrate a dynamic model with four intertemporal links: education, physical capital, knowledge and the environment. In line with Nordhaus (2008a) and with the Stern Review (2007), we assume that GHG emissions allow increased production, while a higher stock of atmospheric carbon decreases production. Our index of human welfare, which we call quality of life (QuoL), emphasizes education, knowledge, and the environment, affected by greenhouse gas emissions, in addition to consumption and leisure. Thus, we avoid a Consumptionist Fallacy – that welfare depends only on commodity consumption and perhaps leisure. We reject discounted utilitarianism as a normative criterion, and consider two alternatives. The first is an intergenerational maximin criterion, which maximizes the quality of life of the first generation subject to maintaining at least that level for all successive generations. The second is human development optimization, that seeks the maximization of the QuoL of the first generation subject to achieving a given, constant rate of growth in all subsequent generations. Hence, our analysis focuses on a human notion of sustainability, as opposed to the conventional “green” sustainability, limited to keeping the quality of the environment constant. Because our dynamic optimization programs defy explicit analytical solutions, our approach has been computational. As a benchmark, we consider a simple model with physical and human capital, for which we prove a turnpike theorem. We then devise a computational algorithm inspired by the turnpike property to construct feasible, although not necessarily optimal, paths in the more complex and realistic model. Our analysis indicates that, with GHG emission paths entailing very low emissions in the future, positive rates of growth in QuoL are possible while the first generation experiences a QuoL higher than the historical reference level. We also observe a tradeoff between the quality of life of the first generation and the rate of growth in the quality of life. Yet Generation 1’s sacrifice for the sake of a higher growth rate appears to be small. The paths that we compute involve investments in knowledge at noticeably higher levels than in the past.
    Keywords: Quality of life, climate change, education, maximin, growth
    JEL: D63 O40 O41 Q50 Q54 Q56
    Date: 2008–09
  10. By: Yannick LE PEN; Benoît SEVI
    Abstract: Using daily data from March 2001 to June 2005, we estimate a VAR-BEKK model and find evidence of return and volatility spillovers between the German, the Dutch and the British forward electricity markets. We apply Hafner and Herwartz [2006, Journal of International Money and Finance 25, 719-740] Volatility Impulse Response Function(VIRF) to quantify the impact of shock on expected conditional volatility. We observe that a shock has a high positive impact only if its size is large compared to the current level of volatility. The impact of shocks are usually not persistent, which may be an indication of market efficiency. Finally, we estimate the density of the VIRF at different forecast horizon. These fitted distributions are asymmetric and show that extreme events are possible even if their probability is low. These results have interesting implications for market participants whose risk management policy is based on option prices which themselves depend on the volatility level.
    Keywords: volatility impulse response function, GARCH, non Gaussian distributions, electricity market, forward markets
    JEL: C3 G1 Q43
    Date: 2008
  11. By: Federico Boffa; Viswanath Pingali (School of Economics and Management, Free University of Bolzano, Cornerstone Research-Boston)
    Abstract: <p>We estimate the bene ts resulting from completely interconnecting the Italian electricity spot market. The market is currently divided into two geographic zones - North and South - with limited interzonal transmission capacity that often induces congestion, and hence potential inefficiency. By simulating a fully interconnected market for May 2004, we predict that the total spot market expenditure reduces substantially by almost four percent. Our analysis finds evidence that the (partly State owned) major firm in the market does not currently maximize its short-term profit, and would benefit as well from improved interconnection.</p>
    Keywords: Transmission constraints,self-regulated monopoly,zonal pricing,congestion
    JEL: O1 O11
    Date: 2008–06
  12. By: Nicolas Coulombel (LVMT - Laboratoire Ville, Mobilité, Transports - INRETS - Université Paris-Est - Ecole Nationale des Ponts et Chaussées)
    Abstract: Considering the prolonged rise of energy price and the still elevated housing prices, the policy to limit the share of housing expenses in the households’ budget, so as to secure their solvability, has been criticized. Supposedly, it induces people to get farther from the city center in search for cheaper housing prices, but with subsequent increased transportation costs that are often disregarded during the house search process. Therefore, to improve the well-being of households, it has been advocated to set a constraint on the share of both housing and transportation expenditure. The paper is purported to analyze and compare the effects of the two policies in terms of: 1. Well-being of the households; 2. Land-use: city size and density curve; 3. Solvability of the households; 4. Transportation costs. The analysis is carried out within the classical monocentric model of urban economics. After setting a general analysis, an applied model is specified to capture the effects of each policy in straightforward formulae. It is shown that constraining housing expenses may increase the well-being of households. Besides, both policies prove effective in reducing urban sprawl and hereby energy consumption. Thus the choice of the optimal policy will depend on the local authority’s objectives.
    Keywords: monocentric model, urban economics, housing expenses, transportation expenses, housing policy
    Date: 2008–08–31
  13. By: Chen Feng Ng (Department of Economics, California State University at Long Beach); Kenneth Small (Department of Economics, University of California-Irvine)
    Abstract: This paper investigates differentiated design standards as a source of capacity additions that are more affordable and have smaller aesthetic and environmental impacts than expressways. We consider several tradeoffs, including narrow versus wide lanes and shoulders on an expressway of a given total width, and high-speed expressway versus lower-speed arterial. We quantify the situations in which off-peak traffic is sufficiently great to make it worthwhile to spend more on construction, or to give up some capacity, in order to provide very high off-peak speeds even if peak speeds are limited by congestion. We also consider the implications of differing accident rates. The results support expanding the range of highway designs that are considered when adding capacity to ameliorate urban road congestion.
    Keywords: Highway design; Capacity; Free-flow speed; Parkway
    JEL: L91 R42
    Date: 2008–08

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