nep-ene New Economics Papers
on Energy Economics
Issue of 2009‒07‒11
twenty-six papers chosen by
Roger Fouquet
Basque Climate Change Centre, Bilbao, Spain

  1. Interfuel Substitution: A Meta-Analysis By David I. Stern
  2. How the European Union is preparing the 'Third Industrial Revolution' with an innovative energy policy By Andris Piebalgs
  3. The New Technologies: An Integrated view, July, 1986 By Carlota Perez
  4. Predicting Market Power in Wholesale Electricity Markets By David Newbery
  5. Regulating Networks in the New Economy By Jean-Michel Glachant
  6. Electricity Retailing in Norway By Nils-Henrik M. Von Der Fehr; Petter Vegard Hansen
  7. Long-term Energy Supply Contracts in European Competition Policy: Fuzzy not Crazy By Jean-Michel Glachant; Adrien de Hauteclocque
  8. Estimation of Elasticity Price of Electricity with Incomplete Information By Xavier Labandeira Villot; José María Labeaga; Xiral López-Otero
  9. Energy Community for South East Europe: Rationale behind and Implementation to date By Rozeta Karova
  10. Market liberalization in the European Natural Gas Market The importance of capacity constraints and efficiency differences By Steven Brakman; Charles van Marrewijk; Arjen van Witteloostuijn
  11. Growth with imported resources: On the sustainability of U.S. growth and foreign debt By Ziesemer, Thomas
  12. Oil Price Shocks and Their Short- and Long-Term Effects on the Chinese Economy By Weiqi Tang; Libo Wu; ZhongXiang Zhang
  13. Real Exchange Rate, Output and Oil: Case of Four Large Energy Producers By Korhonen, Iikka; Mehrotra, Aaron
  14. More on the energy / non-energy commodity price link By Baffes, John
  15. Biomass Supply for Biofuel Production: Estimates for the United States and Canada By Kumarappan, Subbu; Joshi, Satish; MacLean, Heather
  16. Impacts of Selected US Ethanol Policy Options By Meyer, Seth; Westhoff, Pat; Thompson, Wyatt
  17. Joint water quantity/quality management analysis in a biofuel production area: Using an integrated economic-hydrologic model By de Moraes, Marcia Maria Guedes Alcoforado; Cai, Ximing; Ringler, Claudia; Albuquerque, Bruno Edson; da Rocha, Sérgio P. Vieira; Amorim, Carlos Alberto
  18. The Effects of Biofuels Policies on Global Commodity Trade Flows By Fridfinnson, Brooke; Rude, James
  19. How do improvements in labour productivity in the Scottish economy affect the UK position on the Environmental Kuznets Curve? By Karen Turner; Nick Hanley
  20. The EU's Emissions Trading Scheme: A Proto-Type Global System? By Denny Ellerman
  21. Green House Gases and Carbon Trading By Massey, Ray
  22. An Economic and Environmental Assessment of Carbon Capture and Storage (CCS) Power Plants – A Case Study for the City of Kiel By Sören Lindner; Sonja Peterson; Wilhelm Windhorst
  23. The Incentives to Participate in and the Stability of International Climate Coalitions: A Game-Theoretic Approach Using the WITCH Model By Valentina Bossetti; Carlo Carraro; Enrica De Cian; Romain Duval; Emanuele Massetti; Massimo Tavoni
  24. Economics of Managing Green House Gasses In Agriculture (PowerPoint) By Gustafson, Cole R.
  25. Cooperation in transboundary water sharing under climate change By Bhaduri, Anik; Manna, Utpal; Barbier, Edward; Liebe, Jens
  26. Cost Containment in Climate Change Policy: Alternative Approaches to Mitigating Price Volatility By Gilbert E. Metcalf

  1. By: David I. Stern
    Abstract: Interfuel substitutability has been of longstanding interest to the energy economics and policy community. However, no quantitative meta-analysis has yet been carried out of this literature. This paper fills this gap by analyzing a broad sample of studies of interfuel substitution in the industrial sector, manufacturing industry or subindustries, or macro-economy of a variety of both developed and developing economies. Publication bias is controlled for by including the primary study sample size in the meta-regression. Results for the shadow elasticities of substitution between coal, oil, gas, and electricity for forty-six primary studies show that at the level of the industrial sector there are easy substitution possibilities between all the fuel pairs with the exception of gas-electricity and coal-electricity. Substitution possibilities seem more constrained at the macro level and less constrained in sub-industries. Estimates also vary across countries and there seems to be less substitutability in more developed economies. Publication bias does not seem to be present, but model and data specification issues very significantly affect the estimates derived by each individual study. Estimates from cross-section regressions are generally largest, fixed effects panel estimates intermediate in magnitude, and time-series estimates are mostly much smaller. Econometric research suggests that the fixed effects estimates are likely the best among the existing studies, though biased downwards.
    Keywords: Meta-analysis, energy, substitution, elasticity, interfuel
    JEL: D24 Q40
    Date: 2009
  2. By: Andris Piebalgs
    Abstract: It is clear that we are at the beginning of what has correctly been called the 'third industrial revolution' - the rapid development of an entirely new energy system. We can expect a massive shift towards a carbon-free electricity system, huge pressure to reduce energy consumption and transport on the basis of renewable electricity. To make this shift in a manner that maintains, and in fact increases the EU's competitiveness, means that stimulating rapid technological development in these areas has to be a central part of the EU's energy policy. Indeed, this is at the heart of the question: how can the EU turn the challenges of climate change and energy security into an opportunity?
    Keywords: energy policy; electricity; electricity
    Date: 2009–03–15
  3. By: Carlota Perez
    Abstract: This paper is an English translation, by the author herself, of a paper that until now has only been published in Spanish. The editors of this working paper series are of the opinion that the paper - although written 24 years ago - represents such an important element in the writings of Carlota Perez that it should be made available also to the English-speaking research community. The paper presents an early notion of a techno-economic paradigm and - although internet was years away from being available - it is indeed an outline of the paradigm we presently live in. Many of the issues raised here, like alternative sources of energy and biotechnology, are still with us today, and many of the predictions have proved to be based on accurate perceptions.
    Date: 2009–01
  4. By: David Newbery
    Abstract: The traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship.
    Keywords: energy policy; electricity; electricity
    Date: 2009–02–15
  5. By: Jean-Michel Glachant
    Abstract: The regulation of network industries has undergone profound transformation in the past twenty years. The regulated industry is no longer the same, being exposed to new competitive dynamics having revolutionized their industrial framework, technology and interactions with users. There also have been fundamental changes in what regulation is feasible. In an information society a model devised in the 19th century to set prices for monopoly infrastructures such as bridges, roads and railways no longer captures the essential: the interactive dynamics created by technologies, uses, and markets.
    Keywords: energy policy; regulation
    Date: 2009–02–15
  6. By: Nils-Henrik M. Von Der Fehr; Petter Vegard Hansen
    Abstract: We analyse retailer and household behaviour on the Norwegian electricity market, based on detailed information on prices and other market characteristics. We find that there exists a competitive market segment where a number of retailers compete fiercely for customers, with small margins on all products. However, we also find evidence of monopolistic behaviour, whereby retailers exploit the passivity of some of their customers. We discuss explanations for these results, as well as means to improve market performance.
    Keywords: energy policy; electricity; electricity; Norway
    Date: 2009–02–15
  7. By: Jean-Michel Glachant; Adrien de Hauteclocque
    Abstract: Long-term supply contracts often have ambiguous effects on the competitive structure, investment and consumer welfare in the long term. In a context of market building, these effects are likely to be worsened and thus even harder to assess. Since liberalization and especially since the release of the Energy Sector Enquiry in early 2007, the portfolio of long-term supply contracts of the former incumbents have become a priority for review by the European Commission and the national competition authorities. It is widely believed that European Competition authorities take a dogmatic view on these contracts and systemically emphasize the risk of foreclosure over their positive effects on investment and operation. This paper depicts the methodology that has emerged in the recent line of cases and argues that this interpretation is largely misguided. It shows that a multiple-step approach is used to reduce regulation costs and balance anti-competitive effects with potential efficiency gains. However, if an economic approach is now clearly implemented, competition policy is constrained by the procedural aspect of the legal process and the remedies imposed remain open for discussion.
    Keywords: energy policy; competition policy
    Date: 2009–02–15
  8. By: Xavier Labandeira Villot; José María Labeaga; Xiral López-Otero
    Abstract: The sharp increase in energy prices and the growing concern for environmental issues, among other things, are behind the renewed interest in energy demand estimation. However, there is very little academic literature that takes account of the usual situation of energy suppliers: high quality but incomplete data. In this paper, we propose a useful and rather simple instrument for estimating electricity demand with incomplete or/and imperfect data available to suppliers. In particular, using real data of expenditure and consumption of electricity, we employ a model of random effects for panel data in order to estimate residential and industrial electricity demand in Spain.
    Date: 2009–06
  9. By: Rozeta Karova
    Abstract: The European Commission and the Stability Pact have launched the Athens Process in 2002 and the Energy Community Treaty, with the objective of creating a regional energy market in SEE, was signed in 2005. The purpose of this paper is to give an overview of the national but also reforms at regional level in the electricity systems in SEE, but also to underline the open questions with regard to the areas in which reforms are not complete and progress is still needed. The focus of the paper will be put on the implementation of the Energy Community Treaty covering its most relevant aspects. It does not aim however, to provide a detailed comparative analysis of the electricity systems in all nine countries from SEE, neither to study one specific issue. Therefore, real conclusions will not be drawn at the end, but rather questions for further research will be left open.
    Keywords: electricity; electricity; energy policy
    Date: 2009–03–15
  10. By: Steven Brakman; Charles van Marrewijk; Arjen van Witteloostuijn
    Abstract: In the European Union, energy markets are increasingly being liberalized. A case in point is the European natural gas industry. The general expectation is that more competition will lead to lower prices and higher volumes, and hence higher welfare. This paper indicates that this might not happen for at least two reasons. First, energy markets, including the market for natural gas, are characterized by imperfect competition and increasing costs to develop new energy sources. As a result, new entrants in the market are less efficient than incumbent firms. Second, energy markets, again including the market for natural gas, are associated with capacity constraints. Prices are determined in residual markets where the least efficient firms are active. This is likely to lead to price increases, rather than decreases.
    Keywords: natural gas, capacity constraints, efficiency, market liberalization
    JEL: Q4 L1 L7
    Date: 2009–07
  11. By: Ziesemer, Thomas (UNU-MERIT, and Maastricht University)
    Abstract: We provide a growth model with imported resources and foreign debt accumulation providing the basis for two questions and regression equations. 1) Under what conditions do growth rates of per capita income remain positive if imported inputs such as oil have increasing real prices? 2) Is accumulation of foreign debt driven by a current account deficit of which two percent of the GDP stem from oil imports, sustainable? For both questions we provide estimates for the USA with the following results. Oil price growth rates have only a marginal impact on those of GDP per capita as long as they exceed inflation rates by not much more than they did in the past. The US foreign debt/GDP ratio follows an unstable difference equation and therefore is not sustainable. We briefly discuss possible future stabilization through the market and through policies.
    Keywords: capital movements, growth, sustainability
    JEL: F21 O41 Q01
    Date: 2009
  12. By: Weiqi Tang (Fudan University); Libo Wu (Fudan University); ZhongXiang Zhang (East-West Center)
    Abstract: A considerable body of economic literature shows the adverse economic impacts of oil-price shocks for the developed economies. However, there has been a lack of empirical study of this kind on China and other developing countries. This paper attempts to fill this gap by answering how and to what extent oil-price shocks impact China's economy, emphasizing on the price transmission mechanisms. To that end, we develop a structural vector auto-regressive model. Our results show that an oil-price increase negatively affects output and investment, but positively affects inflation rate and interest rate. However, with the differentiated price control policies for materials and intermediates on the one hand and final products on the other hand in China, the impact on real economy, represented by real output and real investment, lasts much longer than that to price/monetary variables. Our decomposition results also show that the short-term impact, namely output decrease induced by the cut of capacity-utilization rate, is greater in the first one to two years, but the portion of the long-term impact, defined as the impact realized through an investment change, increases steadily and exceeds that of short-term impact at the end of the second year. Afterwards, the long-term impact dominates, and maintains for quite some time.
    JEL: F
    Date: 2009–04
  13. By: Korhonen, Iikka (BOFIT); Mehrotra, Aaron (BOFIT)
    Abstract: We assess the effects of oil price shocks on real exchange rate and output in four large energy-producing countries: Iran, Kazakhstan, Venezuela, and Russia. We estimate four-variable structural vector autoregressive models using standard long-run restrictions. Not surprisingly, we find that higher real oil prices are associated with higher output. However, we also find that supply shocks are by far the most important driver of real output in all four countries, possibly due to ongoing transition and catching-up. Similarly, oil shocks do not account for a large share of movements in the real exchange rate, although they are clearly more significant for Iran and Venezuela than for the other countries.
    Keywords: structural VAR model; oil price; Iran; Kazakhstan; Russia; Venezuela
    JEL: E31 E32 F31
    Date: 2009–07–01
  14. By: Baffes, John
    Abstract: This paper examines the energy/non-energy commodity price link, based on a reduced form econometric model and using annual data from 1960 to 2008. The transmission elasticity from energy to the non-energy index is estimated at 0.28. At a more disaggregated level, the fertilizer index exhibited the largest elasticity (0.55), followed by precious metals (0.46), food (0.27), metals and minerals (0.25), and raw materials (0.11). By contrast, only a few price indices responded strongly to inflation, although the trend parameter estimate (often viewed as a proxy for technological progress) is negative for agriculture and positive for metals. A key implication of the pass-through results is that for as long as energy prices remain elevated, most non-energy commodity prices are expected to be high.
    Keywords: Markets and Market Access,Energy Production and Transportation,Emerging Markets,E-Business,Commodities
    Date: 2009–06–01
  15. By: Kumarappan, Subbu; Joshi, Satish; MacLean, Heather
    Abstract: Published in BioResources, Volume 4, Number 3, 2009, Pages 1070-1087.
    Keywords: Biomass Supply, Resource Assessment, Lignocellulosic Biomass, Crop Production/Industries, Demand and Price Analysis, Production Economics, Resource /Energy Economics and Policy, Q42, Q11, Q2, Q20, Q29,
    Date: 2009–08
  16. By: Meyer, Seth; Westhoff, Pat; Thompson, Wyatt
    Abstract: Analysis of eleven biofuel policy options prepared in response to a request from five Members of Congress.
    Keywords: Agricultural and Food Policy,
    Date: 2009–05
  17. By: de Moraes, Marcia Maria Guedes Alcoforado; Cai, Ximing; Ringler, Claudia; Albuquerque, Bruno Edson; da Rocha, Sérgio P. Vieira; Amorim, Carlos Alberto
    Abstract: "Water management in the Pirapama River Basin in northeastern Brazil is affected by both water quantity and water quality constraints. The region is known for significant sugarcane-based ethanol production—which is key to the Brazilian economy and expected to grow dramatically under recent global changes in energy policy. Sugarcane production in the region goes hand in hand with controlled fertirrigation practices with potentially significant adverse impacts on the environment. To assess sustainable water allocation in the basin, an integrated hydrologic-economic basin model is adapted to study both water quantity and water quality aspects. The model results show that incorporating water quality aspects into water allocation decisions leads to a substantial reduction in application of vinasse to sugarcane fields. To enforce water quality restrictions, the shadow price for maintaining water in the reservoir could be used as a pollution tax for fertirrigated areas, which are currently not subject to pollution charges." from authors' abstract
    Keywords: Water quality, River basin model, Integrated economic-hydrologic modeling, Nonlinear optimization, Biofuels, Water resources, Environmental impacts,
    Date: 2009
  18. By: Fridfinnson, Brooke; Rude, James
    Keywords: biofuel, Agricultural and Food Policy, Demand and Price Analysis, International Relations/Trade,
    Date: 2009–04
  19. By: Karen Turner (Department of Economics, University of Strathclyde); Nick Hanley (Department of Economics, University of Stirling)
    Abstract: The Environmental Kuznets Curve (EKC) hypothesis focuses on the argument that rising prosperity will eventually be accompanied by falling pollution levels as a result of one or more of three factors: (1) structural change in the economy; (2) demand for environmental quality increasing at a more-than-proportional rate; (3) technological progress. Here, we focus on the third of these. In previous work we have used single region/nation models of the Scottish and UK economies to simulate the impacts of increased labour and energy efficiency on the domestic economy’s position on the EKC, with a specific focus on CO2 emissions. There we find that, while the impacts of an increase in energy efficiency are difficult to predict, mainly due to the potential for ‘rebound’ effects, while increasing CO2 emissions, improved labour productivity is likely to move an economy along its EKC through more rapid GDP growth. However, recent developments in the EKC literature have raised the issue of whether this will still be the case if emissions are accounted for from a consumption rather than a production perspective (the ‘pollution leakage’ hypothesis) – i.e. taking account of indirect pollution generation embodied in trade flows rather than just domestic emissions generation. Here we extend our earlier single region analysis for Scotland by using an interregional CGE model of the UK economy to examine the likely impacts of an increase in Scottish labour productivity on the rest of the UK and on a national EKC through interregional labour migration and trade flows.
    Keywords: computable general equilibrium; technological progress; environmental kuznets curve; pollution leakage
    JEL: D58 F16 F18 O13
    Date: 2009–06
  20. By: Denny Ellerman
    Abstract: The European Union's Emission Trading Scheme (EU ETS) is the world's first multinational cap-and-trade system for greenhouse gases. As an agreement between sovereign nations with diverse historical, institutional, and economic circumstances, it can be seen as a prototype for an eventual global climate regime. Interestingly, the problems that are often seen as dooming a global trading system - international financial flows and institutional readiness - haven't appeared in the EU ETS, at least not yet. The more serious problems that emerge from the brief experience of the EU ETS are those of (1) developing a central coordinating organization, (2) devising side benefits to encourage participation, and (3) dealing with the interrelated issues of harmonization, differentiation, and stringency. The pre-existing organizational structure and membership benefits of the European Union provided convenient and almost accidental solutions to the need for a central institution and side benefits, but these solutions will not work on a global scale and there are no obvious substitutes. Furthermore, the EU ETS is only beginning to test the practicality of harmonizing allocations within the trading system, differentiating responsibilities among participants, and increasing the stringency of emissions caps. The trial period of the EU ETS punted on these problems, as was appropriate for a trial period, but they are now being addressed seriously. From a global perspective, the answers that are being worked out in Europe will say a great deal about what will be feasible on a broader, global scale.
    Keywords: energy policy; environmental policy
    Date: 2009–02–15
  21. By: Massey, Ray
    Abstract: Presented to USDA Economists Group, Washington DC
    Keywords: cap and trade, agriculture, offsets, credits, sequestration, Agribusiness, Agricultural and Food Policy, Environmental Economics and Policy, Farm Management, Livestock Production/Industries, Resource /Energy Economics and Policy, Q,
    Date: 2009–05–27
  22. By: Sören Lindner; Sonja Peterson; Wilhelm Windhorst
    Abstract: In the next years several power plants throughout Europe have to be replaced and the questions is whether to build coal fired power plants with carbon capture and storage (CCS). In a study for the city of Kiel in northern Germany only a 800 MW coal power plant reaches a required minimum rentability. We use the study for an additional economic and environmental evaluation of a coal plant with CCS. We find that integrated gasification combined cycle (IGCC) plants with CCS have in two out of three carbon and energy price scenarios the largest rentability. Pulverized coal (PC) plants with CCS can only compete with other options under very favourable assumptions. Life-cycle emissions from CCS are less than 70% of a coal plant – compared to at least more than 80% when only considering direct emissions from plants. Still, life-cycle emissions are lower than in any other assessed option
    Keywords: coal fired power plants, carbon capture and storage (CCS), cash flow analysis, life cycle analysis
    JEL: Q49 Q54 Q59
    Date: 2009–06
  23. By: Valentina Bossetti; Carlo Carraro; Enrica De Cian; Romain Duval; Emanuele Massetti; Massimo Tavoni
    Abstract: This paper uses WITCH, an integrated assessment model with a game-theoretic structure, to explore the prospects for, and the stability of broad coalitions to achieve ambitious climate change mitigation action. Only coalitions including all large emitting regions are found to be technically able to meet a concentration stabilisation target below 550 ppm CO2eq by 2100. Once the free-riding incentives of non-participants are taken into account, only a “grand coalition” including virtually all regions can be successful. This grand coalition is profitable as a whole, implying that all countries can gain from participation provided appropriate transfers are made across them. However, neither the grand coalition nor smaller but still environmentally significant coalitions appear to be stable. This is because the collective welfare surplus from cooperation is not found to be large enough for transfers to offset the free-riding incentives of all countries simultaneously. Some factors omitted from the analysis, which might improve coalition stability, include the co-benefits from mitigation action, the costless removal of fossil fuel subsidies, as well as alternative assumptions regarding countries’ bargaining behaviour.<P>Incitations à participer à des coalitions internationales de lutte contre le changement climatique et stabilité de ces coalitions : Une analyse en théorie des jeux à l’aide du modèle WITCH<BR>Cet article utilise WITCH, un modèle d’évaluation intégré doté d’une structure en théorie des jeux, pour explorer les perspectives et la stabilité de larges coalitions de lutte contre le changement climatique. Il ressort que seules des coalitions incluant toutes les principales régions émettrices ont la capacité technique d’atteindre une cible de stabilisation des concentrations inférieure à 550 ppm CO2eq à l’horizon 2100. Une fois pris en compte les comportements de passager clandestin des régions non-participantes, seule une « grande coalition » regroupant pratiquement toutes les régions du monde est susceptible d’atteindre une telle cible. Cette grande coalition est profitable, impliquant qu’il est toujours possible de mettre en place un ensemble de transferts entre pays tel que tous gagnent à participer. Cependant, ni la grande coalition, ni des coalitions de moindre de taille mais néanmoins significatives d’un point de vue environnemental, n’apparaissent stables. Ceci tient au fait que le surplus collectif engendré par la coopération n’est pas suffisant pour permettre des transferts offrant à tous les pays simultanément les gains qu’ils tireraient d’un comportement de passager clandestin. Certains facteurs non pris en compte ici pourraient améliorer la stabilité des coalitions, tels les bénéfices connexes de la lutte contre le changement climatique, la possibilité de supprimer sans coût les subventions aux énergies fossiles, ou encore des hypothèses alternatives concernant le comportement de négociation des pays.
    Keywords: climate policy, politique climatique, climate coalition, coalition climatique, game theory, théorie des jeux, free riding, passager clandestin
    JEL: C68 C72 D58 Q54
    Date: 2009–06–30
  24. By: Gustafson, Cole R.
    Abstract: Presented to USDA Economists Group,Washington, DC
    Keywords: greenhouse gasses, agriculture, forestry, regulation, economic alternatives, Agricultural and Food Policy, Environmental Economics and Policy, Resource /Energy Economics and Policy, Q,
    Date: 2009–05–27
  25. By: Bhaduri, Anik; Manna, Utpal; Barbier, Edward; Liebe, Jens
    Abstract: As multiple countries share a river, the likelihood of a water resource conflict from climate change could be higher between countries. In this paper, we demonstrate how countries can cooperate in transboundary water sharing in a sustainable way, given the impacts of climate change. We illustrate the case of water sharing of the Volta River between the upstream and downstream country, Burkina Faso and Ghana respectively, where the latter country faces a tradeoff of water use between agriculture in the north and production of hydro energy in the south. In the framework of a stochastic Stackelberg differential game, we have shown how the issue of water sharing could be linked to hydropower export that can make water sharing between the countries sustaining in the event of climate change. Our results indicate that during cooperation, Ghana will have an opportunity to increase its water abstraction for agriculture, which has remained largely restricted. We also find that the equilibrium strategies in the long run steady state distribution are stable even with increasing variances of water flow.
    Keywords: Climate Change, Water sharing, Resource /Energy Economics and Policy, Risk and Uncertainty,
    Date: 2009–06
  26. By: Gilbert E. Metcalf
    Abstract: Cap and trade systems are emerging as the front-running policy choice to address climate change concerns in many countries. One of the apparent attractions of this approach is the ability to achieve hard limits on emissions over a control period. The cost of achieving this certainty on emission limits is price volatility. I discuss and evaluate various approaches within cap and trade systems to reduce price volatility. A fundamental trade-off exists between certainty of emission limits and price volatility. A pure carbon tax sacrifices certainty of emission limits in favor of price stability. I discuss how a hybrid carbon tax can be designed to achieve a balance between price stability and emissions certainty. This hybrid, dubbed the Responsive Emissions Autonomous Carbon Tax (REACT), combines the short-run price stability of a carbon tax with the long-run certainty of emission reductions over a control period.
    JEL: H23 Q4 Q54
    Date: 2009–07

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