nep-ene New Economics Papers
on Energy Economics
Issue of 2009‒08‒30
nineteen papers chosen by
Roger Fouquet
Basque Climate Change Centre, Bilbao, Spain

  1. Europe's Twenties: A Study Using the WIATEC Model By Claudia Kemfert; Hans Kremers; Truong Truong
  2. Energy Risk Management with Carbon Assets By Julien Chevallier
  3. Long-term risk management for utility companies: the next challenges By René Aïd
  4. Impacts of Alternative Emissions Allowance Allocation Methods under a Federal Cap-and-Trade Program By Lawrence H. Goulder; Marc A. C. Hafstead; Michael S. Dworsky
  5. Lock-in effects of road expansion on CO2 emissions : results from a core-periphery model of Beijing By Anas, Alex; Timilsina, Govinda R.
  6. The effect of uncertainty on decision making about climate change mitigation. A numerical approach of stochastic control By Thomas S. Lontzek; Daiju Narita
  7. The Effect of Uncertainty on Pollution Control Policy By Athanassoglou, Stergios
  8. Explaining the Price of Voluntary Carbon Offsets By Marc N. Conte; Matthew J. Kotchen
  9. Mitigation of Methane Emissions: A Rapid and Cost-effective Response to Climate Change By Claudia Kemfert; Wolf-Peter Schill
  10. Liberalizing climate-friendly goods and technologies in WTO environmental goods negotiations: product coverage, modalities, challenges and the way forward By Zhang, ZhongXiang
  11. Assessment of existing global financial initiatives and monitoring aspects of carbon sinks in forest ecosystems – The issue of REDD By Westholm, Lisa; Henders, Sabine; Ostwald, Madelene; Mattsson, Eskil
  12. Biofuels production versus forestry in the presence of lobbies and technological change By Hammes, Johanna Jussila
  13. Simulation of Economic Losses from Tropical Cyclones in the Years 2015 and 2050: The Effects of Anthropogenic Climate Change and Growing Wealth By Silvio Schmidt; Claudia Kemfert; Eberhard Faust
  14. Why did the Breed Reactor Fail? - Swedish and international nuclear development in a cold war context By Fjaestad, Maja
  15. Rohstoffbasierte Staatsfonds: Theorie und Empirie By Clemens, Marius; Fuhrmann, Wilfried
  16. Exchange Rates, Oil Price Shocks, and Monetary Policy in an Economy with Traded and Non-Traded Goods. By Micheal Plante
  17. Fiscal and Monetary Policy Responses to Oil Price Shocks in Oil Importing Low Income Countries. By Micheal Plante
  18. Non-renewable Resource Prices: Structural Breaks and Long Term Trends By Sharma, Abhijit; Balcombe, Kelvin; Fraser, Iain
  19. How Should Monetary Policy Respond to Exogenous Changes in the Relative Price of Oil? By MICHAEL PLANTE

  1. By: Claudia Kemfert; Hans Kremers; Truong Truong
    Abstract: In this paper, we use a computable general equilibrium model (WIATEC) to study the potential impact of implementing Europe's 20-20-20 climate policy. The results show that the economic costs of implementing the policy are only moderate and within the range of recent empirical evidence. Furthermore, they also indicate that there is a possibility that the existing allocations to the Europena sectors participating in the EU Emissions Trading Scheme (EU ETS) are on the low side, and therefore, there are still rooms for movement in the future.
    Keywords: Climate policy, Energy policy, EU 20-20-20 plan, EU Emission Trading System, Computable General Equilibrium
    JEL: C63 C68 D58 F11 F18 H21 O13 P28 Q54 Q58 R13
    Date: 2009
  2. By: Julien Chevallier (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre)
    Abstract: This article proposes a mean-variance optimization and portfolio frontier analysis of energy risk management with carbon assets, introduced in January 2005 as part of the EU Emissions Trading Scheme. In a stylized exercise, we compute returns, standard deviations and correlations for various asset classes from April 2005 to January 2009. Our central result features an expected return of 3% with a standard deviation < 0.06 by introducing carbon assets – carbon futures and CERs- in a diversified portfolio composed of energy (oil, gas, coal), weather, bond, equity risky assets, and of a riskless asset (U.S. T-bills). Besides, we investigate the characteristics of each asset class with respect to the alpha, beta, and sigma in the spirit of the CAPM. These results reveal that carbon, gas, coal and bond assets share the best properties for composing an optimal portfolio. Collectively, these results illustrate the benefits of carbon assets for diversification purposes in portfolio management, as the carbon market constitutes a segmented commodity market with specific risk factors linked to the EU Commission's decisions and the power producers' fuel-switching behavior.
    Keywords: Mean-variance optimization; Portfolio frontier analysis; CAPM; CO2; Carbon; Energy; Bonds; Equity; Asset Management; EU ETS; CERs
    Date: 2009–08–16
  3. By: René Aïd (EDF R&D - EDF, FiME Lab - Laboratoire de Finance des Marchés d'Energie - Université Paris Dauphine - Paris IX - CREST - EDF R&D)
    Abstract: Since the energy markets liberalisation at the beginning of the 1990s in Europe, electricity monopolies have gone through a profound evolution process. From an industrial organisation point of view, they lost their monopoly on their historical business, but gained the capacity to develop in any sector. Companies went public and had to upgrade their financial risk management process to international standards and implement modern risk management concepts and reporting processes (VaR, EaR...). Even though important evolutions have been accomplished, we argue here that the long-term risk management process of utility companies has not yet reached its full maturity and is still facing two main challenges. The first one concerns the time consistency of long-term and mid-term risk management processes. We show that consistencies issues are coming from the different classical financial parameters carrying information on firms' risk aversion (cost of capital and short-term risk limits) and the concepts inherited from the monopoly period, like the loss of load value, that are still involved in the utility company decision-making process. The second challenge concerns the need for quantitative models to assess their business model. With the deregulation, utilities have to address the question of their boundaries. Although intuition can provide insights on the benefits of some firm structures like vertical integration, only sound and tractable quantitative models can bring answers to the optimality of different possible firm structures.
    Keywords: electricity markets; risk management; investment decision; long-term risk
    Date: 2008–12–30
  4. By: Lawrence H. Goulder; Marc A. C. Hafstead; Michael S. Dworsky
    Abstract: This paper examines the implications of alternative allowance allocation designs under a federal cap-and-trade program to reduce emissions of greenhouse gases. We focus on the impacts on industry profits and overall economic output, employing a dynamic general equilibrium model of the U.S. economy. The model's unique treatment of capital dynamics permits close attention to profit impacts.We find that the effects on profits depend critically on the method of allowance allocation. Freely allocating fewer than 15 percent of the emissions allowances generally suffices to prevent profit losses among the eight industries that, without free allowances or other compensation, would suffer the largest percentage losses of profit. Freely allocating 100 percent of the allowances substantially overcompensates these industries, in many cases causing more than a doubling of profits.These results indicate that profit preservation is consistent with substantial use of auctioning and the generation of considerable auction revenue. GDP costs of cap and trade depend critically on how such revenues are used. When these revenues are employed to finance cuts in marginal income tax rates, the resulting GDP costs are about 33 percent lower than when all allowances are freely allocated and no auction revenue is generated. On the other hand, when auction proceeds are returned to the economy in lump-sum fashion (for example, as rebate checks to households), the potential cost-advantages of auctioning are not realized.Our results are robust to cap-and-trade policies that differ according to policy stringency, the availability of offsets, and the extent of opportunities for intertemporal trading of allowances.
    JEL: D58 H23 Q52 Q54 Q58
    Date: 2009–08
  5. By: Anas, Alex; Timilsina, Govinda R.
    Abstract: In the urban planning literature, it is frequently explicitly asserted or strongly implied that ongoing urban sprawl and decentralization can lead to development patterns that are unsustainable in the long run. One manifestation of such an outcome is that if extensive road investments occur, urban sprawl and decentralization are advanced and locked-in, making subsequent investments in public transit less effective in reducing vehicle kilometers traveled by car, gasoline use and carbon dioxide emissions. Using a simple core-periphery model of Beijing, the authors numerically assess this effect. The analysis confirms that improving the transit travel time in Beijing’s core would reduce the city’s overall carbon dioxide emissions, whereas the opposite would be the case if peripheral road capacity were expanded. This effect is robust to perturbations in the model’s calibrated parameters. In particular, the effect persists for a wide range of assumptions about how location choice depends on travel time and a wide range of assumptions about other aspects of consumer preferences.
    Keywords: Transport Economics Policy&Planning,Roads&Highways,Energy and Environment,Environment and Energy Efficiency,Economic Theory&Research
    Date: 2009–08–01
  6. By: Thomas S. Lontzek; Daiju Narita
    Abstract: We apply standardized numerical techniques of stochastic optimization (Judd [1998]) to the climate change issue. The model captures the feature that the effects of uncertainty are different with different levels of agent's risk aversion. A major finding is that the effects of stochasticity differ even in sign as to emission control with varying parameters: introduction of stochasticity may increase or decrease emission control depending on parameter settings, in other words, uncertainties of climatic trends may induce people's precautionary emission reduction but also may drive away money from abatement
    Keywords: climate change and uncertainties, stochastic control, climate policy
    JEL: C63 Q54 D81
    Date: 2009–08
  7. By: Athanassoglou, Stergios
    Abstract: I study a class of differential games of pollution control with profit functions that are polynomial in the global pollution stock. Given an emissions path satisfying mild regularity conditions, a simple polynomial ambient transfer scheme is exhibited that induces it in Markov-perfect equilibrium (MPE). Proposed transfers are a polynomial function of the difference between actual and desired pollution levels; moreover, they are designed so that in MPE no tax or subsidy is ever levied. Their applicability under stochastic pollution dynamics is studied for a symmetric game of polluting oligopolists with linear demand. I discuss a quadratic scheme that induces agents to adopt Markovian emissions strategies that are stationary and linear-decreasing in total pollution. Total expected ambient transfers are always non-positive and increase linearly in volatility and the absolute value of the slope of the inverse demand function. However, if the regulator is interested in inducing a constant emissions strategy then, in expectation, transfers vanish.
    Keywords: differential games; stochastic dynamics; nonpoint source pollution; policy design
    JEL: H21 H23 C73
    Date: 2009–07
  8. By: Marc N. Conte; Matthew J. Kotchen
    Abstract: This paper investigates factors that explain the large variability in the price of voluntary carbon offsets. We estimate hedonic price functions using a variety of provider- and project-level characteristics as explanatory variables. We find that providers located in Europe sell offsets at prices that are approximately 30 percent higher than providers located in either North America or Australasia. Contrary to what one might expect, offset prices are generally higher, by roughly 20 percent, when projects are located in developing or least-developed nations. But this result does not hold for forestry-based projects. We find evidence that forestry-based offsets sell at lower prices, and the result is particularly strong when projects are located in developing or least-developed nations. Offsets that are certified under the Clean Development Mechanism or the Gold Standard, and therefore qualify for emission reductions under the Kyoto Protocol, sell at a premium of more than 30 percent; however, third-party certification from the Voluntary Carbon Standard, one of the largest certifiers, is associated with a price discount. Variables that have no effect on offset prices are the number of projects that a provider manages and a provider’s status as for-profit or not-for-profit.
    JEL: Q2 Q42 Q5
    Date: 2009–08
  9. By: Claudia Kemfert; Wolf-Peter Schill
    Abstract: Methane is a major anthropogenic greenhouse gas, second only to carbon dioxide (CO2) in its impact on climate change. Methane (CH4) has a high global warming potential that is 25 times as large as the one of CO2 on a 100 year time horizon according to the latest IPCC report. Thus, CH4 contributes significantly to anthropogenic radiative forcing, although it has a relatively short atmospheric perturbation lifetime of 12 years. CH4 has a variety of sources that can be small, geographically dispersed, and not related to energy sectors.<br /> <br /> In this report, we analyze methane emission abatement options in five different sectors and identify economic mitigation potentials for different CO2 prices. While mitigation potentials are generally large, there are substantial potentials at low marginal abatement costs. Drawing on different assumptions on the social costs of carbon, we calculate benefit/cost ratios for different sectors and mitigation levels.<br /> <br /> We recommend an economically efficient global methane mitigation portfolio for the year 2020 that includes the sectors of livestock and manure, rice management, solid waste, coal mine methane and natural gas. Depending on assumptions of social costs of carbon, this portfolio leads to global CH4 mitigation levels of 1.5 or 1.9 GtCO2-eq at overall costs of around $14 billion or $30 billion and benefit/cost ratios of 1.4 and 3.0, respectively. We also develop an economically less efficient alternative portfolio that excludes cost-effective agricultural mitigation options. It leads to comparable abatement levels, but has higher costs and lower benefit/cost ratios.<br /> <br /> If the global community wanted to spend an even larger amount of money - say, $250 billion - on methane mitigation, much larger mitigation potentials could be realized, even such with very high marginal abatement costs. Nonetheless, this approach would be economically inefficient. If the global community wanted to spend such an amount, we recommend spreading the effort cost-effectively over different greenhouse gases.<br /> <br /> While methane mitigation alone will not suffice to solve the climate problem, it is a vital part of a cost-effective climate policy. Due to the short atmospheric lifetime, CH4 emission reductions have a rapid effect. Methane mitigation is indispensable for realizing ambitious emission scenarios like IPCC's "B1", which leads to a global temperature increase of less than 2?C by the year 2100. Policy makers should put more emphasis on methane mitigation and aim for realizing low-cost methane mitigation potentials by providing information to all relevant actors and by developing appropriate regulatory and market frameworks. We also recommend including methane in emissions trading schemes.
    Keywords: Methane, mitigation, climate change, cost-benefit analysis
    JEL: Q52 Q53 Q54
    Date: 2009
  10. By: Zhang, ZhongXiang
    Abstract: The Doha Round Agenda (paragraph 31(3)) mandates to liberalize environmental goods and services. This mandate offers a good opportunity to put climate-friendly goods and services on a fast track to liberalization. Agreement on this paragraph should represent one immediate contribution that the WTO can make to fight against climate change. This paper presents the key issues surrounding liberalized trade in climate-friendly goods and technologies in WTO environmental goods negotiations. It begins with what products to liberalize and in which manner. Clearly, WTO environmental goods negotiations to date show that WTO member countries are divided by this key issue. Focusing on the issue, the paper explores options available to liberalize trade in climate-friendly goods and technologies, both within and outside the WTO, and along with these discussion, discusses how to serve the best interests of developing countries.
    Keywords: Environmental goods and services; Low-carbon goods and technologies; Doha Round; WTO
    JEL: F18 F13 Q48 Q56 Q54 Q58
    Date: 2009–04–01
  11. By: Westholm, Lisa (Department of Economics, School of Business, Economics and Law, Göteborg University); Henders, Sabine (Centrum för klimatpolitisk forskning, CSPR); Ostwald, Madelene (Centrum för klimatpolitisk forskning, CSPR); Mattsson, Eskil (Institutionen för geovetenskaper, Göteborg University)
    Abstract: The objective of this report is to explore the topic of carbon sinks in forest ecosystems, focusing on the issue of REDD. The report covers different angles: i) an overview of existing financial and methodological initiatives that currently invest in preparation and capacity building of potential REDD host countries, but also in REDD pilot projects, ii) the preparedness of potential host countries (Bolivia, Cameroon, Costa Rica and Sri Lanka) to establish baselines and implement a REDD system that contributes to sustainable development, and iii) the funding structure and channels of a major investor country (Norway). The focus of our analysis lies on two REDD-related issues; baseline establishment and sustainable development.<p>
    Keywords: REDD; deforestation; climate change; baseline
    JEL: Q00
    Date: 2009–08–19
  12. By: Hammes, Johanna Jussila (VTI)
    Abstract: We study the political determination of a hypothetical land tax, which internalises a negative environmental externality from biofuels. The tax allocates land from biofuels towards forestry. Lobbying affects the tax rate, so that the sector with the lower elasticity of land demand determines the direction in which the tax deviaties from the social optimum. Lobbying by the sector with higher elasticity of land demand cancels partly out the other sector's lobbying. The politically optimal tax rate is "self-enhancing" in that the tax lowers the elasticity of land demand in the sector which initially had a lower elasticity, and raises it in the other sector. This can dwarf the government's other attempts to support the production of biofuels. Finally, technological progress in biofuels serves to strengthen that sector by lowering its elasticity of land demand, and weakens the forestry sector by raising its elasticity of land demand. Depending on the initial tax rate, this can be welfare enhancing or lowering. Furthermore, it can lead to excessive deforestation.
    Keywords: Biofuels; forestry; land use; political economy; technological change
    JEL: D78 H23 O13 O30 Q15 Q23 Q24 Q42 Q55
    Date: 2009–07–08
  13. By: Silvio Schmidt; Claudia Kemfert; Eberhard Faust
    Abstract: This paper simulates the increase in the average annual loss from tropical cyclones in the North Atlantic for the years 2015 and 2050. The simulation is based on assumptions concerning wealth trends in the regions affected by the storms, considered by the change in material assets (capital stock). Further assumptions are made about the trend in storm intensity resulting from anthropogenic climate change. The simulations use a stochastic model that models the annual storm loss from the number of storms and the loss per storm event. The paper demonstrates that increasing wealth will continue to be the principle loss driver in the future (average annual loss in 2015 +32%, in 2050 +308%). But climate change will also lead to higher losses (average annual loss in 2015 +4%, in 2050 +11%). In order to reduce the uncertainties surrounding the assumptions on the trend in capital stock and storm intensity, a sensitivity analysis was carried out, based on the assumptions from current studies on the future costs for tropical storms.
    Keywords: climate change, tropical cyclones, natural catastrophes, insurance
    Date: 2009
  14. By: Fjaestad, Maja (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This article discusses the visions about nuclear breeder reactors, plans set out in the aftermath of World War II. This seemed like the ideal solution for future energy, and even small countries, as Sweden, launched breeder reactor programs. The breeder reactor never reached industrial development, interestingly; however, different countries cancelled their breeder project at different times. In this article, in addition to discussing why breeder reactors failed generally, I also suggest possible explanations for the differences in when the reactors failed, particularly between Europe and the United States. Though the breeder reactor never fulfilled its promises, it is an interesting example about the complex mechanisms behind technological development. It tells us a story about a technological failure that is not simple, but must be understood in a social, economical and political context.
    Keywords: technology; technology development; institutions; innovation; innovation failure
    JEL: N70 O14 O32 O38
    Date: 2009–08–26
  15. By: Clemens, Marius; Fuhrmann, Wilfried
    Abstract: Because of increasing resource prices and thus, higher export profits, resource abundant countries become more and more constrained in implementing a sustainable resource management which realizes two main objectives: The development of competitive non-oil industries and the reduction of resource caused volatility. This paper surveys rationales, structures and effects of resource-based Souvereign Wealth Funds as an instrument of optimal resource management. The main objective is to find out if resource funds have some significant impact on macroeconomic stability and development. Therefore, chapter 2 gives a review of different "resource curse" theories to identify macroeconomic core indicators that should be affected by introducing SWFs. The next chapter introduces the theory of resource-based SWF by simulating a general optimal resource management under different scenarios in an infinite horizon model. It shows that resource funds can be an effective instrument to obtain stabilization as well as sustainability objectives. After discussing specific practical topics as different types of funds, the linkage to government budget and the portfolio management, chapter 4 starts with a descriptive analysis about the implementation of resource funds in three different countries: Norway, Russia and Azerbaijan. Other nations and regions were considered by short subsections. In chapter 5 an unbalanced panel data model with 30 countries from 1970-2006 is build to estimate the effects of resource-based SWF´s on resource curse, stabilization and sustainability by means of fixed and random effects estimator. Finally, a short criticism and outlook gives motivation for further research tasks.
    Keywords: Sovereign Wealth Funds; Oil; Optimal Resource Management
    JEL: Q32 Q38 N5 E6 E61
    Date: 2008–06–31
  16. By: Micheal Plante (Indiana University, Ball State University)
    Abstract: This paper examines monetary policy responses to oil price shocks in a small open economy that produces traded and non-traded goods. When only labor and oil are used in production and prices are sticky in the non-traded sector the behavior of ination, the nominal exchange rate, and the relative price of the non-traded good depends crucially upon whether the ratio of the cost share of oil to the cost share of labor is higher for the traded or non-traded sector. If the ratio is smaller (higher) for the traded sector then a policy that fully stabilizes non-traded ination causes the nominal exchange rate to appreciate (depreciate) and the relative price of the non-traded good to rise (fall) when there is a surprise rise in the price of oil. Similar results can hold for a policy that stabilizes CPI ination. Under a policy that xes the nominal exchange rate, non-traded ination rises (falls) if the ratio is smaller (larger) for the traded sector. Analytical results show that a policy of xing the exchange rate always produces a unique solution and that a policy of stabilizing non-traded ination produces a unique solution so long as the nominal interest rate is raised more than one-for-one with rises in non-traded ination. A policy that stabilizes CPI ination, however, produces multiple equilibria for a wide range of calibrations of the policy rule.
    Date: 2009–08
  17. By: Micheal Plante (Indiana University, Ball State University)
    Abstract: This paper considers monetary and scal policy responses to oil price shocks in low income oil importing countries. I examine the dynamic properties and the welfare implications of a set of ination targeting policies and a group of policies where the government provides a subsidy on household purchases of oil products and nances this subsidy through some combination of printing money and raising non-distortionary lump sum taxes. Even in the case where lump sum taxes nance the subsidy, it distorts household behavior in important ways leading to over consumption of oil products, increased trade decits, and distortions to the labor supply. Resorting to the ination tax to nance the subsidy leads to signicant macroeconomic issues when exchange rates are exible. The welfare gains from a policy that nances the subsidy through lump sum taxation are small compared to the policy with full pass through. For most calibrations the losses from nancing the policy through the ination tax are substantial. The welfare generated by the ination targeting policies is close to the baseline policy with full pass through so long as the response to ination is strong enough.
    Date: 2009–08
  18. By: Sharma, Abhijit; Balcombe, Kelvin; Fraser, Iain
    Abstract: In this paper we examine the time series properties of nine non-renewable resources. In particular we are concerned with understanding the relationship between the number of structural breaks in the data and the nature of the resource price path, i.e. is it stationary or a random walk. To undertake our analysis we employ a number of relevant econometric methods including Bai and Perron's (1998) multiple structural break dating method. Our results indicate that these series are in many cases stationary and subject to a number of structural breaks. These results indicate that a deterministic model of resources prices may well be appropriate.
    Keywords: structural change; non-renewable resources; breaks; resource depletion
    JEL: Q31 C12
    Date: 2009–05
  19. By: MICHAEL PLANTE (Indiana University, Ball State University)
    Abstract: This paper examines welfare maximizing optimal monetary policy and simple mon- etary policy rules in a New Keynesian model that incorporates oil as an intermediate input and as a consumption good. I show under several dierent assumptions that the optimal policy focuses on stabilizing some combination of nominal wage and core ination while allowing for signicant movements in value added and CPI (headline) in- ation. Wage indexation to headline ination does not change this result. The optimal response of the nominal rate is sensitive to the assumptions of the model. For all cases examined the optimal policy is well approximated, in welfare terms, by a simple policy rule that suciently stabilizes core ination. Empirical evidence using data from after 1986 supports the hypothesis that the Federal Reserve has been responding to real oil price changes in a manner similar to what the model says is optimal.
    Date: 2009–08

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