nep-ene New Economics Papers
on Energy Economics
Issue of 2010‒06‒26
35 papers chosen by
Roger Fouquet
Basque Climate Change Centre, Bilbao, Spain

  1. Renewable Energy Policy in the Presence of Innovation: Does Government Pre-Commitment Matter? By Madlener, Reinhard; Neustadt, Ilja
  2. Global and local networks in the Solar Energy Industry - The case of the San Francisco Bay Area By Matthias Böttcher
  3. Evaluating the Slow Adoption of Energy Efficient Investments: Are Renters Less Likely to Have Energy Efficient Appliances? By Lucas W. Davis
  4. Modeling Electricity Markets as Two-Stage Capacity Constrained Price Competition Games under Uncertainty By Sakellaris, Kostis
  5. Modeling electricity spot prices: Regime switching models with price-capped spike distributions By Janczura, Joanna; Weron, Rafal
  6. Water and energy in South Africa – managing scarcity By Potgieter, Petrus H.
  7. The Dutch Energy Markets in 2009: Target Scenario – Obstacles – Measures By Vermeulen, Marcel; Bremer, Simon; Barfi Masihi, Vera
  8. Crude Oil Prices and Stock Markets in Major Oil Exporting Countries: Evidence on Decoupling Feature By Onour, Ibrahim
  9. The role of model uncertainty and learning in the U.S. postwar policy response to oil prices By Francesca Rondina
  10. Asymmetric Competition in the Setting of Diesel Excise Taxes in EU Countries By Laszlo Paizs
  11. Poverty Impacts of Government Expenditure from Natural Resource Revenues By Warr, Peter; Menon, Jayant; Yusuf, Arief Anshory
  12. The Global Financial Crisis and Equity Markets in Middle East Oil Exporting Countries By Onour, Ibrahim
  14. Remanufacturing By Sophie Bernard
  15. Human Development and Sustainability By Eric Neumayer
  16. TRADE OPENNESS AND CO2 EMISSIONS IN TUNISIA By Houssem Eddine Chebbi; Marcelo Olarreaga; Habib Zitouna
  17. The REDD scheme to curb deforestation: A well-designed system of incentives? By Charles Figuières; Solenn Leplay; Estelle Midler; Sophie Thoyer
  18. Prerequisites and limits for economic modelling of climate change impacts and adaptation By Frank Jotzo
  19. Where is it Cheapest to Cut Carbon Emissions? By David Stern; Ross Lambie
  20. Tradable Green Certificates as a Policy Instrument? A Discussion on the Case of Poland By Christoph Heinzel; Thomas Winkler
  21. Markets for Anthropogenic Carbon Within the Larger Carbon Cycle By Severin Borenstein
  22. EUAs and CERs : Vector autoregression, impulse response function and cointegration analysis. By Chevallier, Julien
  23. Financial market instability and CO2 emissions By Patrick Richard
  24. EUAs and CERs : moving in lockstep ?. By Hervé-Mignucci, Morgan; Chevallier, Julien; Alberola, Emilie; Mansanet-Bataller, Maria
  25. Catastrophic Natural Disasters and Economic Growth By Eduardo Cavallo; Sebastian Galiani; Ilan Noy; Juan Pantano
  26. The Potential Global and Developing Country Impacts of Alternative Emission Cuts and Accompanying Mechanisms for the Post Copenhagen By Huifang Tian; John Whalley
  27. Volatility forecasting of carbon prices using factor models. By Chevallier, Julien
  28. How Can Policy Encourage Economically Sensible Climate Adaptation? By V. Kerry Smith
  29. Initial Allocation Effects in Permit Markets with Bertrand Output Oligopoly By Evan Calford; Christoph Heinzel; Regina Betz
  30. Climate Policy and Labor Markets By Olivier Deschenes
  31. Belts and Suspenders: Interactions Among Climate Policy Regulations By Arik Levinson
  32. Climate Change and Game Theory By Peter Wood
  33. Climate Policy and Voluntary Initiatives: An Evaluation of the Connecticut Clean Energy Communities Program By Matthew J. Kotchen
  34. Distributional Impacts in a Comprehensive Climate Policy Package By Gilbert E. Metcalf; Aparna Mathur; Kevin A. Hassett
  35. Upstream versus Downstream Implementation of Climate Policy By Erin T. Mansur

  1. By: Madlener, Reinhard (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN)); Neustadt, Ilja (Socioeconomic Institute (SOI), Faculty of Economics, University of Zurich)
    Abstract: In a perfectly competitive market with a possibility of technological innovation we contrast guaranteed feed-in tariffs for electricity from renewables and tradable green certificates from a dynamic efficiency and social welfare point of view. Specifically, we model decisions about the technological innovation with convex costs within the framework of a game-theoretic model, and discuss implications for optimal policy design under different assumptions regarding regulatory pre-commitment. We find that for the case of technological innovation with convex costs subsidy policies are preferable over quota-based policies. Further, in terms of dynamic efficiency, no pre-commitment policies are shown to be at least as good as the pre-commitment ones. Thus, a government with a preference for innovation being performed if the achievable cost reduction is high should be in favor of the no pre-commitment regime.
    Keywords: Renewable Electricity; Feed-In Tariffs; Regulatory Pre-Commitment; Tradable Green Certificates; Quota Target; Innovation; Energy Policy
    JEL: Q42 Q48
    Date: 2010–04
  2. By: Matthias Böttcher
    Date: 2010–05–27
  3. By: Lucas W. Davis
    Abstract: While public discussion of HR 2454 (the “Waxman Markey” bill) has focused on the cap-andtrade program that would be established for carbon emissions, the bill also includes provisions that would tighten energy efficiency standards for consumer appliances. Supporters argue that appliance standards help address a number of market failures. In particular, many studies have pointed out that landlords may buy cheap inefficient appliances when their tenants pay the utility bill. Although this landlord-tenant problem has been widely discussed in the literature, there is little empirical evidence on the magnitude of the distortion. This paper compares appliance ownership patterns between homeowners and renters using household-level data from the Residential Energy Consumption Survey. The results show that, controlling for household income and other household characteristics, renters are significantly less likely to have energy efficient refrigerators, clothes washers and dishwashers.
    JEL: D13 L68 Q41 Q54
    Date: 2010–06
  4. By: Sakellaris, Kostis
    Abstract: The last decade has seen an increasing application of game theoretic tools in the analysis of electricity markets and the strategic behavior of market players. This paper focuses on the model examined by Fabra et al. (2008), where the market is described by a two-stage game with the firms choosing their capacity in the first stage and then competing in prices in the second stage. By allowing the firms to endogenously determine their capacity, through the capacity investment stage of the game, they can greatly affect competition in the subsequent pricing stage. Extending this model to the demand uncertainty case gives a very good candidate for modeling the strategic aspect of the investment decisions in an electricity market. After investigating the required assumptions for applying the model in electricity markets, we present some numerical examples of the model on the resulting equilibrium capacities, prices and profits of the firms. We then proceed with two results on the minimum value of price caps and the minimum required revenue from capacity mechanisms in order to induce adequate investments.
    Keywords: Capacity Constraints; Electricity Markets; Regulatory Policy; Strategic Behaviour;
    JEL: C63 L94 C72
    Date: 2010–03
  5. By: Janczura, Joanna; Weron, Rafal
    Abstract: We calibrate Markov regime-switching (MRS) models to spot (log-)prices from two major power markets. We show that while the price-capped (or truncated) spike distributions do not give any advantage over the standard specification in case of moderately spiky markets (such as NEPOOL), they improve the fit and yield significantly different results in case of extremely spiky markets (such as the Australian NSW market).
    Keywords: Electricity spot price; Markov regime-switching model; Price spike; Price cap; Truncated distribution
    JEL: C52 C24 Q4
    Date: 2010–06–14
  6. By: Potgieter, Petrus H.
    Abstract: In this paper we examine the nexus of water an energy scarcity in South Africa. The fresh water resources of the country are close to exhaustion (Business Day, 2009; Turton, 2008)⁠, yet safe drinking water is not yet universally available to all in the country – in spite of a government policy to provide water for basic needs, taken to be 25ℓ per person per day (Coovadia, Jewkes, Barron, Sanders, & McIntyre, 2009)⁠. A growing economy and a population now close to 50 million have also put considerable strain on the electricity supply and distribution system, including wide-spread residential power outages in the main economic centers and, since January 2008, mandatory cuts for industrial users (Patel, 2008)⁠. The paper provides an overview of the current system in South Africa for supplying and managing water and electricity – for residential, industrial and for agricultural use – with a special emphasis on the energy requirements for delivering water as well as the water required in generating electric power. Finally we consider the example of Australia, another country with severe water shortages and one with a comparable demand for electricity, and attempt to draw lessons for South Africa from Australia’s more market-driven approach to energy and water.
    Keywords: Water; energy; South Africa
    JEL: Q32 N77 O13 Q58
    Date: 2010–01
  7. By: Vermeulen, Marcel; Bremer, Simon; Barfi Masihi, Vera
    Abstract: Competition on the wholesale gas market is still in its early stages. Measures have already been put in place to eliminate some shortcomings, these are the new market model and the market-based balancing system. Both of these are the result of the Gas Letter from the Minister and the underlying TTF advice from the NMa. These measures facilitate a development towards more competition. But for a better functioning market the commitment of all market participants is required. Gasterra, the exclusive marketer of Groningen gas, has a key responsibility here. Energy suppliers should be able to obtain gas on the TTF in the required periods and quantities. Otherwise the development of the wholesale gas market will just be stalled further.
    Keywords: Monitoring, electricity, gas, competition, infrastructure
    JEL: L1 Q4
    Date: 2009–11–01
  8. By: Onour, Ibrahim
    Abstract: This paper investigates common cyclical features between crude oil market and stock markets in major oil exporting countries including Saudi Arabia, UAE, and Kuwait. The results of the paper indicate, at low oil prices (below $40 per oil barrel) Saudi and Abu-Dhabi markets share common cyclical feature with oil market, but they digress from the oil market as oil prices rose above $40 per barrel. The decoupling feature indicate the capital markets and oil market respond in different pattern to cycle generating shocks, suggesting as higher oil prices may raise global investment risk, stock markets in these countries deflect from their key fundamental driver.
    Keywords: Common trends; Shared cycles; nonlinear cointegration
    JEL: C10 C50 F30
    Date: 2010–05–10
  9. By: Francesca Rondina
    Abstract: This paper studies optimal monetary policy in a framework that explicitly accounts for policymakers' uncertainty about the channels of transmission of oil prices into the economy. More specfically, I examine the robust response to the real price of oil that US monetary authorities would have been recommended to implement in the period 1970 2009; had they used the approach proposed by Cogley and Sargent (2005b) to incorporate model uncertainty and learning into policy decisions. In this context, I investigate the extent to which regulator' changing beliefs over different models of the economy play a role in the policy selection process. The main conclusion of this work is that, in the specific environment under analysis, one of the underlying models dominates the optimal interest rate response to oil prices. This result persists even when alternative assumptions on the model's priors change the pattern of the relative posterior probabilities, and can thus be attributed to the presence of model uncertainty itself.
    Keywords: model uncertainty, learning, robust policy, Bayesian model averaging, oil prices
    JEL: C52 E43 E58 E65
    Date: 2010–06–11
  10. By: Laszlo Paizs (Institute of Economics - Hungarian Academy of Sciences)
    Abstract: This paper tests new implications of the asymmetric tax competition model on diesel excise taxes in the European Union (EU). I extend the standard tax competition model by replacing the unit demand assumption with iso-elastic demand. As a result, not only the level of the equilibrium tax but also the slope of the tax reaction function depends positively on the size of the country. The new implication is testable on panel data in first differences, and it is tested on a panel of 16 European countries. The results provide strong evidence for strategic interaction in the setting of diesel excises and confirm the effect of country size on the response to tax changes in neighboring countries. Strategic interaction between EU countries intensified in the mid 1990s and drove small European countries to set lower diesel tax rates. These results explain why the EU's minimum tax policy has failed to harmonize diesel tax rates across member states.
    Keywords: tax competition, minimum tax, asymmetric regions, diesel excise, European Union
    JEL: H70 H77 H87
    Date: 2010–06
  11. By: Warr, Peter (Arndt-Corden Division of Economics, Australian National University); Menon, Jayant (Asian Development Bank); Yusuf, Arief Anshory (Padjadjaran University)
    Abstract: This study analyzes the effects on poverty incidence and other economic variables resulting from government expenditures associated with natural resource revenues, using the Nam Theun II hydroelectric power project in the Lao People’s Democratic Republic (Lao PDR) as a case study. The analysis uses a multi-sector/multi-household general equilibrium model of the economy of Lao PDR. The conceptual framework distinguishes between official and marginal expenditures financed by project revenues, recognizing that some of the former still might have been undertaken without the new revenues generated by the project. A range of assumptions is considered regarding the direct distributional impact of the marginal expenditures. The analysis also incorporates the project’s indirect distributional effects, operating through the "Dutch disease" mechanism. We find that poverty incidence declines under the entire range of distributional assumptions considered. Nevertheless, the most important determinant of poverty impact is the degree of rural bias. Even the most regressive of the pro-rural distributions reduces poverty incidence by seven times as much as the most progressive of the pro-urban distributions.
    Keywords: Poverty incidence; general equilibrium; natural resource revenues; Dutch disease; Lao PDR
    JEL: D58 I32 Q25
    Date: 2010–06–01
  12. By: Onour, Ibrahim
    Abstract: This paper employs extreme downside risk measures to estimate the impact of the global financial crisis in 2008/2009 on equity markets in major oil producing Middle East countries. The results in the paper indicate the spillover effect of the global crisis varied from a country to another, but most hardly affected market among the group of six markets was Dubai financial market in which portfolio loss reached about 42 per cent. This indicates that Dubai debt crisis, which emerged on surface in 2009, exacerbated the impact of the global financial crisis and prolonged the recovery process in these markets.
    Keywords: Value at risk; Fat-tails distribution; Expected Shortfall; Extreme losses.
    JEL: G12 F30 C01
    Date: 2010–06–15
  13. By: Hanan Morsy (International Monetary Fund (IMF))
    Abstract: The paper aims at characterizing the main determinants of the medium-term current account balance for oil-exporting countries using dynamic panel estimation techniques. Previous studies included a very limited number of oil-exporting countries in their samples, raising concerns about the applicability of the estimated coefficients for oil countries. Furthermore, current approaches are not specifically tailored to oil-producing countries because they fail to capture the effects of oil wealth and the degree of maturity in oil production. This paper explores the underlying determinants of the current account balance for a large sample of oil exporting countries, and extends the specifications commonly used in the literature to include an oil wealth variable, as well as a proxy for the degree of maturity in oil production. The paper therefore contributes to the existing literature both in terms of the sample studied as well as the variables considered. The results reveal that factors that matter in determining the equilibrium current account balance of oil-exporting counties are the fiscal balance, the oil balance, oil wealth, age dependency, and the degree of maturity in oil production.
    Date: 2010–03
  14. By: Sophie Bernard (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: Remanufacturing is a form of recycling where used durable goods are refurbished to a condition comparable to new products. With reduced energy and resource consumption, remanufactured goods are produced at a fraction of the original cost and with lower emissions of pollution. This paper presents a theoretical model of remanufacturing where a duopoly of original manufacturers produce a component of a final good. The component needing to be replaced creates an aftermarket. An environmental regulation assessing a minimum level of remanufacturability is also introduced. The main results indicate that a social planner could use collusion of the firms on the level of remanufacturability as a substitute for environmental regulation. However, if an environmental regulation is to be implemented, collusion should be repressed since competition supports the public intervention better. One of the results also coincides with the Porter Hypothesis.
    Keywords: remanufacturing, competition, environmental regulation, Porter Hypothesis
    JEL: H23 L10 L51 Q53 Q58
    Date: 2010
  15. By: Eric Neumayer (London School of Economics and Political Science)
    Abstract: The literatures and debates on human development on the one hand and sustainability on the other share much in common. Human development is essentially what sustainability advocates want to sustain and without sustainability, human development is not true human development. Yet the two strands of research have largely been separate and this paper shows how they can learn from each other. I put forward a concrete proposal on how human development and its measurement in the form of the Human Development Index (HDI) can be linked with measures of both weak and strong sustainability. Weak sustainability is built on the assumption that different forms of capital are substitutable, whereas strong sustainability rejects the notion of substitutability for certain critical forms of natural capital. Empirical results over the period 1980 to 2006 show that many of the lowest performing countries on the HDI also face problems of weak unsustainability, as measured by genuine savings. Countries with high to very high HDI performance, on the other hand, typically appear to be strongly unsustainable, as measured by ecological footprints, mostly because of unsustainably large carbon dioxide emissions. Two of the biggest challenges facing mankind this century will be to break the link between high human development and strongly unsustainable damage to natural capital on the one hand, requiring a very significant and rapid decarbonisation of their economies, and assisting countries with very low human development to overcome weak unsustainability by raising their investment levels into all forms of capital on the other.
    Keywords: weak sustainability, strong sustainability, Human Development Index, genuine savings, ecological footprints, climate change
    JEL: Q01 Q2 Q3 Q4
    Date: 2010–06
  16. By: Houssem Eddine Chebbi (Faculty of Economic Sciences and Management of Nabeul (FSEGN), Tunisia); Marcelo Olarreaga; Habib Zitouna
    Abstract: The literature on trade often focuses on its impact on economic growth. However, more recently attention has been paid to the impact of openness on other important aspects of individual welfare, such as the environment. Because openness affects economic activity it will also affect pollution levels. But changes in economic activity also imply changes in the levels of income per capita which may lead to changes in the demand for environmental standards. Moreover, trade will affect pollution levels directly through its impact on the composition of the production bundle, as resources get reallocated across more, or less polluting sectors. All this suggests that the impact of trade openness on pollution is likely to depend on initial conditions and therefore cross-country results are likely to hide significant heterogeneity which may lead to the wrong policy conclusions. The objective of this paper is to assess the impact of Tunisia’s trade reforms over the last four decades on its CO2 emissions by taking into account not only the direct effect of trade on emissions, but also its indirect effect through growth. Using cointegration techniques we disentangle the long and short-run relationship between trade openness, income per capita and CO2 emissions in Tunisia, and explore the extent of Granger causality among these variables. Results suggest that the direct effect of trade openness on CO2 emissions is positive both in the short and the long run, but the indirect effect is negative at least in the long run.
    Date: 2010–04
  17. By: Charles Figuières; Solenn Leplay; Estelle Midler; Sophie Thoyer
    Abstract: Bioprospection is, largely, meant to help reducing deforestation and, the other way around, stopping deforestation enhances the prospects of bioprospection. The need for a global agreement to the problem of tropical deforestation has led to the REDD (Reducing Emissions from Deforestation and Degradation) scheme, which proposes that developed countries pay developing countries for CO2 emissions saved through avoided deforestation and degradation. The remaining issue at stake is to definer the rules defning payments to countries reducing their deforestation rate. This article develops a game-theoretic bargaining model, simulating the on-going negotiation process which is currently taking place within the Convention of Climate Change, after the Copenhagen agreement of December 2009. It shows that the conditions under which developing countries are left to bargain over the allocation of the global forest fund may lead to an ineffective system of incentives. Below a given level of contributions from the North, the mechanism fails to curb the deforestation. Beyond this level, it induces perverse effects: the larger the North's contribution, the larger the deforestation rate. Consequently, the mechanism is most effective only at a specifc threshold level which, given the unobservability of countries'preferences, can only be found by a repeated "trial and error" implementation process.
    Date: 2010–06
  18. By: Frank Jotzo (ANU Climate Change Institute (Crawford School of Economics and Government), the Australian National University)
    Abstract: There is demand for qualitative and quantitative economic analysis on the optimum degree of climate change mitigation and adaptation, the optimal timing of such actions, and their optimum distribution between countries and sectors. This paper discusses what is possible for economic modelling in this field and what is not, with specific reference the paper by Bosello, Carraro and de Cian (2009) as well as Tol (2009). Integrated assessment modelling can provide powerful qualitative insights, for example about the need for both mitigation and adaptation and the interactions between the two, or the need for both individual and policy-driven adaptation. However, the more detailed quantitative results from such studies are subject to such strong limitations, and in many cases are virtually irrelevant as a guide to policy. Three important features are needed in economic models of climate change in order for these models to be useful representations of reality: representation of uncertainty about impacts, in particular the risk of abrupt climate change; fuller representation of economic impacts from climate change and inclusion of non-market impacts; and modelling of equity dimensions. These features are absent in many model currently used, and as a result quantitative results tend to be biased against mitigation as an option to address climate change, and in favour of other adaptation.
    Date: 2010–03
  19. By: David Stern (Arndt-Corden Division of Economics, Crawford School of Economics and Government, Australian National University, and Centre for Applied Macroeconomic Analysis, Canberra, Australia); Ross Lambie (Crawford School of Economics and Government, Australian National University, Australia. Australian National University)
    Abstract: The relative cost of carbon emissions reductions across regions depends on whether we measure cost by marginal or total cost, private or economy-wide cost, and using market or purchasing power parity exchange rates. If all countries are on the same marginal carbon abatement cost curve then lower marginal costs of abatement are associated with higher energy intensities and higher total costs of abatement in achieving proportional cuts in emissions, equal emissions per capita, or common global carbon price targets. We test this conjecture using the results of the GTEM computable general equilibrium model as presented in the climate change economics review conducted by the Australian Treasury Department. Rankings of countries by costs do differ depending on whether marginal or total cost is used. But some regions, including OPEC and the former USSR, have high marginal costs and high emissions intensities and, therefore, high total costs and others like the EU relatively low marginal and total costs. Under a global emissions trading regime real economy-wide costs of abatement are higher in developing economies with currencies valued below purchasing power parity and large differences between private and economy-wide costs such as India contributing to the high GDP losses experienced in those countries.
    Keywords: Climate change, costs, developing countries, computable general equilibrium
    JEL: Q52 Q54
    Date: 2010–06
  20. By: Christoph Heinzel (Centre for Energy and Environmental Markets (CEEM) School of Economics, Australian School of Business, University of New South Wales, Sydney, Australia); Thomas Winkler (WSB Neue Energien GmbH)
    Abstract: Quota obligation schemes based on tradable green certificates have become a popular policy instrument to expand power generation from renewable energy sources (RES). Their application, however, can neither be justified as a first-best response to a market failure, nor, in a second-best sense, as an instrument mitigating distortionary effects of the emissions externality, if an emissions trading system exists that fully covers the energy industry. We study how ancillary reasons, in form of overcoming various barriers for RES use and establishing beneficial side-effects, such as industry development, energy security, and abatement of pollutants not covered under the ETS, apply to the scheme recently introduced in Poland. While setting substantial expansion incentives, an advantage for local industry or job-market development or energy security can hardly be seen. With rising power prices for end consumers and awareness that the extra rents from the schemes mostly accrue to foreign investors and renewable and polluting generators, we expect a negative impact on social acceptance for RES and RES deployment support policies.
    Keywords: tradable green certificates, environmental policy, Poland
    Date: 2010–03
  21. By: Severin Borenstein
    Abstract: Human activity has disrupted the natural balance of greenhouse gases in the atmosphere and is causing climate change. Burning fossil fuels and deforestation result directly in about 9 gigatons of carbon (GtC) emissions per year against the backdrop of the natural carbon flux -- emission and uptake -- of about 210 GtC per year to and from oceans, vegetation, soils and the atmosphere. But scientific research now indicates that humans are also impacting the natural carbon cycle through less-direct, but very important, mechanisms that are more difficult to monitor and control. I explore the challenges this presents to market or regulatory mechanisms that might be used to reduce greenhouse gases: scientific uncertainty about these indirect processes, pricing heterogeneous impacts of similar human behaviors, and the difficulty of assigning property rights to a far larger set of activities than has previously been contemplated. While this does not undermine arguments for market mechanisms to control direct anthropogenic release of greenhouse gases, it suggests that more research is needed to determine how and whether these mechanisms can be extended to address indirect human impacts.
    JEL: H23 Q54
    Date: 2010–06
  22. By: Chevallier, Julien
    Abstract: EUAs are European Union Allowances traded on the EU Emissions Trading Scheme (EU ETS), while Certified Emissions Reductions (CERs) arise from the Clean Development Mechanism under the Kyoto Protocol. These emissions assets attract an increasing attention among brokers, investors and operators on emissions markets, because they may be both used for compliance under the EU ETS (up to fixed limits). This paper proposes a statistical analysis of the inter-relationships between EUA and CER price series, by using vector autoregression, impulse response function, and cointegration analysis on daily data from March 9, 2007 to January 14, 2010. The central results show that EUAs and CERs affect each other significantly through the vector autoregression model, and react quite rapidly to shocks on each other through the impulse response function analysis. Most importantly, both price series are found to be cointegrated, with EUAs leading the price discovery process in the long-term through the vector error correction mechanism.
    Keywords: EUA; CER; Vector Autoregression; Impulse Response Function; Cointegration; Vector Error Correction Model; EU ETS; Price Discovery;
    JEL: Q4 C3
    Date: 2010–02
  23. By: Patrick Richard (GREDI, Département d'économique, Université de Sherbrooke)
    Abstract: Capital markets may be an important tool in the reduction of pollution emissions. Indeed, they provide firms with an incentive to maintain a good environmental record (or at least, a good reputation) in order to maximize the value of their equity shares. Also, efficient capital markets may facilitate financing of environmentally friendly projects and reduce problems resulting from asymmetric information. In this paper, I use a panel of 36 countries between 1981 and 2007 to study the impact of financial market instability on CO2 emissions at the national level. According to my results, higher financial stability is beneficial for the environment.
    Keywords: CO2 emissions; financial stability; dynamic panel data model
    Date: 2010–06–17
  24. By: Hervé-Mignucci, Morgan; Chevallier, Julien; Alberola, Emilie; Mansanet-Bataller, Maria
    Keywords: European CO2 allowance; Certified Emission Reduction;
    JEL: Q52 Q56
    Date: 2009–10
  25. By: Eduardo Cavallo; Sebastian Galiani; Ilan Noy; Juan Pantano
    Abstract: This paper examines the short and long-run average causal impact of catastrophic natural disasters on economic growth by combining information from comparative case studies. The counterfactual of the cases studied is assessed by constructing synthetic control groups, taking advantage of the fact that the timing of large sudden natural disasters is an exogenous event. It is found that only extremely large disasters have a negative effect on output, both in the short and long run. However, this result appears in two events where radical political revolutions followed the natural disasters. Once these political changes are controlled for, even extremely large disasters do not display any significant effect on economic growth. It is also found that smaller, but still very large natural disasters, have no discernible effect on output.
    Keywords: Natural Disasters, Political Change, Economic Growth and Causal Effects
    JEL: O40 O47
    Date: 2010–06
  26. By: Huifang Tian; John Whalley
    Abstract: We report numerical simulation results using a multiyear global multi country modeling framework which we use to assess the impacts of alternative emissions cuts which will likely come under consideration for the process to follow the December 2009 UNFCCC negotiation in Copenhagen. The Copenhagen Accord sets out prior country unilateral commitments, and provides a framework for further negotiation of mutually agreed cuts. We also consider possible financial transfers under the Adaptation Fund and possible trade linked border measures against non participants. Countries are linked not only through shared impacts of global temperature change but also through trade among country subscripted goods. We can thus evaluate the potential impacts of either explicit or implicit accompanying mechanisms including funds/transfers, border adjustments, and tariffs. We calibrate the model to alternative BAU damage scenarios largely as set out in the Stern report. The welfare impacts of both emission reductions and accompanying measures are computed in Hicksian money metric equivalent form over alternative potential commitment periods: 2012-2020, 2012-2030, and 2012-2050. We consider different depth, forms, and timeframes for reductions by China, India, Russia, Brazil, US, EU, Japan and a residual Row. Given the damage estimates we use all countries lose from joint reductions since their foregone consumption is more costly than saved damage from reduced climate change. With the use of larger damage estimates this reverses the depth of cut and allocation of cuts by country cause large differences in impacts by country, while differences in form of cut (intensity, embedment) matter less. Accompanying mechanisms also can make a large difference to participation decisions and especially for large population, low wage, rapidly growing non OECD countries, but are costly for the OECD countries. This all suggests that the bargaining set for the post Copenhagen process is very large, making an eventual jointly agreed outcome difficult to achieve.
    JEL: F01 F51 Q54
    Date: 2010–06
  27. By: Chevallier, Julien
    Abstract: This article develops a forecasting exercise of the volatility of EUA spot, EUA futures, and CER futures carbon prices (modeled after an AR(1)-GARCH(1,1)) using two dynamic factors as exogenous regressors that were extracted from a Factor Augmented VAR model (Bernanke et al. (2005)). The dataset includes 115 macroeconomic, financial and commodities indicators with daily frequency from April 4, 2008 through January 25, 2010 totalling 463 observations that capture the strong uncertainties emerging on the carbon market. The main result shows that the best forecasting performance for the volatility of carbon prices is achieved for the model including the dynamic factors as exogenous regressors, which can be useful to inform hedging or speculative trading strategies by energy utilities, financial market players and risk managers.
    Keywords: Volatility Forecasting; Carbon price; Factor models;
    JEL: Q4 C3
    Date: 2010
  28. By: V. Kerry Smith
    Abstract: This paper considers the role of incentive based climate adaptation policies. It uses the early literature on pricing and capacity choices under demand uncertainty to describe how revised price structures for the substitutes for climate services can be treated as anticipatory adaptation. In many situations the policies determining the prices of these services make them difficult to adjust. Thus, excess demand will not be managed through price adjustment. This situation is important because it implies that the rationing rules determining who is served influence both capacity planning and pricing decisions. The lesson drawn from these models is that reform of pricing policy for climate substitutes offers a ready basis for incentive based adaptation policy. The last part of the paper offers some empirical evidence on how the price elasticity of the residential demand for water changes with variations in seasonal precipitation. The findings suggest marked differences between normal and dry conditions for the Phoenix metropolitan area. These results reinforce the need to co-ordinate changes in pricing policy with any capacity planning developed for water supplies as part of anticipatory climate adaptation. Similar relationships may well apply for other substitutes for climatic services.
    JEL: Q4 Q54
    Date: 2010–06
  29. By: Evan Calford (Centre for Energy and Environmental Markets, School of Economics, University of New South Wales, Australia); Christoph Heinzel (Centre for Energy and Environmental Markets (CEEM) School of Economics, Australian School of Business, University of New South Wales, Australia); Regina Betz (Centre for Energy and Environmental Markets, School of Economics, University of New South Wales, Australia)
    Abstract: We analyse the efficiency effects of the initial permit allocation given to firms with market power in both permit and output market. We examine two models: a long-run model with endogenous technology and capacity choice, and a short-run model with fixed technology and capacity. In the long run, quantity pre-commitment with Bertrand competition can yield Cournot outcomes also under emissions trading. In the short run, Bertrand output competition reproduces the effects derived under Cournot competition, but displays higher pass-through profits. In a second-best setting of overallocation, a tighter emissions target tends to improve permit-market efficiency in the short run.
    Keywords: Emissions trading, Initial permit allocation, Bertrand competition, EU ETS, Endogenous technology choice, Kreps and Scheinkman
    JEL: L13 Q28 D43
    Date: 2010–03
  30. By: Olivier Deschenes
    Abstract: An important component of the debate surrounding climate legislation in the United States is its potential impact on labor markets. Theoretically the connection is ambiguous and depends on the sign of cross-elasticity of labor demand with respect to energy prices, which is a priori unknown. This paper provides some new evidence on this question by estimating the relationship between real electricity prices and indicators of labor market activity using data for 1976-2007. A key contribution of this analysis is that it relies on within-state variation in electricity prices to identify the models and considers all sectors of the U.S. economy rather than focusing only on the manufacturing sector. The main finding is that employment rates are weakly related to electricity prices with implied cross elasticity of full-time equivalent (FTE) employment with respect to electricity prices ranging from -0.16% to -0.10%. I conclude by interpreting these empirical estimates in the context of increases in electricity prices consistent with H.R. 2454, the American Clean Energy and Security Act of 2009. The preferred estimates in this paper suggest that in the short-run, an increase in electricity price of 4% would lead to a reduction in aggregate FTE employment of about 460,000 or 0.6%.
    JEL: J23 Q50
    Date: 2010–06
  31. By: Arik Levinson
    Abstract: With few exceptions, economic analyses of "cap-and-trade" permit trading mechanisms for climate change mitigation have been based on first-best scenarios without pre-existing distortions or regulations. The reason is obvious: interactions between permit trading and other regulations will be complex. However, climate policy proposed for the U.S. will certainly interact with existing laws, and will also likely include additional regulatory changes with their own sets of interactions. Major bills introduced in the U.S. Congress have included both permit trading and traditional command and control regulations – a combination sometimes called "belts and suspenders." This paper discusses interactions between these instruments, and begins to lay out a framework for thinking about them systematically. The most important determinant of how the two types of instruments interact involves whether or not the cap-and-trade permit price would induce more or less abatement than mandated by the traditional standards alone. Moreover, economists' experience predicting the costs of environmental regulations suggests we are more likely to overestimate the costs of cap-and-trade, and therefore the price of carbon permits, than we are to overestimate the costs of a traditional regulatory standard, and that therefore the regulatory standards will likely reduce the cost-effectiveness benefits of cap-and-trade.
    JEL: Q58
    Date: 2010–06
  32. By: Peter Wood (Resource Management in Asia-Pacific Program, Crawford School of Economics and Government, Australian National University)
    Abstract: This survey paper examines the problem of achieving global cooperation to reduce greenhouse gas emissions. Contributions to this problem are reviewed from non-cooperative game theory, cooperative game theory, and implementation theory. Solutions to games where players have a continuous choice about how much to pollute, games where players make decisions about treaty participation, and games where players make decisions about treaty ratification, are examined. The implications of linking cooperation on climate change with cooperation on other issues, such as trade, is examined. Cooperative and non-cooperative approaches to coalition formation are investigated in order to examine the behaviour of coalitions cooperating on climate change. One way to achieve cooperation is to design a game, known as a mechanism, whose equilibrium corresponds to an optimal outcome. This paper examines some mechanisms that are based on conditional commitments, and could lead to substantial cooperation.
    Keywords: Climate change negotiations; game theory; implementation theory; coalition formation; subgame perfect equilibrium
    Date: 2010–05
  33. By: Matthew J. Kotchen
    Abstract: Can simple government programs effectively promote voluntary initiatives to reduce greenhouse-gas emissions? This paper provides an evaluation of how the Connecticut Clean Energy Communities program affects household decisions to voluntarily purchase “green” electricity, which is electricity generated from renewable sources of energy. The results suggest that, within participating communities, subsidizing municipal solar panels as matching grants for reaching green-electricity enrollment targets increases the number of household purchases by 35 percent. The Clean Energy Communities program thus demonstrates how mostly symbolic incentives can mobilize voluntary initiatives within communities and promote demand for renewable energy.
    JEL: Q2 Q4 Q58
    Date: 2010–06
  34. By: Gilbert E. Metcalf; Aparna Mathur; Kevin A. Hassett
    Abstract: This paper provides a simple analytic approach for measuring the burden of carbon pricing that does not require sophisticated and numerically intensive economic models but which is not limited to restrictive assumptions of forward shifting of carbon prices. We also show how to adjust for the capital income bias contained in the Consumer Expenditure Survey, a bias towards regressivity in carbon pricing due to underreporting of capital income in higher income deciles in the Survey. Many distributional analyses of carbon pricing focus on the uses-side incidence of carbon pricing. This is the differential burden resulting from heterogeneity in consumption across households. Once one allows for sources-side incidence (i.e. differential impacts of changes in real factor prices), carbon policies look more progressive. Perhaps more important than the findings from any one scenario, our results on the progressivity of the leading cap and trade proposals are robust to the assumptions made on the relative importance of uses and sources side heterogeneity.
    JEL: H22 H23 Q48 Q54 Q58
    Date: 2010–06
  35. By: Erin T. Mansur
    Abstract: This chapter examines the tradeoffs of regulating upstream (e.g., coal, natural gas, and refined petroleum product producers) versus regulating downstream (e.g., direct sources of greenhouse gases (GHG)). In general, regulating at the source provides polluters with incentives to choose among more opportunities to abate pollution. This chapter develops a simple theoretical model that shows why this added flexibility achieves the lowest overall costs. I broaden the theory to incorporate several reasons why these potential gains from trade may not be realized--transactions costs, leakage, and offsets--in the context of selecting the vertical segment of regulation.
    JEL: Q4 Q5
    Date: 2010–06

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