nep-ene New Economics Papers
on Energy Economics
Issue of 2011‒02‒26
thirty-six papers chosen by
Roger Fouquet
Basque Climate Change Centre, Bilbao, Spain

  1. The role of the Arctic in future global petroleum supply By Lars Lindholt and Solveig Glomsrød
  2. Historical Oil Shocks By James D. Hamilton
  3. Is Our World Going to Get a Whole Lot Smaller? By Byron Gangnes; Alyson C. Ma; Ari Van Assche
  4. The Impact of Oil Prices in Turkey on Macroeconomics By Aktas, Erkan; Özenç, Çiğdem; Arıca, Feyza
  5. Nonrenewable Resources, Strategic Behavior and the Hotelling Rule: An Experiment By Roel van Veldhuizen; Joep Sonnemans
  6. Does OPEC still exist as a cartel? An empirical investigation By Vincent Bremond; Emmanuel Hache; Valérie Mignon
  7. Food and energy prices, government subsidies and fiscal balances in south Mediterranean countries By Albers, Ronald; Peeters, Marga
  8. A Barrel of Oil or a Bottle of Wine: How Do Global Growth Dynamics Affect Commodity Prices? By Tahsin Saadi-Sedik; Serhan Cevik
  9. Do Firms sell forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas By Remco van Eijkel; J.L. Moraga
  10. A Generalized Nash-Cournot Model for the European NaturalGas markets with a Fuel Substitution Demand Function: The GaMMES Model By Ibrahim Abada; Vincent Briat; Steve A. Gabriel; Olivier Massol
  11. Challenge of Economic Growth and the Concern for Energy Security: A Comparative Analysis of South and South-East Asia By Jain, Varinder
  12. Labor productivity and energy use in a three sector model: An application to Egypt By Rudiger von Arnim and Codrina Rada
  13. Pivotal Suppliers and Market Power in Experimental Supply Function Competition By Jordi Brandts; Stanley S. Reynolds; Arthur Schram
  14. Cost of electricity in Brazil: Effects of 2004 regulatory reform By Marina Figueira de Mello; Monica Barros
  15. Price capping in partially monopolistic electricity markets By Bruno Bosco; Lucia Parisio; Matteo Pelagatti
  16. Black swans or dragon kings? A simple test for deviations from the power law By Joanna Janczura; Rafal Weron
  17. Is Power Production Flexibility a Substitute for Storability? Evidence from Electricity Futures Prices By Mehtap Kilic; Ronald Huisman
  18. The Electricity Sector in FYR Macedonia By Alexander F. Tieman
  19. Wind Energy in Egypt: Economic Feasibility for Cairo By Yasmina Hamouda
  20. Global Prospects for Utility-Scale Solar Power: Toward Spatially Renewable Energy Systems - Working Paper 235 By Kevin Ummel
  21. Incorporating Vehicular Emissions into an Efficient Mesoscopic Traffic Model: An Application to the Alameda Corridor By Gan, Qijian; Sun, Jielin; Jin, Wenlong; Saphores, Jean-Daniel
  22. The Economics of Information in Transport By Piet Rietveld
  23. Is there really a Green Paradox? By Frederick van der Ploeg; Cees Withagen
  24. Output-based allocation and investment in clean technologies By Knut Einar Rosendahl and Halvor Briseid Storrøsten
  25. Optimal Environmental Policy under Monopolistic Provision of Clean Technologies By Hattori, Keisuke
  26. Competing Recombinant Technologies for Environmental Innovation By Paolo Zeppini; Jeroen C.J.M. van den Bergh
  27. Clean energy technology and the role of non-carbon price based policy: an evolutionary economics perspective By Eric Knight; Nicholas Howarth
  28. Wie der klimapolitische Patient Japan den Anweisungen des umweltökonomischen Dok-tors folgte: Eine Analyse nationaler Treibhausgas-Emissionshandelssysteme in Japan By Sven Rudolph; Matthias
  29. Emission Trading Systems and the Optimal Technology Mix By Zöttl, Gregor
  30. International Environmental Agreements in the Presence of Adaptation By Walid Marrouch; Amrita Ray Chaudhuri
  31. Designing climate change adaptation policies : an economic framework By Hallegatte, Stephane; Lecocq, Franck; de Perthuis, Christian
  32. International Support of Climate Change Policies in Developing Countries: Strategic, Moral and Fairness Aspects By Dirk Rübbelke
  33. The Economics of Population Policy for Carbon Emissions Reduction in Developing Countries - Working Paper 229 By David Wheeler and Dan Hammer
  34. Zur Architektur globaler Governance des Klimaschutzes By Winter, Gerd
  35. Confronting the American Divide on Carbon Emissions Regulation - Working Paper 232 By David Wheeler
  36. Greenhouse Gas Regulation under the Clean Air Act: A Guide for Economists By Burtraw, Dallas; Fraas, Arthur G.; Richardson, Nathan

  1. By: Lars Lindholt and Solveig Glomsrød (Statistics Norway)
    Abstract: The Arctic has a substantial share of global petroleum resources, but at higher costs than in most other petroleum provinces. Arctic states and petroleum companies are carefully considering the potential for future extraction in the Arctic. This paper studies the oil and gas supply from 6 arctic regions during 2010-2050 along with global economic growth and different assumptions regarding petroleum prices and resource endowments. Supply is calculated based on a global model of oil and gas markets. The data on undiscovered resources for the Arctic is based on the estimates by USGS. Sensitivity studies are carried out for two alternative price scenarios and for a 50 per cent reduction of arctic undiscovered resources compared with the USGS 2008 resource estimate. Although a major part of the undiscovered arctic petroleum resources is natural gas, our results show that the relative importance of the Arctic as a world gas supplier will decline, while its importance as a global oil producer may be maintained. We also show that less than full access to undiscovered oil resources will have minor effect on total arctic oil production and a marginal effect on arctic gas extraction. The reason is that Arctic Russia is an important petroleum producer with a sufficiently large stock of already discovered resources to support their petroleum production before 2050.
    Keywords: Arctic; oil market; gas market; equilibrium model
    JEL: Q31 Q41 R10
    Date: 2011–02
  2. By: James D. Hamilton
    Abstract: This paper surveys the history of the oil industry with a particular focus on the events associated with significant changes in the price of oil. Although oil was used much differently and was substantially less important economically in the nineteenth century than it is today, there are interesting parallels between events in that era and more recent developments. Key post-World-War-II oil shocks reviewed include the Suez Crisis of 1956-57, the OPEC oil embargo of 1973-1974, the Iranian revolution of 1978-1979, the Iran-Iraq War initiated in 1980, the first Persian Gulf War in 1990-91, and the oil price spike of 2007-2008. Other more minor disturbances are also discussed, as are the economic downturns that followed each of the major postwar oil shocks.
    JEL: E32 Q41 Q43
    Date: 2011–02
  3. By: Byron Gangnes; Alyson C. Ma; Ari Van Assche
    Abstract: The surge of oil prices in recent years has led to speculation that rising transportation costs could end the period of dramatic world trade growth — in the words of Rubin (2009), “…Your world is going to get a whole lot smaller.” Using data from China’s Customs Statistics, we examine the impact of oil prices on trade’s sensitivity to distance. We find that higher oil prices increase trade’s elasticity to distance, but that the economic effect is small. We also find that the effect is more pronounced for trade within global production networks, and less large for goods shipped by air. <P>
    Keywords: oil prices, distance, trade, vertical specialization, mode of transport, China,
    Date: 2011–02–01
  4. By: Aktas, Erkan; Özenç, Çiğdem; Arıca, Feyza
    Abstract: This study explores the impact of fluctuations in oil prices on Turkey's economy. The data used in this study covers the years from 1991 to 2008. Macro-economic variables used in this study are GNP, inflation, unemployment and the ratio of exports to imports. VAR model is used in estimating the macro-economic impact of oil prices. Based on the results of the analysis conducted, a meaningful relationship of oil prices with inflation, unemployment and the ratio of exports to imports is estimated. However, it is observed that a rise in oil prices do not have any substantial impact on macro-economic variables. While an inverse relationship of oil prices with the ratio of exports to imports and unemployment is estimated, a direct relationship between oil prices and inflation emerged. The results of impulse-response analysis shows that the responses of macro-economic variables to oil price shocks become stable only after one year.
    Keywords: Oil prices; VAR; Macroeconomics; Turkey
    JEL: C32 E6
    Date: 2010–02–18
  5. By: Roel van Veldhuizen (University of Amsterdam); Joep Sonnemans (University of Amsterdam)
    Abstract: This study uses the methods of experimental economics to investigate possible causes for the failure of the Hotelling rule for nonrenewable resources. We argue that as long as resource stocks are high enough, producers may choose to (partially) ignore the dynamic component of their production decision, shifting production to the present and focusing more on strategic behavior. We experimentally vary stock size in a nonrenewable resource duopoly setting and find that producers with high stocks indeed pay significantly less attention to variables related to dynamic optimization, leading to a failure of the Hotelling rule.
    Keywords: Experiments; Nonrenewable Resources; Dynamic Oligopoly
    JEL: C90 Q31 Q41 L13
    Date: 2011–01–21
  6. By: Vincent Bremond; Emmanuel Hache; Valérie Mignon
    Abstract: The aim of this paper is to determine if OPEC acts as a cartel by testing whether the production decisions of the different countries are coordinated and if they have an influence on oil prices. Relying on cointegration and causality tests in both time series and panel settings, our findings show that the OPEC influence has evolved through time, following the changes in the oil pricing system. While the influence of OPEC is found to be important just after the counter-oil shock, our results show that OPEC is price taker on the majority of the considered sub-periods. Finally, by dividing OPEC between savers and spenders, we show that it acts as a cartel mainly with a subgroup of its members.
    Keywords: Oil prices, oil production, OPEC, cartel, cointegration, causality.
    JEL: C22 C23 L11 Q40
    Date: 2011
  7. By: Albers, Ronald; Peeters, Marga
    Abstract: Just before the global crisis soaring commodity prices pushed up inflation significantly, not least in EU neighbour countries at the Mediterranean. These price shocks affected public finances in the southern Mediterranean region, notably via government subsidies. Partly due to lags in the transmission of commodity prices into prices for final users the subsidies burden continued to be felt, despite the price falls registered in the wake of the credit crisis. We show that downward price rigidities play a role. Recently, commodity price pressures have re-emerged. We focus on food prices and analyse recent developments in food inflation in Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, the occupied Palestinian territories, Syria and Tunisia in comparison with other middle income economies. Subsidies on food and fuel are quantified per country for the period 2002-2010. The incremental government subsidies entail an estimated deterioration of the government balances of up to more than 2% of GDP in 2008 and, for most countries only slight improvements in the global recession year 2009. Ensuing longer-term challenges for public finances remain as inflation rises on the back of higher global economic growth. As recent events in Tunisia and Egypt illustrate, these can have important political implications. Finally, the paper discusses some options that can lead to more efficient government spending, even in the event of sharp swings in prices of basic necessities.
    Keywords: food prices; energy prices; inflation; public finances; government subsidies
    JEL: E62 L71 L66 H2 E3
    Date: 2011–01
  8. By: Tahsin Saadi-Sedik; Serhan Cevik
    Abstract: This paper investigates the causes of extreme fluctuations in commodity prices from 1990 to 2010. Analyzing two very distinct commodities-crude oil and fine wine, we find that macroeconomic factors are the main determinants of commodity prices. Although supply constraints have the expected effect, aggregate demand growth is the key factor. The empirical results show that while advanced economies account for more than half of global consumption, emerging economies make up the bulk of the incremental change in demand, thereby having a greater weight in commodity price formation. The results also show that the shift in the composition of aggregate commodity demand is a recent phenomenon.
    Keywords: Agricultural commodities , Agricultural prices , Commodity price fluctuations , Consumption , Demand , Economic growth , Emerging markets , International liquidity , Oil prices , Oil sector , Supply ,
    Date: 2011–01–04
  9. By: Remco van Eijkel (Dept. of Economics, Econometrics and Finance, University of Groningen); J.L. Moraga (ICREA, IESE Business School, and University of Groningen)
    Abstract: Building on a model of the interaction of risk-averse frms that compete in forward and spot markets, we develop an empirical strategy to test whether oligopolistic frms use forward contracts for strategic motives, for risk-hedging, or for both. An increase in the number of players weakens the incentives to sell forward for risk-hedging reasons.
    Keywords: market power; risk-hedging; forward contracts; spot market; over-thecounter trade; market transparency; churn rates
    JEL: D43 L13 G13 L95
    Date: 2010–06–10
  10. By: Ibrahim Abada; Vincent Briat; Steve A. Gabriel; Olivier Massol
    Abstract: This article presents a dynamic Generalized Nash-Cournot model in order to describe the evolution of the natural gas markets. We tried to represent most of the gas chain actors, from the producers to the consumers, passing by the storage and pipeline operators and the intermediate local traders. Our economic structure description takes into account market powers and the demand representation tries to capture the possible fuel substitution that can be made between the consumption of oil, coal and natural gas in the overall fossil energy consumption. We also take into account the long-term aspects inherent to some markets, in an endogenous way. This particularity of our description makes the model a Generalized Nash Equilibrium problem that needs to be solved using specific mathematical techniques. Our model has been applied to represent the European natural gas market and forecast, till 2030, after a calibration process, consumptions, prices, productions and natural gas dependence. A comparison between our model, a more standard one that does not take into account energy substitution, and the European Commission natural gas forecasts is carried out to analyse our results. Finally, in order to illustrate the possible use of fuel substitution, we studied the evolution of the natural gas price over the coal and oil prices.
    Keywords: Energy markets modelling, Game theory, Generalized Nash-Cournot equilibria, Quasi-Variational Inequality
    Date: 2011
  11. By: Jain, Varinder
    Abstract: Rapidly increasing dependence of the economic growth process on energy and the depletion of fossil fuel reserves at a fast pace have raised concerns for securing energy supply across the world. The developing nations remain the worst affected on at least two counts: first, they are at the lower levels of economic development and thereby have the pressing need for growth; second, they have the limited affordability to finance their energy imports in the face of rapid surge in the prices of fossil fuels. In such a context, this study provides a comparative analysis of South and South-east Asia – the major economies of India, Pakistan and Bangladesh are selected from the former region and Indonesia, Malaysia and Thailand are selected from the latter for focused analytical inquiry into energy supply situation and energy policy framework.
    Keywords: Energy Security; South Asia; South-east Asia; India; Pakistan; Bangladesh; Thailand; Indonesia; Malaysia
    JEL: Q48 Q40 Q27
    Date: 2011–02
  12. By: Rudiger von Arnim and Codrina Rada
    Abstract: This paper presents a model of a developing economy with three sectors---a modern sector producing manufactures and services, a traditional sector producing agricultural goods, and a third sector providing energy. Modern and energy sector are assumed to be demand--constrained; the agricultural sector is supply--constrained. Simulation exercises confirm insights of existing theory on structural heterogeneity: A price--clearing agricultural sector can impose an inflationary barrier on growth. Further, emphasis is placed on the sources of productivity growth. Specifically, higher energy intensity rather than increases in energy productivity enable labor productivity growth, with the attendant complications for 'green growth'.
    Keywords: Structural heterogeneity, Multi-sector model, Energy use JEL Classification: O41, Q43, C63
    Date: 2011
  13. By: Jordi Brandts (Universitat Autonoma de Barcelona); Stanley S. Reynolds (University of Arizona); Arthur Schram (University of Amsterdam)
    Abstract: In the process of regulatory reform in the electric power industry, the mitigation of market power is one of the basic problems regulators have to deal with. We use experimental data to study the sources of market power with supply function competition, akin to the competition in wholesale electricity markets. An acute form of market power may arise if a supplier is pivotal; that is, if the supplier's capacity is required in order to meet demand. To be able to isolate the impact of demand and capacity conditions on market power, our treatments vary the distribution of demand levels as well as the amount and symmetry of the allocation of production capacity between different suppliers. We relate our results to a descriptive power index and to the predictions of two alternative models: a supply function equilibrium (SFE) model and a multi-unit auction (MUA) model. We find that pivotal suppliers do indeed exercise their market power in the experiments. We also find that observed behavior is consistent with the range of equilibria of the unrestricted SFE model and inconsistent with the unique equilibria of two refinements of the SFE model and of the MUA model.
    Keywords: Market Power; Electric Power Markets; Pivotal Suppliers; Experiments
    JEL: C92 D43 L11 L94
    Date: 2011–02–11
  14. By: Marina Figueira de Mello (Department of Economics PUC-Rio); Monica Barros (ENCE/IBGE)
    Abstract: In 2004, in the beginning of the first president Lula mandate, a complete regulatory reform of electricity was launched. In 2008, four years after, Brazilian Congress started an investigation of the causes of Brazilian relatively high electricity tariffs. The results of the investigation pointed out numerous reasons, but failed to identify generation costs as one of the main causes. In this paper the analysis done by Congress is broadened addressing the trend in electricity production costs. The main conclusions are that the implementation of auctions together with subsidies from state enterprises did not reduce future acquisition costs as much as expected, but successfully reduced the rhythm of price increases. The long run marginal expansion cost is increasing very fast because new hydro plants are ever more distant of consumption centers and environmental costs are difficult to mitigate. Thermal plants and other technologies, though increasing in importance, still have much higher prices. In case prices reflected marginal incremental costs, electricity prices would have been much higher. The fact that consumers do not see such high incremental costs, allow them to take wrong consumption decisions. As consumers are able to buy at prices lower than marginal cost, consumption levels go too far. Demand increases amplify the electricity market gap and reinforce the necessity of new investments.
    Keywords: Electricity; regulatory reform; energy auctions and generation costs. JEL Codes: L43
    Date: 2010–10
  15. By: Bruno Bosco (Department of Legal and Economic Systems, Università degli Studi di Milano-Bicocca); Lucia Parisio (Department of Legal and Economic Systems, Università degli Studi di Milano-Bicocca); Matteo Pelagatti (Department of Statistics, Università degli Studi di Milano-Bicocca)
    Abstract: In this paper we consider an oligopolistic market in which one firm can be monopolist on her residual demand function and derive implications on the shape of her profit function, which we show may not be concave in price. We propose a simple price-capping rule that induce the pivotal operator to compete for quantity instead of taking advantage of her monopoly. Then, we analyze the bidding behaviour of the dominant electricity producer oper- ating in the Italian wholesale power market (IPEX). This firm is vertically integrated and in many instances she acts as a monopolist on the residual demand. We find that, contrary to expectations, this pivotal firm refrains to exploit totally her unilateral market power and, therefore, bids at levels well below the cap. We discuss such a behaviour and derive implications for the setting of the price cap.
    Keywords: Electricity auctions, capacity constraints, price cap, optimal bidding
    JEL: C50 L11 L12 L43 L51 L94 Q41 Q48
    Date: 2011–02
  16. By: Joanna Janczura; Rafal Weron
    Abstract: We develop a simple test for deviations from power law tails, which is based on the asymptotic properties of the empirical distribution function. We use this test to answer the question whether great natural disasters, financial crashes or electricity price spikes should be classified as dragon kings or 'only' as black swans.
    Date: 2011–02
  17. By: Mehtap Kilic (Erasmus University Rotterdam); Ronald Huisman (Erasmus University Rotterdam)
    Abstract: Electricity is not storable. As a consequence, electricity demand and supply need to be in balance at any moment in time as a shortage in production volume cannot be compensated with supply from inventories. However, if the installed power supply capacity is very flexible, variation in demand can be counterbalanced with flexible adjustment of production volumes. Therefore, supply flexibility can replace the role of inventory. In this paper, we question whether power production flexibility is a substitute for storability. To do so, we examine power futures prices from countries that differ in their power supply and test whether power futures prices contain information about expected future spot prices and risk premiums and examine whether futures prices from a market in which power supply is more flexible would lead to futures prices that are more in line with the theory of storage. We find the opposite; futures prices from markets with flexible power supply behave according to the expectations theory. The implicit view from futures prices is that flexibility is not a substitute for storability.
    Keywords: Electricity futures prices; forward risk premium; theory of storage; expectations theory
    JEL: G13
    Date: 2010–07–19
  18. By: Alexander F. Tieman
    Abstract: This paper describes the current state of the Macedonian electricity sector. It looks at ongoing structural changes, driven by the gradual adoption of the EU acquis on energy, and comes up with estimates for electricity subsidies. It concludes by discussing the longer term outlook and sketching policy options.
    Keywords: Demand , Electric power , Energy policy , Energy sector , European Economic and Monetary Union , Macedonia, former Yugoslav Republic of , Supply ,
    Date: 2011–02–04
  19. By: Yasmina Hamouda (Faculty of Management Technology, The German University in Cairo)
    Abstract: Motivated by the rise of the electricity tariffs applied on industrial customer and the frequent electricity cut offs recently experienced in Egypt, this paper assesses the economic feasibility of installing a stand alone wind energy technology by an industrial customer who seeks to reduce his dependency on the national grid. For this purpose, the wind energy potential at the wind regime of Cairo was chosen to be assessed using half an hour wind speed data for a full one-year period (2009). The Weibull parameters of the wind speed distribution function were estimated by employing the maximum likelihood approach. The estimation revealed that Cairo has poor wind resources. Despite the poor resources, the financial analysis has shown that under certain parameters the wind project can prove to be financially viable. Thus harnessing wind energy through stand alone systems can help in meeting the industries electric power needs.
    Keywords: Renewable energy, wind resources, Weibull distribution, electricity
    JEL: Q42 O22 N77
    Date: 2011–02
  20. By: Kevin Ummel
    Abstract: In this paper, Kevin Ummel provides high-resolution estimates of the global potential and cost of solar power technologies while identifying deployment patterns that minimize the cost of greenhouse gas abatement. His findings are based on a global simulation of providing 2,000 TWh of solar power (about 7 percent of total consumption) in 2030, taking into account least-cost siting of facilities and transmission lines and the effect of diurnal variation on profitability and required subsidies. The American southwest, the Tibetan Plateau, the Sahel, and the Middle East are identified as major supply areas. Consumption of solar power concentrates in the United States over the next decade, diversifies to Europe and India by the early 2020’s, and focuses in the second half of the decade in China, often relying long-distance, high-voltage transmission lines. Cost estimates suggest that deployment on this scale is likely to be competitive with other prominent greenhouse gas abatement options in the energy sector. Further development of spatially explicit energy models could help guide infrastructure planning and financing strategies both nationally and globally, elucidating a range of important questions related to renewable energy policy.
    Keywords: solar power, green energy, greenhouse gas
    Date: 2010–12
  21. By: Gan, Qijian; Sun, Jielin; Jin, Wenlong; Saphores, Jean-Daniel
    Abstract: We couple EMFAC with a dynamic mesoscopic traffic model to create an efficient tool for generating information about traffic dynamics and emissions of various pollutants (CO2, PM10, NOX, and TOG) on large scale networks. Our traffic flow model is the multi-commodity discrete kinematic wave (MCDKW) model, which is rooted in the cell transmission model but allows variable cell sizes for more efficient computations. This approach allows us to estimate traffic emissions and characteristics with a precision similar to microscopic simulation but much faster. To assess the performance of this tool, we analyze traffic and emissions on a large freeway network located between the ports of Los Angeles/Long Beach and downtown Los Angeles. Comparisons of our mesoscopic simulation results with microscopic simulations generated by TransModeler under both congested and free flow conditions show that hourly emission estimates of our mesoscopic model are within 4 to 15 percent of microscopic results with a computation time divided by a factor of 6 or more. Our approach provides policymakers with a tool more efficient than microsimulation for analyzing the effectiveness of regional policies designed to reduce air pollution from motor vehicles.
    Date: 2011–02–01
  22. By: Piet Rietveld (VU University Amsterdam)
    Abstract: Travelers often are incompletely informed about travel alternatives, which has important implications for various domains of travel behavior such as whether or not to make a trip, modal choice, the timing of a trip or route choice. During the last decade large efforts have been made to increase the availability of information to travelers by means of advanced traveler information systems (ATIS). This paper reviews economic aspects of information in transport markets. First, I will discuss information acquisition from an economics perspective by characterizing costs and benefits of information, leading to the formulation of optimal strategies to acquire information. This will be done in the context of search strategies leading to sequential information acquisition. I further discuss the broader consequences of information acquisition on the functioning of transport networks. In congested networks, when travelers change their behavior on the basis of information they obtain, this will have consequences not only for their own travel times, but also those of other travelers. This leads to interesting positive (and possibly negative) spillovers having important policy implications. The next step is the analysis of a traveler's choice whether to adopt advanced traveler information systems, implying the derivation of a demand function for information.
    Keywords: Information; ATIS; uncertainty
    JEL: R41 D83 L86
    Date: 2010–11–04
  23. By: Frederick van der Ploeg (University of Oxford, University of Amsterdam); Cees Withagen (VU University Amsterdam)
    Abstract: The Green Paradox states that, in the absence of a tax on CO2 emissions, subsidizing a renewable backstop such as solar or wind energy brings forward the date at which fossil fuels become exhausted and consequently global warming is aggravated. We shed light on this issue by solving a model of depletion of non-renewable fossil fuels followed by a switch to a renewable backstop, paying attention to timing of the switch and the amount of fossil fuels remaining unexploited. We show that the Green Paradox occurs for relatively expensive but clean backstops (such as solar or wind), but does not occur if the backstop is sufficiently cheap relative to marginal global warming damages (e.g., nuclear energy) as then it is attractive to leave fossil fuels unexploited and thus limit CO2 emissions. We show that, without a CO2 tax, subsidizing the backstop might enhance welfare. If the backstop is relatively dirty and cheap (e.g., coal), there might be a period with simultaneous use of the non-renewable and renewable fuels.If the backstop is very dirty compared to oil or gas (e.g., tar sands), there is no simultaneous use. The optimum policy requires an initially rising CO2 tax followed by a gradually declining CO2 tax once the dirty backstop has been introduced. We also discuss the potential for limit pricing when the non-renewable resource is owned by a monopolist.
    Keywords: Green Paradox; Hotelling rule; non-renewable resource; renewable backstop; global warming; carbon tax; limit pricing
    JEL: Q30 Q42 Q54
    Date: 2010–02–12
  24. By: Knut Einar Rosendahl and Halvor Briseid Storrøsten (Statistics Norway)
    Abstract: Allocation of emission allowances may affect firms' incentives to invest in clean technologies. In this paper we show that so-called output-based allocation tends to stimulate such investments as long as individual firms do not assume the regulator to tighten the allocation rule as a consequence of their investments. The explanation is that output-based allocation creates an implicit subsidy to the firms' output, which increases production, leads to a higher price of allowances, and thus increases the incentives to invest in clean technologies. On the other hand, if the firms expect the regulator to tighten the allocation rule after observing their clean technology investment, the firms' incentives to invest are moderated. If strong, this last effect may outweigh the enhanced investment incentives induced by increased output and higher allowance price.
    Keywords: Emissions trading; allocation of quotas; abatement technology.
    JEL: H21 Q58
    Date: 2011–02
  25. By: Hattori, Keisuke
    Abstract: In this paper, we characterize optimal environmental policy in a case where innovation in clean production technologies is developed and provided by a monopoly. Two policy instruments are considered: an emission tax on downstream polluting firms and an R& D subsidy for an upstream innovator in clean technologies. We find that (i) a higher emission tax may increase (decrease) R&D investment when the burden of the tax payment in the polluters' marginal costs and the price-elasticity of the demand for polluting goods are rather small (large), (ii) the social optimum can be achieved by the combined implementation of an emission tax that is smaller than an ex-ante Pigouvian rate and a subsidy that is equal to the rate of emission reduction due to the new technology, and (iii) if the policy instrument is limited to the emission tax, the second-best tax rate lies between the first-best rate and the ex-ante Pigouvian rate. We test our model by numerical simulation and demonstrate the possibility of a type of ``double dividend'' due to the emission tax. Three extensions of the model are then considered: Cournot competition in the polluting industry, a subsidy to polluters who adopt the new technology, and technology spillovers.
    Keywords: Environmental Tax; R&D; Environmental Damages; Patent
    JEL: L51 L13 Q55 Q53 Q58
    Date: 2011–01–30
  26. By: Paolo Zeppini (University of Amsterdam); Jeroen C.J.M. van den Bergh (Autonomous University of Barcelona, and VU University Amsterdam)
    Abstract: This article presents a model of sequential decisions about investments in environmentally dirty and clean technologies, which extends the path-dependence framework of Arthur (1989). This allows us to evaluate if and how an economy locked into a dirty technology can be unlocked and move towards the clean technology. The main extension involves the inclusion of the effect of recombinant innovation of the two technologies. A mechanism of endogenous competition is described involving a positive externality of increasing returns to investment which are counterbalanced by recombinant innovation. We determine conditions under which lock-in can be avoided or escaped. A second extension is "symmetry breaking" of the the system due to the introduction of an environmental policy that charges a price for polluting. A final extension adds a cost of environmental policy in the form of lower returns on investment implemented through a growth-depressing factor. We compare cumulative pollution under different scenarios, so that we can evaluate the combination of environmental regulation and recombinant innovation.
    Keywords: externalities; hybrid technology; lock-in; R&D; sequential decisions
    JEL: O33 Q55
    Date: 2010–10–26
  27. By: Eric Knight (Department of Geography and the Environment, University of Oxford, Oxford, UK); Nicholas Howarth (Department of Geography and the Environment, University of Oxford, Oxford, UK)
    Abstract: Much academic attention has been paid to the role of carbon pricing in developing a market-led response to low carbon energy innovation. Taking an evolutionary economics perspective this paper makes the case as to why price mechanisms alone are insufficient to support new energy technologies coming to market. In doing so, we set out the unique investment barriers in the clean energy space. For guidance on possible approaches to non-carbon price based policies that seek to tackle these barriers we turn to case studies from Asia, a region which has experienced a strong uptake in climate policy in recent years.
    JEL: Q48 Q42 Q55
    Date: 2011–02
  28. By: Sven Rudolph (University of Kassesl); Matthias
    Abstract: Dem globalen Verbreitungstrend folgend werden klimapolitische Emissionshandelssysteme seit dem Jahr 2005 auch in Japan getestet. Die ökologischen und ökonomischen Erfolge sind allerdings bescheiden geblieben. Welche Ausgestaltungsmerkmale haben zu den Defiziten in den etablierten Systemen geführt und wie können sie modifiziert werden, um zukünftig ein klimapolitisch wirksames und gesamtgesellschaftlich kostengünstiges nationales Emissions-handelssystem zu implementieren? Zur Beantwortung diese Frage orientiert sich der Beitrag im Wesentlichen an praxisorientierten Design- und allokationstheoretischen Wirkungsanaly-sen. So kann gezeigt werden, dass für die Implementierung eines ökologisch effektiven und ökonomisch effizienten Emissionshandelssystems in Japan auf der Basis der bereits etablier-ten Infrastruktur vor allem Handlungsbedarf im Bereich der Verbindlichkeit der Teilnahme, der Zielfestlegung sowie der Erstvergabe und der Gültigkeit der Lizenzen besteht.
    Date: 2011
  29. By: Zöttl, Gregor
    Abstract: Cap and trade mechanisms enjoy increasing importance in environmental legislation worldwide. The most prominent example is probably given by the European Union Emission Trading System (EU ETS) designed to limit emissions of greenhouse gases, several other countries already have or are planning the introduction of such systems.2 One of the important aspects of designing cap and trade mechanisms is the possibility of competition authorities to grant emission permits for free. Free allocation of permits which is based on past output or past emissions can lead to inefficient production decisions of firms’ (compare for example B¨ohringer and Lange (2005), Rosendahl (2007), Mackenzie et al. (2008), Harstad and Eskeland (2010)). Current cap and trade systems grant free allocations based on installed production facilities, which lead to a distortion of firms’ investment incentives, however.1 It is the purpose of the present article to study the impact of a cap and trade mechanism on firms’ investment and production decisions and to analyze the optimal design of emission trading systems in such an environment.
    Keywords: Emissions Trading; Free Allocation; Investment Incentives; Technology Mix
    JEL: H21 H23 Q55
    Date: 2011–02–16
  30. By: Walid Marrouch; Amrita Ray Chaudhuri
    Abstract: We show that adaptive measures undertaken by countries in the face of climate change, apart from directly reducing the damage caused by climate change, may also indirectly mitigate greenhouse gas emissions by increasing the stable size of international agreements on emission reductions. Moreover, we show that the more effective the adaptive measure in terms of reducing the marginal damage from emissions, the larger the stable size of the international environmental agreement. In addition, we show that larger coalitions may lead to lower global emission levels and higher welfare. <P>Nous montrons que les mesures d’adaptation aux changements climatiques vont réduire directement les dommages causés par les changements climatiques. En plus, ces mesures peuvent aussi, indirectement, réduire les émissions des gaz à effet de serre puisqu’ils vont augmenter le nombre des participants dans les accords internationaux sur la réduction des émissions. En outre, nous montrons que la taille stable des accords internationaux sur l’environnement augmente avec l’efficacité des mesures d’adaptation. Par ailleurs, nous établissons que les grandes coalitions peuvent mener à des niveaux inférieurs d’émissions globales, et en plus ces grandes coalitions augment le bien-être mondial.
    Keywords: international environmental agreements, adaptation, coalition formation, climate change, accords environnementaux internationaux, adaptation, formation de coalitions, changements climatiques
    JEL: Q54 Q59
    Date: 2011–02–01
  31. By: Hallegatte, Stephane; Lecocq, Franck; de Perthuis, Christian
    Abstract: Adaptation has long been neglected in the debate and policies surrounding climate change. However, increasing awareness of climate change has led many stakeholders to look for the best way to limit its consequences and has resulted in a large number of initiatives related to adaptation, particularly at the local level. This report proposes a general economic framework to help stakeholders in the public sector to develop effective adaptation strategies. To do so, it lays out the general issues involved in adaptation, including the role of uncertainty and inertia, and the need to consider structural changes in addition to marginal adjustments. Then, it identifies the reasons for legitimate public action in terms of adaptation, and four main domains of action: the production and dissemination of information on climate change and its impacts; the adaptation of standards, regulations and fiscal policies; the required changes in institutions; and direct adaptation actions of governments and local communities in terms of public infrastructure, public buildings and ecosystems. Finally, the report suggests a method to build public adaptation plans and to assess the desirability of possible policies.
    Keywords: Climate Change Economics,Wetlands,Climate Change Mitigation and Green House Gases,Adaptation to Climate Change,Science of Climate Change
    Date: 2011–02–01
  32. By: Dirk Rübbelke
    Abstract: International transfers in climate policy channeled from the industrialized to the developing<br /> world either support the mitigation of climate change or the adaptation to global warming.<br /> From an allocative efficiency point of view, transfers supporting mitigation tend to be Pareto-improving<br /> whereas this is not very likely in the case of adaptation support. We illustrate this<br /> by regarding transfer schemes currently applied under the UN Framework Convention on<br /> Climate Change (UNFCCC) and the Kyoto framework.<br /> However, if we enrich the analysis by integrating distributional aspects, we find that<br /> international adaptation funding may help both developing and developed world. Interestingly<br /> this is not due to altruistic incentives, but due to follow-up effects on international<br /> negotiations on climate change mitigation. We argue that the lack of fairness perceived by<br /> developing countries in the international climate policy arena can be reduced by the support<br /> of adaptation in these countries. As we show – taking into account different fairness concepts<br /> – this might raise the prospects of success in international negotiations on climate change.<br /> Yet, we find that the influence of transfers may induce different fairness effects on climate<br /> change mitigation negotiations to run counter.<br /> We discuss whether current transfer schemes under the UNFCCC and the Kyoto framework<br /> adequately serve the distributive and allocative objectives pursued in international climate<br /> policy.<br />
    Keywords: adaptation, climate change, fairness, Global Environmental Facility, international climate policy, mitigation, reciprocity, transfers
    Date: 2011–02
  33. By: David Wheeler and Dan Hammer
    Abstract: Female education and family planning are both critical for sustainable development, and they obviously merit expanded support without any appeal to global climate considerations. However, even relatively optimistic projections suggest that family planning and female education will suffer from financing deficits that will leave millions of women unserved in the coming decades. Since both activities affect fertility, population growth, and carbon emissions, they may also provide sufficient climate-related benefits to warrant additional financing from resources devoted to carbon emissions abatement. This paper considers the economic case for such support. Using recent data on emissions, program effectiveness and program costs, we estimate the cost of carbon emissions abatement via family planning and female education. We compare our estimates with the costs of numerous technical abatement options that have been estimated by Naucler and Enkvist in a major study for McKinsey and Company (2009). We find that the population policy options are much less costly than almost all of the options Naucler and Enkvist provide for low-carbon energy development, including solar, wind, and nuclear power, second-generation biofuels, and carbon capture and storage. They are also cost-competitive with forest conservation and other improvments in forestry and agricultural practices. We conclude that female education and family planning should be viewed as viable potential candidates for financial support from global climate funds. The case for female education is also strengthened by its documented contribution to resilience in the face of the climate change that has already become inevitable.
    Keywords: Population Policy, Carbon Emissions Reduction
    Date: 2010–11
  34. By: Winter, Gerd
    Abstract: Der Klimawandel mit seinen Folgen für das Erdsystem lässt sich nur mit einer globalen Rechtsarchitektur bewältigen. Diese integriert eine Vielfalt von Steuerungsarrangements von lokaler und transnationaler Selbstregulierung in Gesellschaft und Wirtschaft über innerstaatliches Recht und horizontaler Rechtsdiffusion bis zu transnationaler Administration, internationalem Recht und Recht internationaler Organisationen. Mit einem funktions-strukturellen Ansatz ist zu untersuchen, was die einzelnen Formationen zum Klimawandel beitragen und wie sie auf klimafreundliche Ziele eingestellt werden können. Dafür sind Wechselwirkungen zwischen ihnen zu optimieren sowie geeignete Strategien und Instrumente auszuwählen. Die Realisierbarkeit wirksamer Klima-Governance hängt jedoch von den gesellschaftlichen und wirtschaftlichen Einsichten und Kräfteverhältnissen ab, die vermutlich nur aus Krisen lernen. Zudem wirft sie Legitimationsprobleme auf, die sich durch Einführung prozeduraler und inhaltlicher Anforderungen an nicht-staatliche Formationen mit verfassungsrechtlichen Geboten in Einklang bringen lassen. -- Climate change and its effects on the earth system can only be managed if the law is conceived as a global architecture. This means to integrate the multitude of governance arrangements reaching from local and transnational self-regulation through domestic law and horizontal law transfer up to transnational administration, international law and the law of international organisations. Applying a functional-structural approach it should be explored in what way the various arrangements contribute to climate change and how they could be alerted to more climate friendly goals. For that purpose mutual effects between them must be adjusted and appropriate strategies and instruments identified. Whether this will be effective depends on the societal and economic attidudes and power constellations which most likely will be willing to learn but through crises. Moreover, the formation of a climate friendly governance architecture poses problems of legitimation. In particular, arrangements detached from the inner-state electorate will have to develop their peculiar modes of legitimation, both procedural and material, in order to cope with constitutional principles.
    Date: 2011
  35. By: David Wheeler
    Abstract: The failure of carbon regulation in the U.S. Congress has undermined international negotiations to reduce carbon emissions. The global stalemate has, in turn, increased the likelihood that vulnerable developing countries will be severely damaged by climate change. This paper asks why the tragic American impasse has occurred, while the EU has succeeded in implementing carbon regulation. Both cases have involved negotiations between relatively rich "Green" regions and relatively poor "Brown" (carbon-intensive) regions, with success contingent on two factors: the interregional disparity in carbon intensity, which proxies the extra mitigation cost burden for the Brown region, and the compensating incentives provided by the Green region. The European negotiation has succeeded because the interregional disparity in carbon intensity is relatively small, and the compensating incentive (EU membership for the Brown region) has been huge. In contrast, the U.S. negotiation has repeatedly failed because the interregional disparity in carbon intensity is huge, and the compensating incentives have been modest at best. The unsettling implication is that an EU-style arrangement is infeasible in the United States, so the Green states will have to find another path to serious carbon mitigation. One option is mitigation within their own boundaries, through clean technology subsidies or emissions regulation. The Green states have undertaken such measures, but potential free-riding by the Brown states and international competitors seems likely to limit this approach, and it would address only the modest Green-state portion of U.S. carbon emissions in any case. The second option is mobilization of the Green states’ enormous market power through a carbon added tax (CAT). Rather than taxing carbon emissions at their points of production, a CAT taxes the carbon embodied in products at their points of consumption. For Green states, a CAT has four major advantages: It can be implemented unilaterally, state-by-state; it encourages clean production everywhere, by taxing carbon from all sources equally; it creates a market advantage for local producers, by taxing transport-related carbon emissions; and it offers fiscal flexibility, since it can either offset existing taxes or raise additional revenue.
    Keywords: Carbon Emissions, Regulation, CAT
    Date: 2010–12
  36. By: Burtraw, Dallas (Resources for the Future); Fraas, Arthur G. (Resources for the Future); Richardson, Nathan (Resources for the Future)
    Abstract: Until recently, most attention to U.S. climate policy has focused on legislative efforts to introduce a price on carbon through cap and trade. In the absence of such legislation, the Clean Air Act is a potentially potent alternative. Decisions regarding existing stationary sources will have the greatest effect on emissions reductions. The magnitude is uncertain, but plausibly 10 percent reductions in greenhouse gas emissions from 2005 levels could be achieved at moderate costs by 2020. This is comparable to the reductions that would have been achieved under the Waxman-Markey legislation in the domestic economy. These measures do not include the switching of fuels, which could yield further reductions. The ultimate cost of regulation under the act hinges on the stringency of standards and the flexibility allowed. A broad-based tradable performance standard is legally plausible and would provide incentives comparable to the proposed legislation, at least in the near term.
    Keywords: climate policy, efficiency, EPA, Clean Air Act, NAAQS, coal
    JEL: K32 Q54 Q58
    Date: 2011–02–09

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