nep-ene New Economics Papers
on Energy Economics
Issue of 2012‒11‒03
thirty papers chosen by
Roger Fouquet
Basque Climate Change Centre, Bilbao, Spain

  1. Deviations in Kilometres Travelled: The Impact of Different Mobility Futures on Energy Use and Climate By Thomas Longden
  2. The Short-Run and Long-Run Effects of Behavioral Interventions: Experimental Evidence from Energy Conservation By Hunt Allcott; Todd Rogers
  3. Innovation policy for directing technical change in the power sector By Rob Aalbers; Victoria Shestalova; Viktoria Kocsis
  4. Implications of liberalization policies on government support to R&D: lessons from electricity markets By Erdogdu, Erkan
  5. The Large Scale Roll-Out of Electric Vehicles: The Effect on the Electricity Sector and CO2 Emissions By Talaei, A.; Begg, K.; Jamasb, T.
  6. Designing electiricty transmission auctions: an introduction to the relevant literature By Greve,T.; Pollitt, M. G.
  7. The optimal short-term management of flexible nuclear plants in a competitive electricity market as a case of competition with reservoir. By Maria Lykidi; Jean-Michel Glachant; Pascal Gourdel
  8. Finding Solutions to the Mindanao Electric Power Problem By Navarro, Adoracion M.
  9. The Rise of Turkey and the New Mediterranean Challenges and Opportunities for Energy Cooperation in a Region in Transition By Simone Tagliapietra
  10. On the dynamics of gasoline market integration in the United States: Evidence from a pair wise approach By Mark J. Holmes; Jesus Otero; Theodore Panagiotidis
  11. Taxation and public service provision: Taxes on road transport and fuel in Congo By Kambale Mirembe, Omer
  12. Development of biofuels in China : technologies, economics and policies By Shiyan, Chang; Lili, Zhao; Timilsina, Govinda R.; Xiliang, Zhang
  13. Food for fuel: The price of ethanol By Dominic K. Albino; Karla Z. Bertrand; Yaneer Bar-Yam
  14. Advanced Biofuels: Future Perspectives from an Expert Elicitation Survey By Giulia Fiorese; Michela Catenacci; Elena Verdolini; Valentina Bosetti
  15. The role of technological change in green growth By Popp, David
  16. Environmental standards and Cournot duopoly: a stability analysis. By Luciano Fanti
  17. Pollution abatement and reservation prices in a market game By Halkos, George; Papageorgiou, George
  18. Pollution, mortality and optimal environmental policy By Goenka, A.; Jafarey, S.; Pouliot, W.
  19. Les émissions de CO2 du Brésil- L’impact du secteur UTCATF (usage des terres, changement d’affectation des terres et foresterie) By Jérôme Trotignon
  20. Singular Forward-Backward Stochastic Differential Equations and Emissions Derivatives By Rene Carmona; Francois Delarue; Gilles-Edouard Espinosa; Nizar Touzi
  21. Green industrial policy : trade and theory By Karp, Larry; Stevenson, Megan
  22. Tools for assessing the costs and benefits of green growth : the U.S. and Mexico By Harrington, Winston; Morgenstern, Richard; Velez-Lopez. Daniel
  23. The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment By Richard Schmalensee; Robert N. Stavins
  24. Tax Evasion and Optimal Environmental Taxes By Liu, Antung Anthony
  25. US Status on Climate Change Mitigation By Burtraw, Dallas; Woerman, Matt
  26. How Volatile is ENSO for Global Greenhouse Gas Emissions and the Global Economy? By Lan-Fen Chu; Michael McAleer; Chi-Chung Chen
  27. Disentangling the Stern/Nordhaus Controversy: Beyond the Discounting Clash By Etienne Espagne; Baptiste Perrissin Fabert; Antonin Pottier; Franck Nadaud; Patrice Dumas
  28. How Should Benefits and Costs Be Discounted in an Intergenerational Context? By Cropper, Maureen
  29. The “Doomsday” Effect in Climate Policies. Why is the Present Decade so Crucial to Tackling the Climate Challenge? By Baptiste Perrissin Fabert; Etienne Espagne; Antonin Pottier; Patrice Dumas
  30. Rare Disasters, Tail-Hedged Investments, and Risk-Adjusted Discount Rates By Martin L. Weitzman

  1. By: Thomas Longden (Fondazione Eni Enrico Mattei, Euro-Mediterranean Center for Climate Change)
    Abstract: The importance of a focus on mobility and the kilometres travelled using light duty vehicles is reflected in the persistence of strong demand for personal mobility and emissions that tend to be linked with population and economic growth. Simulation results using the WITCH model show that changes in the kilometres driven per year using light duty vehicles have a notable impact on investments in alternate transport options. As a result, different mobility futures have notably different optimal vehicle fleet compositions. As climate policy becomes more stringent, achieving abatement with increased mobility implies large investments in battery related technologies and less investments in technologies related to the conversion of biofuel from biomass. Climate policy consistent with a 2°C temperature increase above pre-industrial levels in 2100 leads to a quick transition to plug-in hybrid drive vehicles. Without decreases in mobility trends the cost effective achievement of such a target results in the electrification of passenger vehicles commencing between 2020 and 2035.
    Keywords: Light Duty Vehicles, Transportation, Mobility, Climate Change Policy, Electric Drive Vehicles, Research and Development
    JEL: Q54 R41 O3
    Date: 2012–10
  2. By: Hunt Allcott; Todd Rogers
    Abstract: Interventions to affect repeated behaviors, such as smoking, exercise, or workplace effort, can often have large short-run impacts but uncertain or disappointing long-run effects. We study one part of a large program designed to induce energy conservation, in which home energy reports containing personalized feedback, social comparisons, and energy conservation information are being repeatedly mailed to more than five million households across the United States. We show that treatment group households reduce electricity use within days of receiving each of their initial few reports, but these immediate responses decay rapidly in the months between reports. As more reports are delivered, the average treatment effect grows but the high-frequency pattern of action and backsliding attenuates. When a randomly-selected group of households has reports discontinued after two years, the effects are much more persistent than they had been between the initial reports, implying that households have formed a new "capital stock" of physical capital or consumption habits. We show how assumptions about long-run persistence can be important enough to change program adoption decisions, and we illustrate how program design that accounts for the capital stock formation process can significantly improve cost effectiveness.
    JEL: D03 D11 L97 Q41
    Date: 2012–10
  3. By: Rob Aalbers; Victoria Shestalova; Viktoria Kocsis
    Abstract: <p>This paper discusses policy instruments for redirecting technical change within the electricity sector to mitigate climate change.</p><p>First, we unravel the mechanism behind directed technical change, explaining why markets may underprovide innovations in expensive renewable technologies in comparison to innovations in energy-efficient fossil-fuel generators. Subsequently, we characterize technical change in electricity generation technologies, stressing the heterogeneity of knowledge spillovers both within and between clean electricity generation technologies. We argue that there exists a rationale for a portfolio approach to innovation in the electricity sector, i.e., optimal innovation policies are neither fully generic nor fully specific; and they need to be adapted, in response to new information learned by the government. The existing innovation literature does not, however, provide a clear-cut answer for designing such a policy. We compare policy instruments and argue that public R&D support to clean technologies, either in the form of subsidies or prizes, seems to be the prime candidate for implementing non-generic innovation policy.</p>
    JEL: Q48 Q55
    Date: 2012–10
  4. By: Erdogdu, Erkan
    Abstract: Since the early 1980s, electricity industry reforms have been initiated in more than half of the countries in the world. Among the primary targets of these reform schemes, there has been an increase in efficiency of the sector; and it is implicitly assumed that government support to energy technology R&D will progress in line with the reform process as the former is required to sustain improved efficiency in the middle and long run. The paper reviews the relation between reform process in electricity markets and government support to energy R&D. Using panel data from 27 countries covering the period from 1974 to 2008, this study aims at finding out to what extent the expected correlation between reform process and government support to energy R&D has in practice been materialized so far. The findings suggest that, contrary to expectations, the progress toward electricity market reform is associated with reduced government support to a variety of energy R&D activities, which threatens sustainable efficiency improvements in the power industry.
    Keywords: Economics of Regulation and Liberalization; Research and Development; Government Policy; Electricity Industry; Panel Data Modeling
    JEL: O38 L51 Q48 O13 O32
    Date: 2013–01
  5. By: Talaei, A.; Begg, K.; Jamasb, T.
    Abstract: The UK government has set the ambitious targets of 20 and 50% reduction in greenhouse gas emissions by 2020 and 2050 respectively. The transport sector accounts for 21% of total CO2 emissions in the UK and can, therefore, be important for achieving the emissions reduction targets. Within the transport sector, electric vehicles (EV) are considered as one of the important mitigation options. However the effect of EVs on emissions and the electricity sector is subject to debate. We use scenario analysis to investigate the emission reduction potential of EVs and their interaction with electricity sector. We show that managing the charging patterns could reduce adverse effects of EVs on the electricity sector while the number of EVs remains the factor affecting the mitigation potential. Our findings indicate that in the UK, by 2030, EVs could result in up to 32% emissions reduction compared to advanced internal combustion engines. We also found that the need for new electricity generation and distribution capacity to meet the conventional electricity demand and demand from EVs could be reduced by up to 12% from 70.6 to 61.8 GW if the EV’s electricity demand is managed.
    Keywords: Electric Vehicles, CO2 Emissions, Electricity Demand Management
    Date: 2012–10–26
  6. By: Greve,T.; Pollitt, M. G.
    Abstract: The UK has ambitious plans for exploiting offshore wind for electricity production in order to meet its challenging target under the EU Renewable Energy Directive. This could involve investing up to £20bn in transmission assets to bring electricity ashore. An investment of this magnitude calls for an efficient mechanism to determine which projects get financed and ensuring that only those projects that are selected can be delivered at least costs to consumers. The electricity regulator’s ongoing tender auctions are likely to work well for point-to-point transmission and for networks already built. However, it is still unclear what kinds of models could be considered for complex meshed offshore (and onshore) networks where licences are granted not only to own and operate, but also to build a transmission network. This paper provides an extensive survey on the current theory and experience of auctions. The main objective is to discuss the design of auctions for transmission assets in which bidding for packages of transmission assets is a possibility.
    Keywords: Energy Transmission; Auction Design; Combinatorial Auctions; Package Bidding
    JEL: D44 L94
    Date: 2012–10–26
  7. By: Maria Lykidi (ADIS-GRJM - Université Paris-Sud 11); Jean-Michel Glachant (Florence School of Regulation - European University Institute-Robert Schuman Center et Université Paris-Sud 11); Pascal Gourdel (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: In many countries, the electricity systems are quitting the vertically integrated monopoly organization for an operation framed by competitive markets. It therefore questions how nuclear plants should be operated in an open market framework. We address the medium-term horizon of management to take into account the fluctuations of demand according to the seasons of year. A flexible nuclear set (like the French) could be operated to follow a part of the demand variations. Since nuclear plants have to stop periodically to reload their fuel (every 12 or 18 months), we can analyze the nuclear fuel as a stock behaving like a reservoir. The flexible operation of the reservoir permits to get different nuclear fuel allocations according to the different levels of the seasonal demand. We then analyze it within a general deterministic dynamic framework with two types of generation : nuclear and thermal non-nuclear. We study the optimal management of the production in a perfectly competitive market. In this paper, we focus on the optimal short-term (monthly) production behaviour before moving to a yearly or multi-annual optimization. This constitutes a prudent research strategy of a flexible nuclear set leaving the monopoly organization and exploring how to reach a market equilibrium in a competitive market. Then, we set up a simple numerical model (based on data from the French market) given that the nuclear production set is managed in a flexible manner in order to follow the variations in demand (like the French nuclear set actually does). The marginal cost of nuclear production being (significantly) lower than the one of non-nuclear induces a discontinuity of producer's short-term profit. The problem of discontinuity makes the resolution of the optimal short-term production problem extremely complicated and even leads to a lack of solutions. That is why it is necessary to study an approximate problem (continuous problem) that constitutes a “regularization” of our economical problem (discontinuous problem). The simulations show why future demand has to be anticipated to manage the current use of the nuclear fuel reservoir. Moreover, to ensure the equilibrium between supply and demand, the management of the nuclear set has to take into account the thermal non-nuclear generation capacity.
    Keywords: Electricity market, nuclear generation, competition with reservoir, short-term optimal reservoir operation, electricity fuel mix, price discontinuity.
    JEL: C61 C63 D24 D41 L11
    Date: 2012–10
  8. By: Navarro, Adoracion M.
    Abstract: <p>The Mindanao electric power problem, which led to a crisis situation in summer 2012, is primarily due to inadequate baseload capacity and unbalanced generation capacity mix. The crisis might stage a comeback when the days of relatively cooler weather and heavier rainfall are over and the annual system peaks, which can be expected in summer 2013, kick in once again. The short-term recommended actions are as follows: continue the rehabilitation and sustain the operations of Agus and Pulangui hydropower complexes; minimize the bureaucratic hurdles in the building up of electric cooperatives` embedded generation capacities but only up to the extent allowed by law; undertake a more aggressive information, education, and communication campaign in Mindanao regarding the power situation and power outlook; and address the risk aversion problem in baseload power contracting.</p><p>In the medium to long term, the possible policy responses include the following: decide with finality the fate of the privatization of Agus and Pulangui hydropower complexes and include the concession option in the range of options; facilitate the entry of new baseload capacity commitments and if no new investments would come in, the government could also explore a concession arrangement; accelerate the development of renewable energy projects through quick action in rules setting; strengthen the capacity of the regulator to deal with complex issues in the electric power industry; and pursue the interconnection of the Visayas and Mindanao power grids.</p>
    Keywords: privatization, Philippines, electric power, power generation, concessions
    Date: 2012
  9. By: Simone Tagliapietra (Fondazione Eni Enrico Mattei)
    Abstract: This paper, presenting a wide range of issues related to the role of Turkey in the Mediterranean energy context, aims to provide a comprehensive framework of understanding of the growing strategic relevance of Turkey for both the European Union and the overall Euro-Mediterranean region. In particular, the paper focuses on the EU-Turkey energy relations and outlines the crucial role of natural gas in enhancing energy cooperation between the two players. In 2010 about 80% of EU gas imports derived from only three suppliers: Russian Federation, Norway and Algeria. This heavy dependence on such a few suppliers stimulated the European Commission to make the concept of diversification a cornerstone of its energy policy and to launch the concept of the Southern Gas Corridor, an initiative aimed to develop a natural gas transit corridor from Caspian and Middle Eastern gas-rich regions to Europe, in order to ease the dependency on the natural gas imported from the Russian Federation. An initiative that could shift the "centre of gravity" of the regional gas transit from the north to the south of the Black Sea, allowing Turkey to become a key transit country in the future European gas market; a pivotal element in the European gas security of supply architecture. Furthermore, the paper also considers the enormous renewable energy potential of Southern and Eastern Mediterranean Countries, to which Turkey could greatly contribute in terms of technology transfer and manufacturing know-how. Turkey’s involvement in the Union for the Mediterranean offers a great opportunity for energy cooperation both between the EU and Turkey and within the overall Euro-Mediterranean region. Such large-scale renewable energy projects could greatly contribute to the economic development of the overall Mediterranean region, and also to its social and political stability. Considering the lack of a wide and comprehensive EU-Turkey energy cooperation scheme, the paper proposes a series of policy priorities pointed to enhance this bilateral relationship and also the wider Euro-Mediterranean integration process.
    Keywords: Turkey, Mediterranean, EU Security of Supply, Energy geopolitics
    JEL: Q40 Q42 Q48
    Date: 2012–09
  10. By: Mark J. Holmes (Department of Economics, Waikato University Management School); Jesus Otero (Facultad de Economia, Universidad del Rosario); Theodore Panagiotidis (Department of Economics, University of Macedonia)
    Abstract: This paper employs a pair-wise approach to examine regional integration in the US gasoline market. Using gasoline price data at the state level over a period of more than two decades, we find strong support for the view that the law of one price holds in regional markets, as more than 80% of bivariate price differentials turn out to be stationary. Furthermore, we uncover evidence that the speed at which prices converge to the long-run equilibrium depends upon the distance between states. Asymmetries are also present in this relationship. Our findings suggest that the more similar are states with respect to taxation, gas stations and refining capacity, the faster is the speed of adjustment towards the long-run equilibrium..
    Keywords: Panel data, pair-wise approach, market integration, gasoline, speed of adjustment.
    JEL: C33 Q47 R11
    Date: 2012–10
  11. By: Kambale Mirembe, Omer
    Keywords: Taxation, DRC, Congo
    Date: 2012–10
  12. By: Shiyan, Chang; Lili, Zhao; Timilsina, Govinda R.; Xiliang, Zhang
    Abstract: China promulgated the Medium and Long-Term Development Plan for Renewable Energy in 2007, which included targets of 2010 and 2020 for various renewable energy technologies including biofuels. The 2010 biofuel targets were met and even surpassed except for non-grain fuel ethanol; however, there is debate on whether and how the country will be able to meet the 2020 biofuels target. This paper provides a resource and technological assessment of biofuel feedstocks, compares biofuel production costs from various feddstocks and technologies, and evaluates policies introduced in the country for the development of biofuels. The paper also presents the projections on the production of biofuels under various policy scenarios. The study shows that China can potentially satisfy its non-grain fuel ethanol target by 2020 from the technology perspective. But it will probably fall far short of this target without additional fiscal incentives as production costs of non-grain feedstock based biofuels are expected to remain relatively high. By contrast, the 2020 target of biodiesel production has a high probability of being achieved because the target itself is relatively small. With additional support policies, it could develop even further.
    Keywords: Energy Production and Transportation,Renewable Energy,Climate Change Mitigation and Green House Gases,Energy and Environment,Environment and Energy Efficiency
    Date: 2012–10–01
  13. By: Dominic K. Albino; Karla Z. Bertrand; Yaneer Bar-Yam
    Abstract: Conversion of corn to ethanol in the US since 2005 has been a major cause of global food price increases during that time and has been shown to be ineffective in achieving US energy independence and reducing environmental impact. We make three key statements to enhance understanding and communication about ethanol production's impact on the food and fuel markets: (1) The amount of corn used to produce the ethanol in a gallon of regular gas would feed a person for a day, (2) The production of ethanol is so energy intensive that it uses only 20% less fossil fuel than gasoline, and (3) The cost of gas made with ethanol is actually higher per mile because ethanol reduces gasoline's energy per gallon.
    Date: 2012–10
  14. By: Giulia Fiorese (Fondazione Eni Enrico Mattei and Dipartimento di Elettronica e Informazione, Politecnico di Milano); Michela Catenacci (Fondazione Eni Enrico Mattei); Elena Verdolini (Fondazione Eni Enrico Mattei); Valentina Bosetti (Fondazione Eni Enrico Mattei and Centro Euro-Mediterraneo per i Cambiamenti Climatici)
    Abstract: This paper illustrates the main results of an expert elicitation survey on advanced (second and third generation) biofuel technologies. The survey focuses on eliciting probabilistic information on the future costs of advanced biofuels and on the potential role of RD&D (Research, Development and Demonstration) efforts in reducing these costs and in supporting the deployment of biofuels in OECD and non-OECD countries. Fifteen leading experts from different EU member states provide insights on the future potential of advanced biofuel technologies both in terms of costs and diffusion. This information results in a number of policy recommendations with respect to public RD&D strategies and is an important contribution to the integrated assessment modelling community.
    Keywords: Expert Elicitation, Research, Development and Demonstration, Biofuels
    JEL: Q42 Q55
    Date: 2012–09
  15. By: Popp, David
    Abstract: By reducing the costs of environmental protection, technological change is important for promoting green growth. This entails both the creation of new technologies and more widespread deployment of existing green technologies. This paper reviews the literature on environmentally friendly technological change, with a focus on lessons relevant to developing countries. It begins with a discussion of the data available for measuring the various steps of technological change. It continues with a discussion of sources of environmental innovation. Given that most innovation is concentrated in a few rich countries, this leads to a discussion of the remaining role for lower-income countries, followed by a discussion of technology transfer. Because of the importance of market failures, the paper discusses the role of both technology policy and environmental policy for promoting environmentally friendly technological change. The review concludes with a discussion of what environmental economists can learn from other fields.
    Keywords: Environmental Economics&Policies,ICT Policy and Strategies,Technology Industry,E-Business,Climate Change Mitigation and Green House Gases
    Date: 2012–10–01
  16. By: Luciano Fanti
    Abstract: In this paper the dynamical effects of public environmental policies are investigated in a Cournot duopoly with heterogeneous expectations in a context of limited rationality. It is shown that the introduction of upper limits to emissions always tends to destabilise and generate a chaotic market dynamics. By contrast the role played by the cost of the abatement technology is more complicated: although in most cases higher costs imply a higher likelihood of stability loss, in some cases increases of such costs when their level is sufficiently low tends to stabilise and in such cases if the market is stable either a decrease or an increase of such costs may lead to a stability loss. The policy implications of these results suggest caution in the use of environmental policies from a market stability point of view.
    Keywords: Environmental policies; Bifurcation; Chaos; Cournot; Oligopoly;
    JEL: Q52 C62 D43 L13
    Date: 2012–09–01
  17. By: Halkos, George; Papageorgiou, George
    Abstract: In this paper we set up an oligopolistic market model, where firms invest in pollution abatement in order to increase the whole market size via an increase in the consumers’ reservation price. Moreover, we suppose that the demand function is not a linear one and the resulting game is not a usual linear quadratic one. In the considered model we investigate the open loop, the memory less closed-loop and the collusive patterns equilibrium. Additionally, we examine the social planning perspective. In the case of a convex demand we found the surprising result that the control and state variables have higher values in the open-loop steady state equilibrium than in the closed loop, while in a linear demand case the equilibrium is undetermined. In all cases we find that only if the market demand has concave curvature are the conclusions clear. A number of propositions and remarks are provided.
    Keywords: Oligopoly Game; non-linear demand; pollution abatement; reservation price
    JEL: Q52 C61 D43 C62 Q58
    Date: 2012–10
  18. By: Goenka, A.; Jafarey, S.; Pouliot, W.
    Abstract: We study an overlapping generations economy in which environmental degradation results from economic activity and affects agents' uncertain lifetimes. Life expectancy depends positively on economic activity and negatively on the stock of pollution. This can make the growth-survival relationship convex over some region and lead to two non-trivial steady states, with one a poverty trap. Uniform abatement taxes can cause the poverty trap to widen while increasing incomes at the high steady state. We also study the properties and dynamics of an optimal second-best abatement tax. It is non-homogeneous and increasing in the capital stock, and leads to a variety of dynamic possibilities, including non-existence and multiplicity of steady states, and cycles around some of the steady states, where there were none under exogenous taxes. Thus, optimal taxes can be an independent source of non-linearities.
    Keywords: Overlapping generations model; poverty traps; non-convexities; multiple steady states; pollution; optimal environmental policy; optimal abatement tax
    Date: 2012
  19. By: Jérôme Trotignon (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: L’Equation de Kaya exprime les émissions de CO2 d’un pays en fonction de facteurs économique, démographique et énergétique. Plusieurs travaux décomposent par période, à partir de cette équation, les effets sur les émissions brésiliennes des variables de population, de PIB par tête, d’intensité énergétique (contenu en énergie du PIB) et d’intensité carbonique (contenu en carbone de l’énergie). Mais ils ne tiennent pas compte des émanations de CO2 engendrées par le secteur UTCATF. Pour pallier cet inconvénient et mieux éclairer les enjeux des politiques climatiques, nous proposons une analyse de décomposition des facteurs d’évolution des émissions qui inclut les statistiques du secteur UTCATF. Son influence dans la variation des émissions totales s’avère prédominante, aussi bien comme stimulant sur la période de déforestation massive de 1994-2000, que comme modérateur de 2000 à 2005, année où s’ébauche le programme de déforestation évitée.
    Keywords: analyse de décomposition, Brésil, déforestation, équation de Kaya, facteurs d’émission de CO2, intensité carbonique, intensité énergétique, secteur UTCATF
    JEL: O54 Q23 Q54
    Date: 2012
  20. By: Rene Carmona; Francois Delarue; Gilles-Edouard Espinosa; Nizar Touzi
    Abstract: We introduce two simple models of forward-backward stochastic differential equations with a singular terminal condition and we explain how and why they appear naturally as models for the valuation of CO2 emission allowances. Single phase cap-and-trade schemes lead readily to terminal conditions given by indicator functions of the forward component, and using fine partial differential equations estimates, we show that the existence theory of these equations, as well as the properties of the candidates for solution, depend strongly upon the characteristics of the forward dynamics. Finally, we give a first order Taylor expansion and show how to numerically calibrate some of these models for the purpose of CO2 option pricing.
    Date: 2012–10
  21. By: Karp, Larry; Stevenson, Megan
    Abstract: This paper studies the reality and the potential for green industrial policy. It provides a summary of the green industrial policies, broadly understood, for five countries. It then considers the relation between green industrial policies and trade disputes, emphasizing the Brazil-United States dispute involving ethanol and the broader United States-China dispute. The theory of public policy provides many lessons for green industrial policy. The authors highlight four of these lessons, involving the Green Paradox, the choice of quantities versus prices with endogenous investment, the coordination issues arising from emissions control, and the ability of green industrial policies to promote cooperation in reducing a global public bad like carbon emissions.
    Keywords: Climate Change Economics,Environmental Economics&Policies,Climate Change Mitigation and Green House Gases,Energy Production and Transportation,Economic Theory&Research
    Date: 2012–10–01
  22. By: Harrington, Winston; Morgenstern, Richard; Velez-Lopez. Daniel
    Abstract: This paper examines the processes used in the United States and Mexico to assess the economic costs and benefits of environmental improvement, the kinds of information obtained from these procedures, and the additional knowledge that is needed about both elements to improve understanding of the problems and prospects of advancing a green growth agenda. Because environmental and other development needs are large and resources are limited, it is important to choose the best projects, those with the highest returns on both public investments and private resources harnessed by regulation. The United States is well-established as a world leader in the use of quantitative methods to evaluate options for environmental regulation and policy. Mexico represents a case where a developing country has made clear advances in reforming its economy and in introducing transparency in its regulatory processes for environmental and other policy areas.
    Keywords: Environmental Economics&Policies,Regulatory Regimes,Public Sector Regulation,Transport Economics Policy&Planning,Climate Change Economics
    Date: 2012–10–01
  23. By: Richard Schmalensee (Howard W. Johnson Professor of Economics and Management, Emeritus at the Massachusetts Institute of Technology, and a Research Associate of the National Bureau of Economic Research); Robert N. Stavins (Albert Pratt Professor of Business and Government at the Harvard Kennedy School, a University Fellow of Resources for the Future, and a Research Associate of the National Bureau of Economic Research)
    Abstract: Two decades have passed since the Clean Air Act Amendments of 1990 launched a grand experiment in market-based environmental policy: the SO2 cap-and-trade system. That system performed well but created four striking ironies. First, by creating this system to reduce SO2 emissions to curb acid rain, the government did the right thing for the wrong reason. Second, a substantial source of this system’s cost-effectiveness was an unanticipated consequence of earlier railroad deregulation. Third, it is ironic that cap-and-trade has come to be demonized by conservative politicians in recent years, since this market-based, cost-effective policy innovation was initially championed and implemented by Republican administrations. Fourth, court decisions and subsequent regulatory responses have led to the collapse of the SO2 market, demonstrating that what the government gives, the government can take away.
    Keywords: Market-based Instruments, Cap-and-trade, Clean Air Act Amendments of 1990, Sulfur Dioxide, Acid Rain
    JEL: Q54 Q58 Q40 Q48
    Date: 2012–09
  24. By: Liu, Antung Anthony (Resources for the Future)
    Abstract: This paper introduces a new argument to the debate about the role of environmental taxes in modern tax systems. Some environmental taxes, particularly taxes on gasoline or electricity, are more difficult to evade than taxes on labor or income. When the tax base is shifted in a revenue-neutral manner toward these environmental taxes, the result is a net reduction in the amount of tax evasion. Using a carbon tax as a motivating example, the "tax evasion effect" is shown to sharply reduce the welfare cost of controlling emissions. A simple computable general equilibrium model suggests that the impact of considering tax evasion can be large: costs are lowered by 28 percent in the United States, by 89 percent in China, and by 97 percent in India. In countries with high levels of pre-existing tax evasion, a carbon tax will pay for itself through improvements in the efficiency of the tax system.
    Keywords: environmental regulation, Pigouvian tax, tax evasion, green tax swap, tax interactions
    JEL: H21 H26 Q53 Q54
    Date: 2012–09–14
  25. By: Burtraw, Dallas (Resources for the Future); Woerman, Matt (Resources for the Future)
    Abstract: In 2009, President Obama pledged that, by 2020, the United States would achieve reductions in greenhouse gas emissions of 17 percent from 2005 levels. With the failure of Congress to adopt comprehensive climate legislation in 2010, the feasibility of the pledge was put in doubt. However, we find that the United States is near to reaching this goal; currently, the country is on course to achieve reductions of 16.3 percent from 2005 levels in 2020. Three factors contribute to this outcome: greenhouse gas regulations under the Clean Air Act, secular trends including changes in relative fuel prices and energy efficiency, and subnational efforts. Perhaps even more surprising, domestic emissions are probably less than would have occurred if the Waxman–Markey cap-and-trade proposal had become law in 2010. However, at this point the United States is expected to fail to meet its financing commitments under the Copenhagen Accord for 2020.
    Keywords: greenhouse gases, additionality, emissions cap and trade, Clean Air Act, carbon dioxide
    JEL: Q54 Q58 H77
    Date: 2012–10–16
  26. By: Lan-Fen Chu (National Science and Technology Center for Disaster Taiwan); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam.); Chi-Chung Chen (Department of Applied Economics National Chung Hsing University Taiwan.)
    Abstract: This paper analyzes two indexes in order to capture the volatility inherent in El Niños Southern Oscillations (ENSO), develops the relationship between the strength of ENSO and greenhouse gas emissions, which increase as the economy grows, with carbon dioxide being the major greenhouse gas, and examines how these gases affect the frequency and strength of El Niño on the global economy. The empirical results show that both the ARMA(1,1)-GARCH(1,1) and ARMA(3,2)-GJR(1,1) models are suitable for modelling ENSO volatility accurately, and that 1998 is a turning point, which indicates that the ENSO strength has increased since 1998. Moreover, the increasing ENSO strength is due to the increase in greenhouse gas emissions. The ENSO strengths for Sea Surface Temperature (SST) are predicted for the year 2030 to increase from 29.62% to 81.5% if global CO2 emissions increase by 40% to 110%, respectively. This indicates that we will be faced with even stronger El Nino or La Nina effects in the future if global greenhouse gas emissions continue to increase unabated.
    Keywords: El Niños Southern Oscillations (ENSO), Greenhouse Gas Emissions, Global Economy, Southern Oscillation Index (SOI), Sea Surface Temperature (SST), Volatility.
    Date: 2012
  27. By: Etienne Espagne (Centre International de Recherche sur l’Environnement et le Développement (CIRED)); Baptiste Perrissin Fabert (CIRED); Antonin Pottier (CIRED); Franck Nadaud (CIRED); Patrice Dumas
    Abstract: The Stern/Nordhaus controversy has polarized the widely disparate beliefs about what to do in order to tackle the climate challenge. To explain differences in results and policy recommendations, comments following the publication of the Stern Review have mainly focused on the role played by the discount rate. A closer look at the actual drivers of the controversy reveals however that Stern and Nordhaus also disagree on two other parameters: technical progress on abatement costs and the climate sensitivity. This paper aims at appraising the relative impacts of such key drivers of the controversy on the social cost of carbon and climate policy recommendations. To this end, we use the flexible integrated assessment model RESPONSE which allows us to compare very diverse worldviews, including Stern and Nordhaus’ ones within the same modelling framework and map the relative impacts of beliefs on the three key drivers of the controversy. Furthermore we appraise quantitatively, by means of a linear statistical model, the impacts on results of an extended set of core parameters of RESPONSE. We show that beliefs on long term economic growth, technical progress, the form of the climate damage function and the climate sensitivity have an impact as important as beliefs on pure time preference. Hence, we can qualify the role played by the discount rate in the Stern/Nordhaus controversy and more broadly in the definition of climate policies.
    Keywords: Integrated Assessment Model, Discount Rate, Social Cost of Carbon, Abatement Policy, Worldview
    JEL: Q54 Q58 C61
    Date: 2012–09
  28. By: Cropper, Maureen (Resources for the Future)
    Abstract: Should governments, in discounting the future benefits and costs of public projects, use a discount rate that declines over time? The argument for a declining discount rate is a simple one: if the discount rates that will be applied in the future are persistent, and if the analyst can assign probabilities to these discount rates, this will result in a declining schedule of certainty-equivalent discount rates. A growing empirical literature estimates models of long-term interest rates and uses them to forecast the declining discount rate schedule. I briefly review this literature, focusing on models for the United States. This literature has, however, been criticized for a lack of connection to the theory of project evaluation. In cost-benefit analysis, the net benefits of a project in year t (in consumption units) are to be discounted to the present at the rate at which society would trade consumption in year t for consumption in the present. With simplifying assumptions, this leads to the Ramsey discounting formula. The Ramsey formula results in a declining certainty-equivalent discount rate if the rate of growth in consumption is uncertain and if shocks to consumption are correlated over time. Using the extended Ramsey formula to estimate a numerical schedule of certainty-equivalent discount rates is, however, challenging.
    Keywords: discount rate, uncertainty, declining discount rate, cost-benefit analysis
    JEL: D61
    Date: 2012–10–12
  29. By: Baptiste Perrissin Fabert (Centre International de Recherche Agronomique pour le Développement); Etienne Espagne (CIRED); Antonin Pottier (CIRED); Patrice Dumas (Centre International de Recherche Agronomique pour le Développement)
    Abstract: Despite growing scientific evidence that passing a 2°C temperature increase may trigger tipping points in climate dynamics, most Integrated Assessment Models (IAM) based on Cost Benefit Analysis (CBA) with smooth quadratic damage functions are unable to account for the possibility of strong increase in climate damage. Our IAM RESPONSE makes it possible to bridge this gap by integrating a threshold effect damage function which sets a threshold of temperature increase from which climate damages increase significantly. To fit with on-going climate negotiations, this threshold is set at 2°C. Regardless of the bleak prospect of passing the threshold, it turns out that among a broad set of scenarios accounting for the diversity of worldviews in the climate debate, overshooting the 2°C target and then facing the resulting damage may become an optimal strategy for many economic agents who are struck by what we call a “doomsday effect”. We show that this effect happens for any level of jump in damage and dramatically increases if the beginning of mitigation efforts is postponed till the decade 2010-2020 on. In light of these results, we believe that any further delay in reaching a clear international agreement will close the window of opportunity for meeting the 2°C target with a reasonable chance of diplomatic success.
    Keywords: Integrated Assessment Model, Non Linear Effect, Doomsday Effect, 2°C Target
    JEL: C61 Q54 Q58
    Date: 2012–09
  30. By: Martin L. Weitzman
    Abstract: What is the best way to incorporate a risk premium into the discount rate schedule for a real investment project with uncertain payoffs? The standard CAPM formula suggests a beta-weighted average of the return on a safe investment and the mean return on an economy-wide representative risky investment. Suppose, though, that the project constitutes a tail-hedged investment, meaning that it is expected to yield positive payoffs in catastrophic states of nature. Then the model of this paper suggests that what should be combined in a weighted average are not the two discount rates, but rather the corresponding two discount factors. This implies an effective discount rate schedule that declines over time from the standard CAPM formula down to the riskfree rate alone. Some simple numerical examples are given. Implications are noted for discounting long-term public investments and calculating the social cost of carbon in climate change.
    JEL: E43 G11 G12 Q54
    Date: 2012–10

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