nep-ene New Economics Papers
on Energy Economics
Issue of 2013‒06‒30
sixteen papers chosen by
Roger Fouquet
London School of Economics

  1. Energy Intensive Infrastructure Investments with Retrofits in Continuous Time: Effects of Uncertainty on Energy Use and Carbon Emissions By Framstad, Nils Chr.; Strand, Jon
  2. Analysis of institutional adaptability to redress electricity infrastructure vulnerability due to climate change By Foster, John; Bell, William Paul; Wild, Phillip; Sharma, Deepak; Sandu, Suwin; Froome, Craig; Wagner, Liam; Misra, Suchi; Bagia, Ravindra
  3. The relationship between an electricity supply ceiling and economic growth: An application of disequilibrium modeling to Taiwan By Mototsugu Fukushige; Hiroshige Yamawaki
  4. Multinational enterprises and climate change strategies By Ans Kolk; Jonatan Pinkse
  5. The Peak Oil : Myth or Impending Doom ? By Patrick Criqui
  6. Transparency in Electricity Markets By von der Fehr, Nils-Henrik M.
  7. On the Spatial Economic Impact of Global Warming By Klaus DESMET; Esteban ROSSI-HANSBERG
  8. Economic growth, combustible renewables and waste consumption and emissions in North Africa By Ben Jebli, Mehdi; Ben Youssef, Slim
  9. Crossing the Threshold: Ambitious Baselines for the UNFCCC New Market-Based Mechanism By Andrew Prag; Gregory Briner
  10. Uncertainty in optimal pollution levels: Modeling the benefit area By Halkos, George
  11. When can environmental profile and emissions reductions be optimized independently of the pollutant level? By Framstad, Nils Chr.
  12. Tracking Climate Finance: What and How? By Christa Clapp; Jane Ellis; Julia Benn; Jan Corfee-Morlot
  13. Comparing Definitions and Methods to Estimate Mobilised Climate Finance By Randy Caruso; Jane Ellis
  14. The Impact of Residential Density on Vehicle Usage and Fuel Consumption: Evidence from National Samples By Kim, Jinwon; Brownstone, David
  15. Social Discounting and the Long Rate of Interest By Dorje C. Brody; Lane P. Hughston
  16. Local Natural Resource Curse? By Lars-Erik Borge; Pernille Parmer; Ragnar Torvik

  1. By: Framstad, Nils Chr. (Dept. of Economics, University of Oslo); Strand, Jon (Dept. of Economics, University of Oslo)
    Abstract: Energy-intensive infrastructure may tie up fossil energy use and carbon emissions for a long time after investments, making the structure of such investments crucial for society. Much or most of the resulting carbon emissions can often be eliminated later, through a costly retrofit. This paper studies the decisions to invest in such infrastructure, and retrofit it later, given that future climate damages are uncertain and follow a geometric Brownian motion process with positive drift. It shows that greater uncertainty about climate cost (for given unconditional expected costs) then delays the retrofit decision by increasing the option value of waiting to invest. Higher energy intensity is also chosen for the initial infrastructure when uncertainty is greater. These decisions are efficient given that energy and carbon prices facing the decision maker are (globally) correct, but would be inefficient when they are lower, as typical in practice. Greater uncertainty about future climate costs will then further increase lifetime carbon emissions from the infrastructure, related both to initial investments, and to too infrequent retrofits when this emissions level is already too high. An initially excessive climate gas emissions level is then likely to be worsened when volatility increases.
    Keywords: Greenhouse gas emissions; long-term investments; retrofits; uncertainty; option value of waiting
    JEL: C61 Q54 R42
    Date: 2013–05–16
  2. By: Foster, John; Bell, William Paul; Wild, Phillip; Sharma, Deepak; Sandu, Suwin; Froome, Craig; Wagner, Liam; Misra, Suchi; Bagia, Ravindra
    Abstract: This non-technical summary presents the findings and recommendations from the project called ‘Analysis of institutional adaptability to redress electricity infrastructure vulnerability due to climate change’. The objectives of the project are to examine the adaptive capacity of existing institutional arrangements in the National Electricity Market (NEM) to existing and predicted climate change conditions. Specifically the project: identifies climate change adaptation issues in the NEM; analyses climate change impacts on reliability in the NEM under alternative climate change scenarios to 2030, particularly what adaptation strategies the power generation and supply network infrastructure will need; and assesses the robustness of the institutional arrangements that supports effective adaptation. The project finds that four factors are hindering or required for adaptation to climate change: fragmentation of the NEM, both politically and economically; accelerated deterioration of the transmission and distribution infrastructure due to climate change requiring the deployment of technology to defer investment in transmission and distribution; lacking mechanisms to develop a diversified portfolio of generation technology and energy sources to reduce supply risk; and failure to model and treat the NEM as a national node based entity rather than state based. The project’s findings are primarily to address climate change issues but if these four factors are addressed, the resilience of the NEM is improved to handle other adverse contingences. For instance, the two factors driving the largest increases in electricity prices are investment in transmission and distribution and fossil fuel prices. Peak demand drives the investment in transmission and distribution but peak demand is only for a relatively short period. Exacerbating this effect is increasing underutilisation of transmission and distribution driven by both solar photo voltaic (PV) uptake and climate change. Using demand side management (DSM) to shift demand to outside peak periods provides one method to defer investment in transmission and distribution. Recommendation 2 addresses investment deferment. The commodity boom has increased both price and price volatility of fossil fuels where the lack of diversity in generation makes electricity prices very sensitive to fossil fuel prices and disruptions in supply. A diversified portfolio of generation would ameliorate the price sensitivity and supply disruptions. Furthermore, long term electricity price rises are likely to ensue as the fossil fuels become depleted. A diversified portfolio of generation would also ready the NEM for this contingency. Recommendation 3 addresses diversified portfolios. This project makes four inter-related recommendations to address the four factors listed above. Chapter 10 discusses the justification for these recommendations in more detail.
    Keywords: Climate change adaptation; Climate change mitigation; electricity demand; electricity generation; transmission; distribution; Australian National Electricity Market; Feed-in tariffs; FiT; solar PV; residential solar PV; reverse auction FiT; parity; Levelised cost of energy; LCOE; Diffusion of innovations; dynamic efficiency; allocative efficiency; Sustainable; Social progress; Environmental protection; Social inequity; DUOS; TUOS; smart meters; institutional adaptation;
    JEL: H1 H4 L94 Q2 Q3 Q4 Q5
    Date: 2013–06–12
  3. By: Mototsugu Fukushige (Graduate School of Economics, Osaka University); Hiroshige Yamawaki (Graduate School of Economics, Osaka University)
    Abstract: Using a disequilibrium model, we investigate the relationship between the supply constraint of electricity generation capacity and electricity demand in Taiwan. We find that electricity consumption faced supply constraints in Taiwan between 1959 and 1972, but that after 1973 generation capacity grew rapidly, such that economic growth came to be the major determinant of electricity consumption. Our experience in fitting this disequilibrium model suggests that simple causality tests are not a proper means to understand the relationship between electricity consumption and economic growth. Our results also suggest, at least for developing countries, that an electricity supply constraint sometimes plays an important role when investigating the relationship between energy consumption and economic growth.
    Keywords: Electricity Supply; Economic Growth; Disequilibrium Model; Taiwan
    JEL: Q43 C34 O11
    Date: 2013–06
  4. By: Ans Kolk (Amsterdam Business School - University of Amsterdam); Jonatan Pinkse (MTS - Management Technologique et Strategique - Grenoble École de Management (GEM))
    Abstract: Climate change is often perceived as the most pressing environmental problem of our time, as reflected in the large public, policy, and corporate attention it has received, and the concerns expressed about the (potential) consequences. Particularly due to temperature increases, climate change affects physical and biological systems by changing ecosystems and causing extinction of species, and is expected to have a negative social impact and adversely affect human health (IPCC, 2007). Moreover, as a result of the economic costs and risks of extreme weather, climate change could have a severe impact on economic growth and development as well, if no action is taken to reduce emissions (Stern, 2006). This means that it can affect multinational enterprises (MNEs) active in a wide variety of sectors and countries. Climate change is not a 'purely' environmental issue because it is closely linked to concerns about energy security due to dependence on fossil fuels and oil in particular, and to energy efficiency and management more generally. Controversy about the climate change issue has led to a broadening of the agenda in some cases, with policy-makers targeting energy to avoid commotion about the science and politics of climate change, and firms likewise, also because addressing climate change in practice usually boils down to an adjustment in the energy base of business models.
    Date: 2012
  5. By: Patrick Criqui (PACTE - Politiques publiques, ACtion politique, TErritoires - Institut d'Études Politiques [IEP] - Grenoble - CNRS : UMR5194 - Université Pierre-Mendès-France - Grenoble II - Université Joseph Fourier - Grenoble I)
    Abstract: The purpose of this chapter is thus to review the concept of peak oil, critique its main propositions and assess the arguments advanced by oil optimists against those of peak oil. The paper begins with a presentation of the Hubbert peak theory and of some recent applications of the theory at the global level. Then it introduces a revised conceptual analysis and set of variables with a dynamic analytical framework. The third section assesses the issues behind the polarized debate between the peak community and the oil optimists.
    Keywords: oil production ; oil reserves
    Date: 2013
  6. By: von der Fehr, Nils-Henrik M. (Dept. of Economics, University of Oslo)
    Abstract: The European Commission is introducing new regulations on submission and publication of data in electricity markets (SPDEM) and on wholesale energy market integrity and transparency (REMIT). I discuss issues relevant for undertaking an evaluation such regulations. I argue that, for market performance, more information is not always better; indeed, more information may undermine market performance by facilitating behaviour that is either not cost efficient or aims at exercising market power or establishing and maintaining collusion. Moreover, ensuring rational economic behaviour and an efficient and competitive market outcome does not require general access to information at a very detailed level or with a high degree of immediacy. I conclude that to achieve the aims of efficiently functioning wholesale electricity markets, fair and non-discriminatory access to data and a coherent and consistent view of the European wholesale electricity market, it does not seem advisable to go quite so far with respect to immediacy and detail as intended by the new regulations.
    Keywords: electricity; market performance; information; transparency; regulation
    JEL: D40 D80 K21 L10 L40 L51 L94
    Date: 2013–05–22
  7. By: Klaus DESMET; Esteban ROSSI-HANSBERG
    Abstract: We propose a dynamic spatial theory to analyze the geographic impact of climate change. Agricultural and manufacturing firms locate on a hemisphere. Trade across locations is costly; firms innovate; and technology diffuses over space. Energy used in production leads to emissions that contribute to the global stock of carbon in the atmosphere, which affects temperature.<br />The rise in temperature differs across latitudes, and its effect on productivity also varies across sectors. We calibrate the model to analyze how climate change affects the spatial distribution of economic activity, trade, migration, growth, and welfare. We assess quantitatively the impact of migration and trade restrictions, energy taxes, and innovation subsidies.
    Date: 2013–06
  8. By: Ben Jebli, Mehdi; Ben Youssef, Slim
    Abstract: This paper examines the causal relationship between economic growth, combustible renewables and waste consumption, and CO2 emissions for a balanced panel of five North Africa countries during the period 1971-2008. The panel cointegration test results indicate that in the short-run there is a unidirectional causality running from real GDP per capita to per capita CO2 emissions. However, there is evidence of no causality between combustible renewables and waste consumption and real GDP and between combustible renewables and waste consumption and CO2 emissions. In the long-run, we find that there is evidence of a unidirectional causality running from CO2 emissions and combustible renewables and waste consumption to real GDP. The results from panel FMOLS and DOLS estimates show that emissions is the most significant variable in explaining economic growth in the region which is followed by the consumption of combustible renewables and waste. In the long-run, increases in combustible renewables and waste consumption and emissions lead to increase economic growth. The finding of this paper is that North Africa region can use combustible renewables and waste as a substitutable energy to the fossil one and avoid the disaster on atmosphere by reducing emissions without impeding economic growth in the long-run.
    Keywords: Combustible renewables and waste consumption; panel cointegration; North Africa.
    JEL: C33 Q43
    Date: 2013–06–11
  9. By: Andrew Prag; Gregory Briner
    Abstract: At COP 17 in Durban, countries defined a new market-based mechanism to promote cost-effective mitigation actions, guided by a set of principles previously agreed at COP 16. These principles include “stimulating mitigation across broad segments of the economy”, “ensuring a net decrease and/or avoidance of global greenhouse gas emissions” and “assisting developed countries to meet part of their mitigation targets”. This paper explores the use of ambitious crediting baselines for groups of emitters as the basis for a new market mechanism that meets the principles listed above. It focuses on how to define groups of emitters and explores different approaches for building ambition into baselines including using emissions projections and performance benchmarks. Potential elements of a process for setting baselines for subsequent international recognition are also presented. The paper builds on extensive previous analyses carried out on emissions baselines for market mechanisms, taking into account recent developments in the international negotiations.<BR>Lors de la COP 17, à Durban, les pays ont défini un nouveau mécanisme de marché pour promouvoir les mesures d’atténuation offrant un bon rapport coût / efficacité. Cette action s’inscrit dans la continuité des principes convenus lors de la COP 16 et qui visent à « stimuler l’atténuation dans de vastes secteurs de l’économie », « contribuer à une diminution nette et/ou à la prévention des émissions mondiales de gaz à effet de serre » et « aider les pays développés à atteindre une partie de leurs objectifs d’atténuation ». Le présent document envisage, pour fixer les crédits des groupes d’émetteurs, de retenir des niveaux de base ambitieux comme fondement d’un nouveau mécanisme de marché qui soit conforme aux principes énumérés précédemment. Il s’interroge également sur la manière de définir les groupes d’émetteurs et envisage différentes approches pour rendre ces niveaux de base plus ambitieux, notamment en exploitant les projections en matière d’émissions et les critères de performance. Sont aussi présentés les éléments possibles d’un processus qui aboutirait à fixer des niveaux de base en vue de leur reconnaissance internationale. Le document s’inspire des nombreuses analyses déjà réalisées sur les niveaux de base d’émissions dans une perspective de mécanisme de marché, et il prend en compte les dernières évolutions résultant des négociations internationales.
    Keywords: climate change, mitigation, baselines, new market mechanism, changement climatique, atténuation, nouveau mécanisme de marché, niveaux de base
    JEL: F53 Q54 Q56 Q58
    Date: 2012–05–01
  10. By: Halkos, George
    Abstract: This paper identifies the optimal pollution level under the assumptions of linear, quadratic and exponential damage and abatement cost functions and investigates analytically the certain restrictions that the existence of this optimal level requires. The evaluation of the benefit area is discussed and the mathematical formulation provides the appropriate methods, so that to be calculated. The positive, at least from a theoretical point of view, is that both the quadratic and the exponential case obey to the same form of evaluating the benefit area. These benefit area estimations can be used as indexes between different rival policies and depending on the environmental problem the policy that produces the maximum area will be the beneficial policy.
    Keywords: Benefit area; damage cost; abatement cost; pollution.
    JEL: C02 C62 Q51 Q52 Q53
    Date: 2013–06
  11. By: Framstad, Nils Chr. (Dept. of Economics, University of Oslo)
    Abstract: Consider a model for optimal timing of emissions reduction, trading off the cost of the reduction against the time-additive aggregate of environmental damage, the disutility from the pollutant stock M(t) the infrastructure contributes to. Intuitively, the optimal timing for an infinitesimal pollution source should reasonably not depend on its historical contribution to the stock, as this is negligible. Dropping the size assumption, we show how to reduce the minimization problem to one not depending on the history of M, under linear evolution and suitable linearity or additivity conditions on the damage functional. We employ a functional analysis framework which allows for delay equations, non-Markovian driving noise, a choice between discrete and continuous time, and a menu of integral concepts covering stochastic calculi less frequently used in resource and environmental economics. Examples are given under the common (Markovian Itô) stochastic analysis framework.
    Keywords: Optmal control; optimal stopping; environmental policy; emissions reduction; linear model; Banach space; stochastic differential equations
    JEL: C61 Q52
    Date: 2013–05–16
  12. By: Christa Clapp; Jane Ellis; Julia Benn; Jan Corfee-Morlot
    Abstract: Developed countries have committed under the international negotiations to jointly mobilising USD 100 billion per year by 2020 for climate change mitigation and adaptation in developing countries. Yet consistent and comprehensive data to track this commitment are currently lacking. Such data will also help governments and the private sector understand how much and what type of climate finance is flowing today, so as to be able to evaluate progress and effectiveness of international climate finance flows. Estimates based on available data are highly uncertain and incomplete, highlighting several challenges in establishing a robust tracking system. A more political question is what should be the internationally agreed definition of “climate finance” or, absent agreement on that, what types of flows or activities might count towards the USD 100 billion? On the more technical side, challenges include clearly defining flows and sources of international climate finance, determining the cause and effect of flows, and establishing the boundaries of finance flowing towards climate change action. This paper considers what data are currently available to track climate finance, and demonstrates the complex nature of financial flows through examples across international and domestic as well as public and private flows. The examples highlight questions on how to count and track climate finance.<BR>Les pays développés se sont engagés dans le cadre de négociations internationales à mobiliser ensemble 100 milliards de dollars par an d’ici à 2020 au service de l’atténuation du changement climatique et de l’adaptation à ses effets dans les pays en développement. Cependant, des données cohérentes et détaillées permettant de suivre l’application de cet engagement font aujourd’hui défaut. Ces informations aideraient aussi les pouvoirs publics et le secteur privé à connaître le volume et la nature des financements actuellement consacrés au domaine du climat, ce qui leur permettrait d’évaluer les progrès et l’efficacité des flux internationaux de financement climatique. Les estimations établies à partir des données disponibles sont très incertaines et incomplètes, d’où il ressort plusieurs problèmes auxquels se heurte la mise en place d’un solide système de suivi. Une question de caractère plus politique est celle de savoir en quels termes il convient de définir d’un commun accord à l’échelon international le « financement climatique » ou, à défaut d’accord sur cette définition, quels types de flux ou d’activités pourraient entrer en ligne de compte dans ces 100 milliards de dollars. Sous un angle plus technique, la difficulté consiste notamment à définir précisément les flux et les sources de financement climatique international, à mettre en évidence les causes et les effets des flux, ainsi qu’à déterminer les limites du financement de l’action pour le climat. Ce rapport examine quelles données sont aujourd’hui disponibles pour assurer un suivi du financement climatique, et fait apparaître la complexité des flux financiers au travers d’exemples de flux internationaux et intérieurs, ainsi que publics et privés. Ces exemples mettent en relief les questions que soulèvent les modalités de comptabilité et de suivi du financement climatique.
    Keywords: investment, finance, climate change, adaptation, greenhouse gas mitigation, investissement, changement climatique, financement, adaptation, atténuation des émissions de gaz à effet de serre
    JEL: F30 F53 G15 H87 Q54 Q56
    Date: 2012–05–01
  13. By: Randy Caruso; Jane Ellis
    Abstract: At the 16th Conference of the Parties (COP) in 2010, developed countries formalised a collective climate finance commitment made previously in Copenhagen of “mobilising jointly USD 100 billion per year by 2020 to address the needs of developing countries...from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources” (UNFCCC, 2010). However, there is currently no definition of which “climate” activities, flows, or other interventions could count towards the USD 100 billion; what “mobilising” means; or even which countries are covered by this commitment. The paper examines different definitions used by 24 key actors in climate finance to quantify the level of private climate finance mobilised by their interventions, as well as the methods used to track such private climate finance. Key findings are that i) methodologies to assess and estimate mobilisation vary widely, and ii) considerable risk of double-counting exists.<BR>A la 16e Conférence des Parties (CdP) tenue en 2010, les pays développés ont formalisé un engagement financier collectif pour le climat précédemment souscrit à Copenhague de « mobiliser collectivement 100 milliards USD par an d’ici à 2020 pour répondre aux besoins des pays en développement diverses sources, publiques et privées, bilatérales et multilatérales, y compris de sources alternatives (CCNUCC, 2010). Cependant, il n’existe pas actuellement de définition des activités, flux ou autres interventions « climatiques » qui seront comptabilisés dans ces 100 milliards USD ; que signifie « mobiliser » ; voire, quels sont les pays concernés par cet engagement. Ce document se penche sur les différentes définitions utilisées par les 24 acteurs principaux du financement climatique pour quantifier le niveau des financements climatiques privés mobilisés par leurs interventions, ainsi que les méthodes employées pour suivre ces financements climatiques privés. Il ressort de ce rapport deux grandes constatations i) les méthodologies d’évaluation et d’estimation des fonds mobilisés sont très disparates, et ii) il existe d’énormes risques de double comptage.
    Keywords: tracking, climate finance, MRV, mobilise, leverage, MNV, financement climatique, mobiliser, suivi, stimuler
    JEL: F21 F53 G23 O13 O16 O19 Q54 Q56 Q58
    Date: 2013–05–01
  14. By: Kim, Jinwon; Brownstone, David
    Abstract: This paper investigates the impact of residential density on household vehicle usage and fuel consumption. We estimate a simultaneous equations system to account for the potential residential self-selection problem. While most previous studies focus on a specific region, this paper uses national samples from the 2001 National Household Travel Survey. The estimation results indicate that residential density has a statistically significant but economically modest influence on vehicle usage, which is similar to that in previous studies. However, the joint effect of the contextual density measure (density in the context of its surrounding area) and residential density on vehicle usage is quantitatively larger than the sole effect of residential density. Moving a household from a suburban to an urban area reduces household annual mileage by 18%. We also find that a lower neighborhood residential density induces consumer choices toward less fuel-efficient vehicles, which confirms the finding in Brownstone and Golob (2009).
    Keywords: Household vehicle choice; Simultaneous equations systems; Residential density
    JEL: C31 D12 R41
    Date: 2013–06–17
  15. By: Dorje C. Brody; Lane P. Hughston
    Abstract: The well-known theorem of Dybvig, Ingersoll and Ross shows that the long zero-coupon rate can never fall. This result, which---although undoubtedly correct---has been regarded by many as counterintuitive and even pathological, stems from the implicit assumption that the long-term discount function has an exponential tail. We revisit the problem in the setting of modern interest rate theory, and show that if the long "simple" interest rate (or Libor rate) is finite, then this rate (unlike the zero-coupon rate) acts viably as a state variable, the value of which can fluctuate randomly in line with other economic indicators. New interest rate models are constructed, under this hypothesis, that illustrate explicitly the good asymptotic behaviour of the resulting discount bond system. The conditions necessary for the existence of such "hyperbolic" long rates turn out to be those of so-called social discounting, which allow for long-term cash flows to be treated as broadly "just as important" as those of the short or medium term. As a consequence, we are able to provide a consistent arbitrage-free valuation framework for the cost-benefit analysis and risk management of long-term social projects, such as those associated with sustainable energy, resource conservation, and climate change.
    Date: 2013–06
  16. By: Lars-Erik Borge (Department of Economics, Norwegian University of Science and Technology); Pernille Parmer (Department of Economics, Norwegian University of Science and Technology); Ragnar Torvik (Department of Economics, Norwegian University of Science and Technology)
    Abstract: The large variation in revenues among Norwegian local governments can partly be explained by revenues collected from hydropower production. This revenue variation, combined with good data availability, can be used to extend the literature on the re- source curse in two directions. First, to ensure that there is no problem of endogeneity in the analysis we obtain a purely exogenous measure of local revenue by instrumenting the variation in hydropower revenue, and thus total revenue, by topology, average pre- cipitation and meters of river in steep terrain. Second, using data for revenue derived from hydropower production in Norwegian local governments we test the 'Rentier State' hypothesis; that revenue derived from natural resources should harm efficiency more than revenue derived from other sources such as taxation. Although we do find that higher local government revenue reduces the efficiency in production of public goods, we do not find that this effect is stronger for natural resource revenue than for other revenue.
    Keywords: resource curse, rentier state, identification, local government, political economy
    JEL: D78 H11 H27 H71 H72 H75 Q2
    Date: 2013–06–19

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