nep-ene New Economics Papers
on Energy Economics
Issue of 2014‒02‒08
nineteen papers chosen by
Roger Fouquet
London School of Economics

  1. Asymmetric and nonlinear pass-through of energy prices to CO2 emission allowance prices By Shawkat Hammoudeh; Amine Lahiani; Duc Khuong Nguyen; Ricardo M. Sousa
  2. Energy prices and CO2 emission allowance prices: A quantile regression approach By Shawkat Hammoudeh; Amine Lahiani; Duc Khuong Nguyen; Ricardo M. Sousa
  3. What explains the short-term dynamics of the prices of CO2 emissions? By Shawkat Hammoudeh; Duc Khuong Nguyen; Ricardo M. Sousa
  4. Dynamics of CO2 price drivers By Rita Sousa; Luís Aguiar-Conraria
  5. CARBON TARIFFS REVISITED By Christoph Böhringer; André Müller; Jan Schneider
  6. Integrated technological-economic modeling platform for energy and climate policy analysis By Patrícia Fortes; Alfredo Marvão Pereira; Rui M. Pereira; Júlia Seixas
  7. Carbon Financial Markets: a time-frequency analysis of CO2 price drivers By Rita Sousa; Luís Aguiar-Conraria; Maria Joana Soares
  8. Carbon prices and CCS investment: comparative study between the European Union and China By Marie Renner
  9. Connecting strategy, environmental and social indicators: a study of oil and gas producers By Evgeny Varfolomeev; Oleg Marin; Dmitry Bykov; Oleg Karasev; Natalia Velikanova; Elena Vetchinkina; Anastasia Edelkina; Thomas Thurner
  10. Dynamic Impacts on Growth and Intergenerational Effects of Energy Transition in a Time of Fiscal Consolidation By Gonand, Frédéric
  11. International Environmental Agreements: An Emission Choice Model with Abatement Technology By Eftichios Sartzetakis; Stefania Strantza
  12. The Principal-Agent Model with Multilateral Externalities: An Application to Climate Agreements By Carsten Helm; Franz Wirl
  13. Oil price shocks and global imbalances: Lessons from a model with trade and financial interdependencies By Jean-Pierre Allegret; Valérie Mignon; Audrey Sallenave
  14. On the impact of oil price volatility on the real exchange rate–terms of trade nexus: Revisiting commodity currencies By Virginie Coudert; Cécile Couharde; Valérie Mignon
  15. Transmission constraints and strategic underinvestment in electric power generation By Léautier, Thomas-Olivier
  16. Imperfect resource substitution and optimal transition to clean technologies By VARDAR, N. Baris
  17. What time to adapt? The role of discretionary time in sustaining the climate change value-action gap By Chai, Andreas; Bradley, Graham; Lo, Alex Y.; Reser, Joseph
  18. A new formulation of the European day-ahead electricity market problem and its algorithmic consequences By MADANI, Mehdi; VAN VYVE, Mathieu
  19. Hedging Expected Losses on Derivatives in Electricity Futures Markets By Adrien Nguyen Huu; Nadia Oudjane

  1. By: Shawkat Hammoudeh (Drexel University, LeBow College of Business); Amine Lahiani (University of Orléans and ESC Rennes Business School); Duc Khuong Nguyen (IPAG Business School); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: We use the recently developed nonlinear autoregressive distributed lags (NARDL) model to examine the pass-through of changes in crude oil prices, natural gas prices, coal prices and electricity prices to the CO2 emission allowance prices. This approach allows one to simultaneously test the short- and long-run nonlinearities through the positive and negative partial sum decompositions of the predetermined explanatory variables. It also offers the possibility to quantify the respective responses of the CO2 emission prices to positive and negative shocks to the prices of their determinants from the asymmetric dynamic multipliers. We find that: (i) the crude oil prices have a long-run negative and asymmetric effect on the CO2 allowance prices; (ii) the falls in the coal prices have a stronger impact on the carbon prices in the short-run than the increases; (iii) the natural gas prices and electricity prices have a symmetric effect on the carbon prices, but this effect is negative for the former and positive for the latter. Policy implications are provided.
    Keywords: CO2 allowance price, energy prices, NARDL model, asymmetric passthrough
    JEL: Q47
    Date: 2014
  2. By: Shawkat Hammoudeh (Drexel University, LeBow College of Business); Amine Lahiani (University of Orléans and ESC Rennes Business School); Duc Khuong Nguyen (IPAG Business School); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: We use a quantile regression framework to investigate the impact of changes in crude oil prices, natural gas prices, coal prices, and electricity prices on the distribution of the CO2 emission allowance prices in the United States. We find that: (i) an increase in the crude oil price generates a substantial drop in the carbon prices when the latter is very high; (ii) changes in the natural gas prices have a negative effect on the carbon prices when they are very low but have a positive effect when they are quite high; (iii) the impact of the changes in the electricity prices on the carbon prices can be positive in the right tail of the distribution; and (iv) the coal prices exert a negative effect on the carbon prices.
    Keywords: CO2 allowance price, energy prices, quantile regression.
    JEL: Q47
    Date: 2014
  3. By: Shawkat Hammoudeh (Drexel University, LeBow College of Business); Duc Khuong Nguyen (IPAG Business School); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: Using the vector auto-regression (VAR) and the vector error-correction Models (VECM), this paper analyzes the short-term dynamics of the prices of CO2 emissions in response to changes in the prices of oil, coal, natural gas, electricity and carbon emission allowances. The results show that: (i) a positive shock to the crude oil prices has a negative effect on the CO2 allowance prices; (ii) an unexpected increase in the natural gas prices raises the price of CO2 emissions; (iii) a positive shock to the prices of the fuel of choice, coal, has virtually no significant impact on the CO2 prices; (iv) there is a clear positive effect of the coal prices on the CO2 allowance prices when the electricity prices are excluded from the VAR system; and (v) a positive shock to the electricity prices reduces the price of the CO2 allowances. We also find that the energy price shocks have a persistent impact on the CO2 allowance prices, with the largest effect occurring six months after a shock strikes. The effect is particularly strong in the case of the natural gas price shocks. Additionally, we estimate that it takes between 7.3 and 9.6 months to halve the gap between the actual and the equilibrium prices of the CO2 allowances, i.e., to erase any price over- or undervaluations after a shock strikes. Finally, the empirical findings suggest an important degree of substitution between the three primary sources of energy (i.e., crude oil, natural gas and coal), particularly, when electricity prices are excluded from the VAR system.
    Keywords: CO2 allowance prices, crude oil, natural gas, coal, electricity.
    JEL: Q47
    Date: 2014
  4. By: Rita Sousa (CENSE, Universidade Nova de Lisboa e Universidade do Minho); Luís Aguiar-Conraria (Universidade do Minho - NIPE)
    Abstract: Using data from Phase II-III of the European Union Emission Trading Scheme, we characterize CO2 prices interrelation with energy prices (gas, electricity and coal), carbon allowances substitute prices and with economic activity index. We estimate a vector autoregressive model and the responses of CO2 prices to impulses in other variables, observing duration and direction of the impact. Our main findings include significant positive impact of returns in CO2 of peak electricity, gas, and economy index, and CO2 returns itself. The impact is visible during ten days in case of an electricity innovation, and during one day in case of gas. A shock in economy index prices has 2 days impact, and finally a substitute good for carbon licences in the European market does not have a significant impact.
    Keywords: Carbon price; Emission allowances and trading; VAR model
    Date: 2014
  5. By: Christoph Böhringer (University of Oldenburg, Department of Economics); André Müller (Ecoplan, Bern, Switzerland); Jan Schneider (University of Oldenburg, Department of Economics)
    Abstract: Concerns about adverse impacts on domestic energy-intensive and trade-exposed (EITE) industries are at the fore of the political debate about unilateral climate policies. Tariffs on the carbon embodied in imported goods from countries without emission pricing appeal as a measure to reduce carbon leakage and protect domestic EITE industries. We show that the introduction of carbon tariffs can do more harm than good to domestic EITE industries. Two determinants drive the sign and magnitude of EITE impacts. Firstly, the composition of embodied emissions in goods: if a large share of embodied carbon is imported in intermediate inputs, industries might suffer from carbon tariffs. Secondly, the share of domestic output that is supplied to the export market: while carbon tariffs level the playing field on domestic markets, they increase the cost-disadvantage vis-à-vis competitors from abroad in foreign markets.
    Keywords: carbon tariffs, unilateral climate policy, multi-region input-output analysis, CGE
    JEL: Q58 D57 D58
    Date: 2014–01
  6. By: Patrícia Fortes (CENSE, Departamento de Ciências e Engenharia do Ambiente, Faculdade de Ciências e Tecnologia, Universidade Nova de Lisboa); Alfredo Marvão Pereira (Department of Economics, The College of William and Mary); Rui M. Pereira (Department of Economics, The College of William and Mary); Júlia Seixas (CENSE, Departamento de Ciências e Engenharia do Ambiente, Faculdade de Ciências e Tecnologia, Universidade Nova de Lisboa)
    Abstract: Computable general equilibrium (CGE) and bottom-up models each have unique strengths and weakness in evaluating energy and climate policies. This paper describes the development of an integrated technological, economic modelling platform (HYBTEP), built through the soft-link between the bottomup TIMES and the CGE GEM-E3 models. HYBTEP combines cost minimizing energy technology choices with macroeconomic responses, which is essential for energy-climate policy assessment. HYBTEP advances on other hybrid tools by assuming ‘full-form’ models, integrating detailed and extensive technology data with disaggregated economic structure, and ‘full-link’, i.e., covering all economic sectors. Using Portugal as a case study, we examine three scenarios: i) the current energyclimate policy, ii) a CO2 tax, and iii) renewable energy subsidy, with the objective of assessing the advantages of HYBTEP vis-à-vis bottom-up approach. Results show that the economic framework in HYBTEP partially offsets the increase or decrease in energy costs from the policy scenarios, while TIMES sets a wide range of results, dependent of energy services-price elasticities. HYBTEP allows the computation of the economic impacts of policies while considers technological detail. Moreover, the hybrid platform increases the transparency of policy analysis by making explicit the mechanisms through which energy demand evolves, resulting in high confidence for decision-making.
    Keywords: bottom-up, top-down, hybrid modeling, energy-climate policy
    Date: 2014–01–25
  7. By: Rita Sousa (CENSE, Universidade Nova de Lisboa e Universidade do Minho); Luís Aguiar-Conraria (Universidade do Minho - NIPE); Maria Joana Soares (Universidade do Minho - NIPE)
    Abstract: We characterize the interrelation of CO2 prices with energy prices (gas and electricity), and with economic activity. Previous studies have relied on time-domain techniques, such as Vector Auto-Regressions. In this study, we use multivariate wavelet analysis, which operates in the time-frequency domain. Wavelet analysis provides convenient tools to distinguish relations at particular frequencies and at particular time horizons. Our empirical approach has the potential to identify relations getting stronger and then disappearing over specific time intervals and frequencies. We are able to examine the coherency of these variables and lead-lag relations at different frequencies for the time periods in focus.
    Keywords: Carbon prices; Financial Markets; Multivariate wavelet analysis.
    Date: 2014
  8. By: Marie Renner
    Abstract: As policy makers assess strategies to reduce greenhouse gas emissions (GHG), they need to know the available technical options and the conditions under which these options become economically attractive. Carbon Capture and Storage (CCS) techniques are widely considered as a key option for climate change mitigation. But integrating CCS techniques in a commercial scale power plant adds significant costs to the capital expenditure at the start of the project and to the operating expenditure throughout its lifetime. Its additional costs can be offset by a sufficient CO2 price but most markets have failed to put a high enough price on CO2 emissions: currently, the weak Emission Unit Allowances price threatens CCS demonstration and deployment in the European Union (EU). A different dynamic is rising in China: a carbon regulation seems to appear and CCS techniques seem to encounter a rising interest as suggest their inclusion in the 12th Five-Year Plan and the rising number of CCS projects identifies/planned. However, there are very few in-depth techno-economic studies on CCS costs. This study investigates two related questions: how much is the extra-cost of a CCS plant in the EU in comparison with China? And then, what is the CO2 price beyond which CCS power plants become more profitable/economically attractive than classic power plants, in the EU and in China? To answer these questions, I first review, analyze and compare public studies on CCS techniques in order to draw an objective techno-economic panorama in the EU and China. Then, I develop a net present value (NPV) model for coal and gas plants, with and without CCS, in order to assess the CO2 price beyond which CCS plants become the most profitable power plant type. This CO2 value is called CO2 switching price. I also run some sensitivity analyses to assess the impact of different parameter variations on this CO2 switching price. I show that CCS power plants become the most profitable baseload power plant type with a CO2 price higher than 70 €/t in the EU against 30 €/t in China, without transport and storage costs. When the CO2 price is high enough, CCS gas plants are the most profitable power plant type in the EU whereas these are CCS coal plants in China. Through this study, I advise investors on the optimal power plant type choice depending on the CO2 market price, and suggest an optimal timing for CCS investment in the EU and China.
    Date: 2014
  9. By: Evgeny Varfolomeev (Science Research Institute of Economics and Management in Gas Industry); Oleg Marin (Science Research Institute of Economics and Management in Gas Industry); Dmitry Bykov (Science Research Institute of Economics and Management in Gas Industry); Oleg Karasev (National Research University Higher School of Economics); Natalia Velikanova (National Research University Higher School of Economics); Elena Vetchinkina (Lomonosov Moscow State University); Anastasia Edelkina (National Research University Higher School of Economics); Thomas Thurner (National Research University Higher School of Economics)
    Abstract: This paper studies the integration of social and environmental objectives into strategy through performance indicators based on a sample of multinational world-leading oil- and gas producers. Also, we inquire if the companies under study, which identify certain areas as strategic objectives, do better than their peers. We show that top management of the companies did indeed identify different areas of interest, had different strategic foci, and used different performance indicators. This is often explicable through a company’s own history and past experiences. When comparing a sample of greenhouse gas emissions, safety measures, and energy efficiency indicators between the different companies, we could not identify a consistent development over time trends. In fact, some did worse over time and collective improvements were largely absent. We suggest further research into the link between strategic objectives and a company’s relative position in industry.
    Keywords: indicator, environmental protection, oil- and gas producers, energy efficiency, resource availability
    JEL: M14 M40 N50
    Date: 2014
  10. By: Gonand, Frédéric
    Abstract: Social planners in most western countries will be facing two long-lasting challenges in the next years: energy transition and fiscal consolidation. One problem is that governments might consider that implementing an energy transition could get i n the way of achieving a fiscal consolidation. If so, interrupting the energy transition in a time of fiscal consolidation would involve significant aggregate impacts on activity and inter generational redistributive effects. This article tries to assess them empirically. It relies on an overlapping-generations framework in a general equilibrium setting, with a detailed energy module. The model is parameterized on data provided by OECD/IEA for France. Different results emerge. Renouncing to the energy transition would slightly foster the level of GDP during the next 10 to 15 years - depending on the dynamics of the prices of fossil fuels on world markets - but weigh on it more significantly afterwards (up to -1% in 2050). If the pric es of fossil fuels keep increasing in the future, implementing an energy transition could have br oadly the same favourable effects on the GDP level in the long run as those of a fiscal consolidation diminishing significantly public spending instead of raising taxes. In the long-run, the GDP would be maximized by implementing an energy transition and simultaneously lessening the public deficit by lowering some public expenditure, a policy that would entail an overall gain of around 1,6% of GDP in 2050. Stopping the energy transition would also bring about intergenerational issues. It would be detrimental to the intertemporal wellbeing of almost all cohorts alive in 2010. A fiscal policy with lower public expenditures and frozen tax rates may be still more favourable to young and future generations than implementing an energy transition. However, renouncing to an energy transition would annihilate most of these pro-youth effects.
    Keywords: Energy transition; intergenerational redistribution; overlapping generations; fiscal consolidation; general equilibrium;
    JEL: D58 D63 E62 L7 Q28 Q43
    Date: 2014–01
  11. By: Eftichios Sartzetakis (Department of Economics, University of Macedonia); Stefania Strantza (Department of Economics, Concordia University)
    Abstract: The present paper examines the size of stable IEAs concerning transboundary environmental problems. A coalition is considered stable when no signatories wish to withdraw while no more countries wish to participate. We assume that the coalition behaves as a leader maximizing its members' aggregate welfare while the countries outside the coalition maximize their own welfare independently, taking the choice of the coalition as given. We further assume a benefit function that is concave in the country's own emissions, an environmental damage function that is convex in aggregate net emissions and an abatement cost function that is convex in the country's abatement effort. Each country chooses both its emission and abatement levels. Within this framework we find that the size of the stable coalition depends on the model's parameters but it is always larger than in the case in which countries are allowed to choose either emission or abatement level. Our results complement Barrett's (1994) suggestion that the size of the stable coalition depends on the model's parameters, even though we are imposing the constraint that the net emission flow is positive.
    Keywords: Environmental Agreements.
    JEL: D6 Q5 C7
    Date: 2013–12
  12. By: Carsten Helm (University of Oldenburg - Public Economics & ZenTra); Franz Wirl (University of Vienna, Center of Business Studies)
    Abstract: We consider contracting of a principal with an agent if multilateral externalities are present. The motivating example is that of an interna- tional climate agreement given private information about the willingness- to-pay (WTP) for emissions abatement. Due to multilateral externalities the principal uses her own emissions besides subsidies to incentivize the agent and to assure his participation. Optimal contracts equalize marginal abatement costs and, thus, can be implemented by a system of competitive permit trading. Moreover, optimal contracts can include a boundary part (i.e., the endogenous, type dependent participation constraint is binding), which is not a copy of the outside option of no contract. Compared to this outside option, a contract can increase emissions of the principal for types with a low WTP, and reduce her payo§ for high types. Subsidies can be constant or even decreasing in emission reductions, and turn negative so that the agent reduces emissions and pays the principal.
    Keywords: private information, multilateral externalities, mecha- nism design, environmental agreements, type-dependent outside options
    JEL: D82 Q54 H87
    Date: 2014–01
  13. By: Jean-Pierre Allegret; Valérie Mignon; Audrey Sallenave
    Abstract: The aim of this paper is to investigate oil price shocks’ effects and their associated transmission channels on global imbalances. To this end, we rely on a Global VAR approach that allows us to account for trade and financial interdependencies between countries. Considering a sample of 30 oil-exporting and importing economies over the 1980-2011 period, we show that the nature of the shock—demand-driven or supply-driven—matters in understanding the effects of oil price shocks on global imbalances. In addition, we evidence that the main adjustment mechanism to oil shocks is based on the trade channel, the valuation channel being at play only on the short run.
    Keywords: oil prices;global imbalances;global VAR
    JEL: C32 F32 Q43
    Date: 2014–01
  14. By: Virginie Coudert; Cécile Couharde; Valérie Mignon
    Abstract: The aim of this paper is to study the relationship between terms of trade and real exchange rates of commodity-producing countries on both the short and the long run. We pay particular attention to the dominant role played by oil among commodities by investigating the potential non-linear effect exerted by the situation on the oil market on the real exchange rate - terms of trade nexus. To this end, we rely on the panel smooth transition regression methodology to estimate the adjustment process of the real effective exchange rate to its equilibrium value depending on the volatility on the oil market. Considering a panel of 52 commodity exporters and 17 oil exporters over the 1980-2012 period, our findings show that while exchange rates are mainly driven by fundamentals in the low-volatility regime, they are mostly sensitive to changes in terms of trade when oil price variations exceed a certain threshold. The commodity-currency property is thus at play in the short run only for important variations in the oil price.
    Keywords: commodity currencies, oil price, non-linearity
    JEL: C23 F31 Q43
    Date: 2014
  15. By: Léautier, Thomas-Olivier
    Abstract: This article is the first to examine electric power producers' investment decisions when competition is imperfect and the transmission grid congested. This analysis yields numerous original insights. First, congestion on the grid is transient, and may disappear when demand is highest. Second, transmission capacity increases have complex impacts on generation: they may increase, decrease, or have no impact on the marginal value of generation, and may have similar or opposite impacts on the marginal value of different technologies. Third, the true social value of transmission, including its impact on investment, may be significantly lower than is commonly assumed.
    Keywords: electric power markets, imperfect competition, investment, transmission constraints
    JEL: D61 L11 L94
    Date: 2014–01–06
  16. By: VARDAR, N. Baris (Paris School of Economics)
    Abstract: Non-renewable and renewable resources are imperfect substitutes due to technical and geographical constraints. What is the role of imperfect substitution on the optimal transition path to the clean technologies? We address this question by characterizing the optimal growth path and resource use of an economy. We show that the economy initially starts with using the non-renewable and renewable resources simultaneously and gradually increases the share of renewable. The outcome can be either (i) the economy switches to a backstop at a certain date or (ii) the initial regime lasts forever. The results show that the economy converges to a steady state even if the backstop is too costly and a green, zero-carbon economy is the optimal final state in any case. We also present some simulation results to illustrate the shapes of the optimal paths. This analysis allows us to discuss the policy implications and question the existence of the Green Paradox.
    Keywords: imperfect substitution, optimal transition, non-renewable resource, renewable resource, backstop, simultaneous use, switching, Green Paradox
    JEL: Q43 Q42 Q30 Q20
    Date: 2014–01–13
  17. By: Chai, Andreas; Bradley, Graham; Lo, Alex Y.; Reser, Joseph
    Abstract: We investigate the role discretionary (non-working) time plays in sustaining the gap between individuals’ concern about climate change and their propensity to act on this concern by adopting sustainable consumption practices. Using recent Australian survey data on climate change adaptation, we find that while discretionary time is unrelated to concern about climate change, it is positively correlated with the propensity to adopt mitigating behavior. Moreover, we find that increasing discretionary time is associated with significant reductions in the gap between the concern that individuals express about climate change and their reporting of engagement in sustainable consumption practices.
    Keywords: discretionary time; environmental concern; sustainable consumption ; climate change ; Australia
    JEL: D12 D83 Q50
    Date: 2014–02–06
  18. By: MADANI, Mehdi (Université catholique de Louvain, Louvain School of Management, Belgium); VAN VYVE, Mathieu (niversité catholique de Louvain, CORE and Louvain School of Management, Belgium)
    Abstract: A new formulation of the optimization problem implementing European market rules for non- convex day-ahead electricity markets is presented, that avoids the use of complementarity constraints to express market equilibrium conditions, and also avoids the introduction of auxiliary binary variables to linearise these constraints. Instead, we rely on strong duality theory for linear or convex quadratic optimization problems to recover equilibrium constraints imposed by most of European power exchanges facing indivisible orders. When only so-called stepwise preference curves are considered to describe continuous bids, the new formulation allows to take full advantage of state-of-the-art solvers, and in most cases, an optimal solution together with market clearing prices can be computed for large-scale instances without any further algorithmic work. The new formulation also suggests a very competitive Benders-like decomposition procedure, which helps to handle the case of interpolated preference curves that yield quadratic primal and dual objective functions, and consequently a dense quadratic constraint. This procedure essentially consists in strengthening classical Benders cuts locally. Computational experiments on real data kindly provided by main European power exchanges (Apx-Endex, Belpex and Epex spot) show that in the linear case, both approaches are very efficient, while for quadratic instances, only the decomposition procedure is tractable and shows very good results. Finally, when most orders are block orders, and instances are combinatorially very hard, the new MILP approach is substantially more efficient.
    Keywords: Auctions/bidding, market coupling, equilibrium prices, mixed integer programming, large scale optimization
    JEL: C61 D44
    Date: 2014–01–24
  19. By: Adrien Nguyen Huu (FiME Lab, IMPA); Nadia Oudjane (FiME Lab)
    Abstract: We investigate the problem of pricing and hedging derivatives of Electricity Futures contract when the underlying asset is not available. We propose to use a cross hedging strategy based on the Futures contract covering the larger delivery period. A quick overview of market data shows a basis risk for this market incompleteness. For that purpose we formulate the pricing problem in a stochastic target form along the lines of Bouchard and al. (2008), with a moment loss function. Following the same techniques as in the latter, we avoid to demonstrate the uniqueness of the value function by comparison arguments and explore convex duality methods to provide a semi-explicit solution to the problem. We then propose numerical results to support the new hedging strategy and compare our method to the Black-Scholes naive approach.
    Date: 2014–01

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