nep-ene New Economics Papers
on Energy Economics
Issue of 2015‒05‒09
28 papers chosen by
Roger Fouquet
London School of Economics

  1. Assessing the Energy-Efficiency Gap By Todd D. Gerarden; Richard G. Newell; Robert N. Stavins
  2. Energy Efficiency Policy with Price-quality Discrimination By Marie-Laure Nauleau; Louis-Gaëtan Giraudet; Philippe Quirion
  3. Information v. Energy Efficiency Incentives: Evidence from Residential Electricity Consumption in Maryland By Anna Alberini; Charles Towe
  4. On the Mechanism of International Technology Diffusion for Energy Technological Progress By Wei Jin; ZhongXiang Zhang
  5. Beyond Technology Adoption: Homeowner Satisfaction with Newly Adopted Residential Heating Systems By Michelsen, Carl Christian; Madlener, Reinhard
  6. A Green and Socially Equitable Direction for the ICT Paradigm By Carlota Perez
  7. European Natural Gas Seasonal Effects on Futures Hedging By Beatriz Martínez; Hipòlit Torró
  8. The Economics of Shale Gas Development By Charles F. Mason; Lucija A. Muehlenbachs; Sheila M. Olmstead
  9. Can the US shale revolution be duplicated in europe ? By Aurélien SAUSSAY
  10. The Future of Renewable Energy in the Mediterranean. Translating Potential into Reality By Simone Tagliapietra
  11. The Potential of Electromobility in Austria: An Analysis Based on Hybrid Choice Models By Francisco J. Bahamonde-Birke; Tibor Hanappi
  12. Improving short term load forecast accuracy via combining sister forecasts By Jakub Nowotarski; Bidong Liu; Rafal Weron; Tao Hong
  13. An Exact Solution Method for Binary Equilibrium Problems with Compensation and the Power Market Uplift Problem By Daniel Huppmann; Sauleh Siddiqui
  14. A political economy of China's export restrictions on rare earth elements By Pothen, Frank; Fink, Kilian
  15. Volatility spillovers across petroleum markets By Jozef Baruni; Evzen Kocenda; Lukas Vacha
  16. Impact of U.S. Biofuel Policy in the Presence of Drastic Climate Conditions By Héctor M. Núñez; Andrés Trujillo-Barrera
  17. Biofuels and Vertical Price Transmission: The Case of the U.S. Corn, Ethanol, and Food Markets By Dusan Drabik; Pavel Ciaian; Jan Pokrivcak
  18. A Public Finance Perspective on Climate Policy: Six Interactions That May Enhance Welfare By Jan Siegmeier; Linus Mattauch; Max Franks; David Klenert; Anselm Schultes; Ottmar Edenhofer
  19. Why Finance Ministers Favor Carbon Taxes, Even if They Do not Take Climate Change into Account By Max Franks; Ottmar Edenhofer; Kai Lessmann
  20. The Triple Challenge for Europe: The Economy, Climate Change and Governance By Jan Fagerberg; Staffan Laestadius; Ben R. Martin
  21. Crossing the River by Feeling the Stones: The Case of Carbon Trading in China By ZhongXiang Zhang
  22. Luring Others into Climate Action: Coalition Formation Games with Threshold and Spillover Effects By Valentina Bosetti; Melanie Heugues; Alessandro Tavoni
  23. Risk Aversion in Modeling of Cap-and-Trade Mechanisms and Optimal Design of Emission Markets By Paolo Falbo; Juri Hinz; Cristian Pelizzari
  24. Assessment of the Effectiveness of Global Climate Policies Using Coupled Bottom-up and Top-down Models By Maryse Labriet; Laurent Drouet; Marc Vielle; Richard Loulou; Amit Kanudia; Alain Haurie
  25. Facilitating Linkage of Heterogeneous Regional, National, and Sub-National Climate Policies Through a Future International Agreement By Daniel M. Bodansky; Seth A. Hoedl; Gilbert E. Metcalf; Robert N. Stavins
  26. Fiscal Policy and CO2 Emissions of New Passenger Cars in the EU By Reyer Gerlagh; Inge van den Bijgaart; Hans Nijland; Thomas Michielsen
  27. The impact of pollution abatement investments on technology: Porter hypothesis revisited By Jean Pierre Huiban; Camilla Mastromarco; Antonio Musolesi; Michel Simioni
  28. Implications of Weak Near-term Climate Policies on Long-term Mitigation Pathways By Elorri Igos; Benedetto Rugani; Sameer Rege; Enrico Benetto; Laurent Drouet; Dan Zachary; Tom Hass

  1. By: Todd D. Gerarden (Harvard University); Richard G. Newell (Duke University); Robert N. Stavins (Harvard University)
    Abstract: Energy-efficient technologies offer considerable promise for reducing the financial costs and environmental damages associated with energy use, but these technologies appear not to be adopted by consumers and businesses to the degree that would apparently be justified, even on a purely financial basis. We present two complementary frameworks for understanding this so-called “energy paradox” or “energy-efficiency gap.” First, we build on the previous literature by dividing potential explanations for the energy-efficiency gap into three categories: market failures, behavioral anomalies, and model and measurement errors. Second, we posit that it is useful to think in terms of the fundamental elements of cost-minimizing energy-efficiency decisions. This provides a decomposition that organizes thinking around four questions. First, are product offerings and pricing economically efficient? Second, are energy operating costs inefficiently priced and/or understood? Third, are product choices cost-minimizing in present value terms? Fourth, do other costs inhibit more energy-efficient decisions? We review empirical evidence on these questions, with an emphasis on recent advances, and offer suggestions for future research.
    Keywords: Energy-Efficiency, Financial Costs, Environmental Damages
    JEL: Q4 Q48 Q5 Q55
    Date: 2015–04
  2. By: Marie-Laure Nauleau (CIRED); Louis-Gaëtan Giraudet (CIRED, Ecole des Ponts ParisTech); Philippe Quirion (CIRED, CNRS)
    Abstract: We compare a range of energy efficiency policies in a durable good market subject to both energy-use externalities and price-quality discrimination by a monopolist. We find that the social optimum can be achieved with differentiated subsidies. With ad valorem subsidies, the subsidization of the high-end good leads the monopolist to cut the quality of the low-end good. The rates should always be decreasing in energy efficiency. With per-quality subsidies, there is no such interference and the rates can be increasing if the externality is large enough relative to the market share of low-type consumers. Stand-alone instruments only achieve second-best outcomes. A minimum quality standard may be set at the high-end of the product line if consumers are not too dissimilar, otherwise it should only target the low-end good. An energy tax should be set above the marginal external cost. Likewise, a uniform ad valorem subsidy should be set above the subsidy that would be needed to specifically internalize energy-use externalities. Lastly, if, as is often observed in practice, only the high-end good is to be incentivized, a per-quality schedule should be preferred over an ad valorem one. An ad valorem tax on the high-end good may even be preferred over an ad valorem subsidy if the externality is small enough and low-end consumers dominate the market.
    Keywords: Energy Efficiency, Price-Quality Discrimination
    JEL: Q4 Q41 Q48
    Date: 2015–04
  3. By: Anna Alberini (University of Maryland); Charles Towe (University of Connecticut)
    Abstract: We focus on two utility programs intended to reduce energy usage and the associated CO2 emissions—a home energy audit and rebates on the purchase of high-efficiency air-source heat pumps. We use a unique panel dataset from participating and non-participating households to estimate the average treatment effect of participating in either program on electricity usage. We fit models with household-by-season, season-by-year, and household-by-year fixed effects to account for all possible confounders that might be influence energy usage. Since the programs are voluntary, we seek to restore near-exogeneity of the program “treatment” by matching participating households with control households. We deploy coarsened exact matching (CEM; Iacus et al., 2011) as our main matching method. We ask whether it is sufficient to match households based on past electricity usage, or if we gain by adding structural characteristics of the home, including heating system type. We find that the two programs reduce electricity usage by 5% on average. The effects are strong in both winter and summer for the energy audit group but appear to be stronger in the winter for the heat pump rebate group. Adding house characteristics to the matching variables does seem to affect results, suggesting that using past usage alone may not be sufficient to identify the effects of program participation.
    Keywords: Energy Efficiency, Household Behavior, Energy Efficiency Incentives, Electricity Usage, Home Energy Audit
    JEL: Q41 D12 H3
    Date: 2015–03
  4. By: Wei Jin (School of Public Policy, Zhejiang University, Hangzhou, China); ZhongXiang Zhang (School of Economics, Fudan University, Shanghai, China)
    Abstract: International diffusion of energy-saving technologies has received considerable attention in recent energy and climate economics studies. As a helpful methodological complement to the existing large-scale CGE/IAM–based modelling for energy and climate policy studies, this paper contributes to a transparent analytical model for an economically intuitive exposition on the fundamental mechanism of international technology diffusion for energy technological growth. We first develop an efficiency-improving vertical innovation model where energy technological progress is specified as an improvement in primary energy use efficiency. Then a variety-expanding horizontal innovation model is presented where energy technological progress is described as an expansion of energy technology variety. We show that in both models there is a cross-country convergence in the growth rate of energy technology in a long-run balanced growth path, but the absolute levels of energy technology tend to diverge due to cross-country differences in indigenous innovation efficiencies and knowledge absorptive capacities. An economy with a stronger capacity of absorbing foreign knowledge diffusion and undertaking indigenous research tends to have a higher level of energy technology.
    Keywords: Technological Progress, Energy Technology, International Technology Diffusion, Endogenous Technological Change
    JEL: Q55 Q58 Q43 Q48 O13 O31 O33 O44 F18
    Date: 2015–03
  5. By: Michelsen, Carl Christian (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN)); Madlener, Reinhard (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))
    Abstract: In this paper we study homeowner satisfaction with respect to innovative residential heating systems. In particular, we focus on the role of attributes of the home, homeowners’ socio-demographic characteristics, RHS-related knowledge, and adoption motivations. For this purpose, we apply a linear regression model on a dataset obtained from a survey among homeowners in Germany (N=2,135) that had adopted a RHS shortly before the survey was conducted. Moreover, we investigate differences between groups of homeowners by means of t-tests and ANOVA. Our research shows that the motivations for adopting an RHS are relevant factors explaining satisfaction with newly adopted RHS. Moreover, we find the degree of RHS-related knowledge relevant as well. Socio-demographic aspects – such as age, university degree, gender or income – are found to be less important. In particular, the preference to have an RHS that is compatible with daily habits and routines has a strong impact on satisfaction. We also find differences between groups of adopters. Specifically, adopters of a gas-fired condensing boiler or a heat pump are less satisfied than adopters of a wood pellet-fired boiler. The findings of this study may also contribute to a better understanding of factors influencing the word to mouth communication resulting in the uptake and diffusion of certain RHS over time.
    Keywords: customer satisfaction; user satisfaction; post-adoption behavior; space heating
    JEL: C20 D12 O33 Q41
    Date: 2015–02
  6. By: Carlota Perez
    Abstract: This paper takes up Chris Freeman's challenge of facing the environmental limits with science, technology and innovation in order to keep open the possibilities of the developing world along a sustainable "green" growth path. It analyses the differences between the energy intensive paradigm of mass production and consumerism in mid-20th Century and the potential shift to sustainability generally provided by the ICT revolution. It then focuses on the developing world and examines the changes in the global market context that are creating windows of opportunity for local innovation, social inclusion and green growth. It finally discusses the alliances and conditions for taking full advantage of the available transformative potential.
    Date: 2014
  7. By: Beatriz Martínez (University of Valencia (Spain)); Hipòlit Torró (University of Valencia (Spain))
    Abstract: This paper is the first to discuss the design of futures hedging strategies in European natural gas markets (NBP, TTF and Zeebrugge). A common feature of energy prices is that conditional mean and volatility are driven by seasonal trends due to weather, demand, and storage level seasonalities. This paper follows and extends the Ederington and Salas (2008) framework and considers seasonalities in mean and volatility when minimum variance hedge ratios are computed. Our results show that hedging effectiveness is much higher when the seasonal pattern in spot price changes is approximated with lagged values of the basis (futures price minus spot price). This fact remain true for short (a week) and long (one, three and six months) hedging periods. Furthermore, volatility of weekly price changes also has a seasonal pattern and is higher in winter than in summer. A simple volatility seasonal model that is based on sinusoidal functions on the basis improves the risk reduction obtained by strategies in which hedging ratios are estimated with linear regressions. Seasonal hedging strategies, linear regression based strategies, or even a naïve position, perform better than more sophisticated statistical methods.
    Keywords: Natural Gas Market, Futures, Hedging Ratio, Natural Gas Price Risk
    JEL: G11 L95
    Date: 2015–02
  8. By: Charles F. Mason (University of Wyoming, London School of Economics (Grantham Institute) and Resources for the Future); Lucija A. Muehlenbachs (University of Calgary and Resources for the Future); Sheila M. Olmstead (University of Texas at Austin and Resources for the Future)
    Abstract: In the past decade, innovations in hydraulic fracturing and horizontal drilling have fueled a boom in the production of natural gas (as well as oil) from geological formations – primarily deep shales – in which hydrocarbon production was previously unprofitable. Impacts on U.S. fossil fuel production and the U.S. economy more broadly have been transformative, even in the first decade. The boom has been accompanied by concerns about negative externalities, including impacts to air, water, and quality of life in producing regions. We describe the economic benefits of the shale gas boom, including direct market impacts and positive externalities, providing back-of-the-envelope estimates of their magnitude. The paper also summarizes the current science and economics literatures on negative externalities. We conclude that the likely scope of economic benefits is extraordinarily large, and that continued research on the magnitude of negative externalities is necessary to inform risk-mitigating policies.
    Keywords: Hydraulic Fracturing, Economic Benefits, Positive Externalities, Negative Externalities, Environmental Impacts
    JEL: Q4 Q42 Q5
    Date: 2015–03
  9. By: Aurélien SAUSSAY (OFCE (OFCE))
    Abstract: Over the past decade, the rapid increase in shale gas and shale oil production in the United States has profoundly changed energy markets in North America, and has led to a significant decrease in American natural gas prices. The possible existence of large shale deposits in Europe, mainly in France, Poland and the United Kingdom, has fostered speculation on whether the "shale revolution", and its accompanying macroeconomic impacts, could be duplicated in Europe. However, a number of uncertainties, notably geological, technological and regulatory, make this possibility unclear. We present a techno‐economic model, SHERPA (SHale Exploitation and Recovery Projection and Analysis), to analyze the main determinants of the profitability of shale wells and plays. We calibrate our model using production data from the leading American shale plays. We use SHERPA to estimate three shale gas production scenarios exploring different sets of geological and technical hypotheses for the largest potential holder of shale gas deposits in Europe, France. Even considering that the geology of the potential French shale deposits is favorable to commercial extraction, we find that under assumptions calibrated on U.S. production data, natural gas could be produced at a high breakeven price of $8.6 per MMBtu, and over a 45 year timeframe have a net present value of $19.6 billion – less than 1% of 2012 French GDP. However, the specificities of the European context, notably high deposit depth and stricter environmental regulations, could increase drilling costs and further decrease this low profitability. We find that a 40% premium over American drilling costs would make shale gas extraction uneconomical. Absent extreme well productivity, it appears very difficult for shale gas extraction to have an impact on European energy markets comparable to the American shale revolution.
    Date: 2015–04
  10. By: Simone Tagliapietra (Fondazione Eni Enrico Mattei)
    Abstract: This study seeks to provide a clear and comprehensive overview on the various aspects related to the current status and the future prospects of renewable energy (namely solar and wind) in Southern and Eastern Mediterranean countries (SEMCs). In order to do so, the study will first provide a comprehensive analysis of the regional energy market, particularly focusing on the booming energy -and electricity- demand. This key trend is likely to further accelerate in the future, at a level that might create additional risks to the economic sustainability of the region, considering the extensive use of universal fossil-fuel consumption subsidies. Meanwhile, solar and wind energy continue to cover less than 1% of the region’s electricity generation mix: a figure that strongly collides with the region’s abundant solar and wind resources. In fact, SEMCs are endowed with a huge solar and wind energy potential. The exploitation of this potential could bring various benefits to the region, such as meeting the rising energy/electricity demand at a lower cost, freeing up additional export volumes of oil and gas in energy exporting countries, reducing energy bills in energy importing countries, creating new jobs, alleviating energy poverty, enhancing the quality of the environment and enhancing cooperation both among SEMCs and between SEMCs and the EU. Notwithstanding all the efforts to promote renewable energy carried out over the last decade both at the regional level and at the European level (e.g. Desertec, Mediterranean Solar Plan, etc.), SEMCs continue to lag far behind most other regions in the world in terms of solar and wind energy deployment. This study will try to explore the reasons of this paradox, particularly focusing on the key barriers to the development of renewable energy in the region: the extensive use of energy subsidies and the lack of adequate electricity infrastructures, energy regulatory frameworks and financing mechanisms. On the basis of this in-depth analysis, the study will propose an innovative approach to tackle these barriers, involving a joint action of MedTSO, MEDREG and key financial institutions under the umbrella of a newly-established “Euro-Med Renewable Energy Platform” designed to become -on the basis of an inclusive, pragmatic and bottom-up approach- the new catalyst for the development of renewable energy in SEMCs.
    Keywords: Mediterranean Energy Markets, Renewable Energy, CSP, Solar Energy, Wind Energy
    JEL: Q40 Q42 Q48
    Date: 2015–04
  11. By: Francisco J. Bahamonde-Birke; Tibor Hanappi
    Abstract: This paper analyses the impact of the introduction of electromobility in Austria, focusing specifically on the potential demand for electric vehicles in the automotive market. We estimate discrete choice behavioral mixture models considering latent variables; these allows us to deal with this potential demand as well as to analyze the effect of different attributes of the alternatives over the potential market penetration. We find out that some usual assumptions regarding electromobilityalso hold for the Austrian market (e.g. proclivity of green-minded people and reluctance of older individuals), while others are only partially valid (e.g. the power of the engine is not relevant for purely electric vehicles). Along the same line, it was possible to establish that some policy incentives would have a positive effect over the demand for electrical cars, while others - such as an annual Park and Ride subscription or a one-year-ticket for public transportation - would not increase thewillingness-to-pay for electromobility. Our work suggests the existence of reliability thresholds, concerning the availability of charging stations. Finally this paper enunciates and successfully tests an alternative approach to address unreported information regarding income in presence of endogeneity and multiple information sources.
    Keywords: Electromobility, electric vehicles, Hybrid discrete choice model, latent variables, unreported income
    Date: 2015
  12. By: Jakub Nowotarski; Bidong Liu; Rafal Weron; Tao Hong
    Abstract: Although combining forecasts is well-known to be an effective approach to improving forecast accuracy, the literature and case studies on combining load forecasts are very limited. In this paper, we investigate the performance of combining so-called sister load forecasts with eight methods: three variants of arithmetic averaging, four regression based and one performance based method. Through comprehensive analysis of two case studies developed from public data (Global Energy Forecasting Competition 2014 and ISO New England), we demonstrate that combing sister forecasts outperforms the benchmark methods significantly in terms of forecasting accuracy measured by Mean Absolute Percentage Error. With the power to improve accuracy of individual forecasts and the advantage of easy generation, combining sister load forecasts has a high academic and practical value for researchers and practitioners.
    Keywords: Electric load forecasting; Forecast combination; Sister forecast
    JEL: C22 C32 C53 Q47
    Date: 2015–05–03
  13. By: Daniel Huppmann; Sauleh Siddiqui
    Abstract: We propose a novel method to find Nash equilibria in games with binary decision variables by including compensation payments and incentive-compatibility constraints from non-cooperative game theory directly into an optimization framework in lieu of using first order conditions of a linearization, or relaxation of integrality conditions. The reformulation offers a new approach to obtain and interpret dual variables to binary constraints using the benefit or loss from deviation rather than marginal relaxations. The method endogenizes the trade-off between overall (societal) efficiency and compensation payments necessary to align incentives of individual players. We provide existence results and conditions under which this problem can be solved as a mixed-binary linear program. We apply the solution approach to a stylized nodal power-market equilibrium problem with binary on-off decisions. This illustrative example shows that our approach yields an exact solution to the binary Nash game with compensation. We compare different implementations of actual market rules within our model, in particular constraints ensuring non-negative profits (no-loss rule) and restrictions on the compensation payments to non-dispatched generators. We discuss the resulting equilibria in terms of overall welfare, efficiency, and allocational equity.
    Keywords: binary Nash game, non-cooperative equilibrium, compensation, incentive compatibility, electricity market, power market, uplift payments
    JEL: C72 C61 L13 L94
    Date: 2015
  14. By: Pothen, Frank; Fink, Kilian
    Abstract: We investigate why governments restrict exports of exotic raw materials taking rare earth elements as a case study. Trade restrictions on exotic materials do not have immediate macroeconomic effects. Relocating rare earth intensive industries is found to be the main reason behind China's export barriers. They are part of a more extensive strategy aiming at creating comparative advantages in these sectors and at overcoming path dependencies. Moreover, export barriers serve as a second-best instrument to reduce pollution and to slow down the depletion of exhaustible resources. Growing domestic rare earth consumption renders those increasingly ineffective. Rising reliance on mine-site regulation indicates that this fact is taken into account. Rare earth extraction is dominated by a few large companies; the demand side is dispersed. That speaks against successful lobbying for export restrictions. It appears as if the export barriers are set up to compensate mining firms.
    Keywords: Rare Earths,Export Restrictions,Political Economy
    JEL: Q37 Q38 D78 P26
    Date: 2015
  15. By: Jozef Baruni; Evzen Kocenda; Lukas Vacha
    Abstract: We detect and quantify asymmetries in the volatility spillovers of petroleum commodities: crude oil, gasoline, and heating oil. The increase in volatility spillovers after 2001 correlates with the progressive financialization of the commodities. Further, increasing spillovers from volatility among petroleum commodities substantially change their pattern after 2008 (the financial crisis and advent of tight oil production). After 2008, asymmetries in spillovers markedly declined in terms of total as well as directional spillovers. In terms of asymmetries we also show that overall volatility spillovers due to negative (price) returns materialize to a greater degree than volatility spillovers due to positive returns. An analysis of directional spillovers reveals that no petroleum commodity dominates other commodities in terms of general spillover transmission.
    Keywords: volatility spillovers, asymmetry, petroleum markets
    JEL: C18 C58 G15 L71
    Date: 2015–04–01
  16. By: Héctor M. Núñez; Andrés Trujillo-Barrera (Division of Economics, CIDE)
    Abstract: We analyze the impact of total and partial waivers of the U.S. Renewable Fuel Standard (RFS) under uncertain changes in climate conditions that affects crop yields distributions. The main model results show that reducing RFS would make world agricultural consumers better off, and increase U.S. corn share in the world market, while slightly decrease agricultural commodity prices, but the higher the RFS reduction the higher the uncertainty on the price changes. On the other hand, price changes would make ethanol and agricultural producers face losses as well as increase gasoline consumption and, therefore, bringing larger environmental damages. Overall RFS reduction generates negative changes in total economic surplus, specifically, RFS reductions up to 40 percent generate significant changes in the socioeconomic variables, however any reductions beyond 40 percent do not appear to bring further changes, although welfare results appear more uncertain under an increased reduction.
    Keywords: Biofuel Policy, Climate Uncertainty, Crop Commodity Markets
    Date: 2015–03
  17. By: Dusan Drabik; Pavel Ciaian; Jan Pokrivcak
    Abstract: This is the first paper to analyze the impact of biofuels on the price transmission along the food chain. We analyze the U.S. corn sector and its vertical links with food and ethanol (energy) markets. We find that biofuels affect the price transmission elasticity in the food chain compared to a no biofuel production situation but the effect depends on the source of the market shock and the policy regime: the price transmission elasticity declines under a binding blender’s tax credit and a food market shock. Our results also indicate that the response of corn and food prices to shocks in the corn and/or food markets is lower in the presence of biofuels. Finally, the sensitivity analyses indicate that our results are robust to different assumptions about the model parameters.
    Keywords: price transmission, food chain, biofuels, prices
    JEL: Q11 Q21
    Date: 2014
  18. By: Jan Siegmeier (Technische Universität Berlin and Mercator Research Institute on Global Commons and Climate Change); Linus Mattauch (Technische Universität Berlin and Mercator Research Institute on Global Commons and Climate Change); Max Franks (Technische Universität Berlin and Potsdam Institute for Climate Impact Research); David Klenert (Technische Universität Berlin and Potsdam Institute for Climate Impact Research); Anselm Schultes (Technische Universität Berlin and Potsdam Institute for Climate Impact Research); Ottmar Edenhofer (Technische Universität Berlin, Mercator Research Institute on Global Commons and Climate Change and Potsdam Institute for Climate Impact Research)
    Abstract: Climate change economics mostly neglects sizeable interactions of carbon pricing with other fiscal policy instruments. Conversely, public finance typically overlooks the effects of future decarbonization efforts when devising instruments for the major goals of fiscal policy. We argue that such a compartmentalisation is undesirable: policy design taking into account such interdependencies may enhance welfare and change the distribution of mitigation costs within and across generations. This claim is substantiated by analyzing six interactions between climate policy and public finance that are insufficiently explored in current research: (i) reduced tax competition in an open economy, (ii) portfolio effects induced through climate policy, (iii) restructuring public spending, (iv) revenue recycling for productive public investment, (v) greater intragenerational equity through appropriate revenue recycling and (vi) intergenerational Pareto-improvements through intertemporal transfers. We thereby structure the hitherto identified interactions between climate change mitigation and public finance and show that jointly considering carbon pricing and fiscal policy is legitimate and mandatory for sound policy appraisal.
    Keywords: Carbon Pricing, Taxation, Public Spending, Redistribution, Policy Interactions
    JEL: B41 H21 H23 H54 H60 Q54
    Date: 2015–04
  19. By: Max Franks (Potsdam Institute for Climate Impact Research and Berlin Institute of Technology); Ottmar Edenhofer (Mercator Research Institute on Global Commons and Climate Change, Berlin Institute of Technology and Potsdam Institute for Climate Impact Research); Kai Lessmann (Potsdam Institute for Climate Impact Research)
    Abstract: Fiscal considerations may shift governmental priorities away from environmental concerns: Finance ministers face strong demand for public expenditures such as infrastructure investments but they are constrained by international tax competition. We develop a multi-region model of tax competition and resource extraction to assess the fiscal incentive of imposing a tax on carbon rather than on capital. We explicitly model international capital and resource markets, as well as intertemporal capital accumulation and resource extraction. While fossil resources give rise to scarcity rents, capital does not. With carbon taxes the rents can be captured and invested in infrastructure, which leads to higher welfare than under capital taxation. This result holds even without modeling environmental damages. It is robust under a variation of the behavioral assumptions of resource importers to coordinate their actions, and a resource exporter's ability to counteract carbon policies. Further, no green paradox occurs - instead, the carbon tax constitutes a viable green policy, since it postpones extraction and reduces cumulative emissions.
    Keywords: Carbon Pricing, Green Paradox, Infrastructure, Optimal Taxation, Strategic Instrument Choice, Supply-Side Dynamics, Tax Competition
    JEL: F21 H21 H30 H73 Q38
    Date: 2015–04
  20. By: Jan Fagerberg (Professor, University of Oslo, Aalborg University, and Lund University); Staffan Laestadius (Professor Emeritus, Sustainability and Industrial Dynamics Division, Department of Industrial Economics & Management, Royal Institute of Technology, Stockholm); Ben R. Martin (Professor of Science and Technology Policy Studies, SPRU, University of Sussex)
    Abstract: Europe is confronted by an intimidating triple challenge Ð economic stagnation, climate change, and a governance crisis. This paper demonstrates how the three challenges are closely inter- related, and discusses how they can be dealt with more effectively in order to arrive at a more economically secure, environmentally sustainable and well governed Europe. In particular, a return to economic growth cannot come at the expense of greater risk of irreversible climate change. Instead, what is required is a fundamental transformation of the economy to a new ÔgreenÕ trajectory based on rapidly diminishing emission of greenhouse gases. This entails much greater emphasis on innovation in all its forms (not just technological). Following this path would mean turning Europe into a veritable laboratory for sustainable growth, environmentally as well as socially. The paper is based on a forthcoming book: Fagerberg, J., S. Laestadius and B. R. Martin eds. (2015) The Triple Challenge for Europe: Economic Development, Climate Change and Governance, Oxford University Press.
    Date: 2015–04
  21. By: ZhongXiang Zhang (College of Management and Economics, Tianjin University, Tianjin and School of Economics, Fudan University, Shanghai (China))
    Abstract: Putting a price on carbon is considered a crucial step for China’s endeavor of harnessing the market forces to reduce its energy consumption and carbon emissions. Indeed, aligned with China’s grand experiment with low-carbon provinces and low-carbon cities in six provinces and thirty-six cities, the Chinese central government has approved the seven pilot carbon trading schemes. These pilot trading schemes have features in common, but vary considerably in their approach to issues such as the coverage of sectors, allocation of allowances, price uncertainty and market stabilization, potential market power of dominated players, use of offsets, and enforcement and compliance. This article explains why China turns to market forces and opts for emissions trading, rather than carbon or environmental taxes at least initially, discusses the five pilot trading schemes that have to comply with their emissions obligations by June 2014, and examines a wide range of design, implementation, enforcement and compliance issues related to China’s carbon trading pilots and their first-year performance. The article ends with drawing some lessons learned and discussing the options to evolve regional pilot carbon trading schemes into a nationwide carbon trading scheme.
    Keywords: Pilot Carbon Trading Schemes, Low-carbon Development, Environmental Taxes, Market Stabilization Mechanism, Carbon Offsets, Enforcement and Compliance, China
    JEL: H23 O13 P28 Q43 Q48 Q52 Q54 Q58
    Date: 2015–03
  22. By: Valentina Bosetti (Fondazione Eni Enrico Mattei, Milan (Italy) and Bocconi University, Milan (Italy)); Melanie Heugues (Fondazione Eni Enrico Mattei, Milan (Italy)); Alessandro Tavoni (Grantham Research Institute, London School of Economics, London (England))
    Abstract: We study the effect of leadership in an experimental threshold public ‘bad’ game, where we manipulate both the relative returns of two investments (the more productive of which causes a negative externality) and the extent to which the gains from leadership diffuse to the group. The game tradeoffs mimic those faced by countries choosing to what degree and when to transition from incumbent polluting technologies to cleaner alternatives, with the overall commitment dictating whether they manage to avert dangerous environmental thresholds. Leading countries, by agreeing on a shared effort, may be pivotal in triggering emission reductions in non-signatories countries. In addition, the leaders’ coalition might also work as innovation and technology adoption catalyzer, thus producing a public good (knowledge) that benefits all countries. In our game, players can choose to tie their hands to a cooperative strategy by signing up to a coalition of first movers. The game is setup such that as long as the leading group reaches a pivotal size, its early investment in the externality-free project may catalyze cooperation by non-signatories. We find that the likelihood of reaching the pivotal size is higher when the benefits of early cooperation are completely appropriated by the coalition members, less so when these benefits spillover to the non-signatories. On the other hand, spillovers have the potential to entice second movers into adopting the ‘clean’ technology.
    Keywords: Climate Change, International Cooperation, R&D Spillovers, Threshold Public Goods Game, Coalition Formation Game, Climate Experiment
    JEL: Q5 Q58
    Date: 2015–03
  23. By: Paolo Falbo (Department of Economics and Management, University of Brescia); Juri Hinz (School of Mathematical Sciences, UTS Business School, University of Technology, Sydney); Cristian Pelizzari (Department of Economics and Management, University of Brescia)
    Abstract: According to theoretical arguments, a properly designed emission trading system should help reaching pollution reduction at low social burden. Based on the theoretical work of environmental economists, cap-and-trade systems are put into operations all over the world. However, the practice from emissions trading yields a real stress test for the underlying theory and reveals a number of its weak points. This paper aims to fill the gap between general welfare concepts underlying understanding of liberalized market and speci?c issues of real-world emission market operation. In our work, we present a novel technique to analyze emission market equilibrium in order to address diverse questions in the setting of risk-averse market players. Our contribution signi?cantly upgrades all existing models in this ?eld, which neglect risk-aversion aspects at the cost of having a wide range of singularities in their conclusions, now resolved in our approach. Furthermore, we show how the architecture of an environmental market can be optimized under the realistic assumption of risk-aversion and which approximations must be met therefore.
    Keywords: emission trading; environmental ?nance;, market equilibrium
    Date: 2015–04–01
  24. By: Maryse Labriet (Eneris Environment Energy Consultants, Spain); Laurent Drouet (Fondazione Eni Enrico Mattei and Euro-Mediterranean Center on Climate Change, Italy); Marc Vielle (Ecole Polytechnique de Lausanne, Switzerland); Richard Loulou (Kanlo Consultants Sàrl, France); Amit Kanudia (Kanors Consultants, India); Alain Haurie (Ordecsys, Switzerland)
    Abstract: In order to assess climate mitigation agreements, we propose an iterative procedure linking TIAM-WORLD, a global technology-rich optimization model, and GEMINI-E3, a global general equilibrium model. The coupling methodology combines the precise representation of energy and technology choices with a coherent representation of the macro-economic impacts, especially in terms of trade effects of climate policies on energy-intensive products. In climate mitigation scenarios, drastic technology breakthroughs are required as soon as possible, especially in large emitting countries, and in all sectors of the economy. Energy-intensive industries tend to be delocalized in regions where low-carbon production is feasible and cheap, or in regions without emission cap. However, emission leakage remains small, mainly due to global lower oil demand, and energy exporting countries are extremely penalized given lower energy exports. Emission reduction at least in the power sector and in energy-intensive industries of developing countries must be considered to reach the 2°C target.
    Keywords: Climate Policies, Energy, Techno-economic modelling, Macro-economic Modelling, World
    JEL: Q5 Q54 Q58
    Date: 2015–03
  25. By: Daniel M. Bodansky (Arizona State University); Seth A. Hoedl (Harvard University); Gilbert E. Metcalf (Tufts University); Robert N. Stavins (Harvard University)
    Abstract: Negotiations pursuant to the Durban Platform for Enhanced Action appear likely to lead to a 2015 Paris agreement that embodies a hybrid climate policy architecture, combining top-down elements, such as for monitoring, reporting, and verification, with bottom-up elements, including “nationally determined contributions” from each participating country, detailing what it intends to do to reduce emissions, based on its national circumstances. For such a system to be cost-effective—and thus more likely to achieve significant global emissions reductions—a key feature will be linkages among regional, national, and sub-national climate policies. By linkage, we mean a formal recognition by a greenhouse gas mitigation program in one jurisdiction (a regional, national, or sub-national government) of emission reductions undertaken in another jurisdiction for purposes of complying with the first jurisdiction’s mitigation program. We examine how a future international policy architecture could help facilitate the growth and operation of a robust system of international linkages of regional, national, and sub-national policies. Several design elements merit serious consideration for inclusion in the Paris agreement, either directly or by establishing a process for subsequent international elaboration. At the same time, including detailed linkage rules in the core agreement is not desirable because this could make it difficult for rules to evolve in light of experience.
    Keywords: Climate Policies, International Agreements
    JEL: Q5 Q58
    Date: 2015–03
  26. By: Reyer Gerlagh (Tilburg University, Netherlands); Inge van den Bijgaart (Tilburg University, Netherlands); Hans Nijland (PBL Netherlands Environmental Assessment Agency, Netherlands); Thomas Michielsen (CPB Netherlands Bureau for Economic Policy Analysis, Netherlands)
    Abstract: T o what extent have national fiscal policies contributed to the decarbonisation of newly sold passenger cars? We construct a simple model that generates predictions regarding the effect of fiscal policies on average CO2 emissions of new cars, and then test the model empirically. Our empirical strategy combines a diverse series of data. First, we use a large database of vehicle-specific taxes in 15 EU countries over 2001-2010 to construct a measure for the vehicle registration and annual road tax levels, and separately, for the CO2 sensitivity of these taxes. We find that for many countries the fiscal policies have become more sensitive to CO2 emissions of new cars. We then use these constructed measures to estimate the effect of fiscal policies on the CO2 emissions of the new car fleet. The increased CO2-sensitivity of registration taxes have reduced the CO2 emission intensity of the average new car by 1,3 percent, partly through an induced increase of the share of diesel-fuelled cars by 6,5 percentage points. Higher fuel taxes lead to the purchase of more fuel efficient cars, but higher annual road taxes have no or an adverse effect.
    Keywords: Vehicle Registration Taxes, Fuel Taxes, CO2 Emissions
    JEL: H30 L62 Q48 Q54 Q58 R48
    Date: 2015–04
  27. By: Jean Pierre Huiban (INRA-ALISS); Camilla Mastromarco (Dipartimento di Scienze dell'Economia, Università del Salento, Italy); Antonio Musolesi (Department of Economics and Management, University of Ferrara, Italy); Michel Simioni (Toulouse School of Economics, INRA-GREMAQ and IDEI, France)
    Abstract: This paper revisits the Porter hypothesis by pursuing two new directions. First, we compare the results obtained with two complementary approaches: parametric stochastic frontier analysis and conditional nonparametric frontier analysis. They presents relative advantages and drawbacks. Secondly, we pay attention not only on the average pollution abatement effort effect but we also focus on its variability across rms and over time. We provide new results suggesting that the traditional view about the effect of environmental regulation on productivity and the Porter hypothesis may coexist. This evidence supports the idea that a well-designed environmental regulation affects positively the rm performances in some instances.
    Keywords: Porter hypothesis, pollution abatement investment, stochastic frontier analysis, time-varying eciency, Vuong test, conditional nonparametric frontier analysis.
    JEL: C14 C23 D24 Q50
    Date: 2015–04
  28. By: Elorri Igos (Public Research Centre Henri Tudor, Resource Centre for Environmental Technologies (CRTE), Luxembourg); Benedetto Rugani (Public Research Centre Henri Tudor, Resource Centre for Environmental Technologies (CRTE), Luxembourg); Sameer Rege (Public Research Centre Henri Tudor, Resource Centre for Environmental Technologies (CRTE), Luxembourg); Enrico Benetto (Public Research Centre Henri Tudor, Resource Centre for Environmental Technologies (CRTE), Luxembourg); Laurent Drouet (Fondazione Eni Enrico Mattei (FEEM), Italy); Dan Zachary (Public Research Centre Henri Tudor, Resource Centre for Environmental Technologies (CRTE), Luxembourg); Tom Hass (Institut National de la Statistique et des Études Économique du Grand-Duché du Luxembourg (STATEC), Luxembourg)
    Abstract: The future evolution of energy supply technologies strongly depends on (and affects) the economic and environmental systems, due to the high dependency of this sector on the availability and cost of fossil fuels, especially on the small regional scale. This paper aims at presenting the modeling system and preliminary results of a research project conducted on the scale of Luxembourg to assess the environmental impact of future energy scenarios for the country, integrating outputs from partial and computable general equilibrium models within hybrid Life Cycle Assessment (LCA) frameworks. The general equilibrium model for Luxembourg, LUXGEM, is used to evaluate the economic impacts of policy decisions and other economic shocks over the time horizon 2006-2030. A techno-economic (partial equilibrium) model for Luxembourg, ETEM, is used instead to compute operation levels of various technologies to meet the demand for energy services at the least cost along the same timeline. The future energy demand and supply are made consistent by coupling ETEM with LUXGEM so as to have the same macro-economic variables and energy shares driving both models. The coupling results are then implemented within a set of Environmentally-Extended Input-Output (EE-IO) models in historical time series to test the feasibility of the integrated framework and then to assess the environmental impacts of the country. Accordingly, a disaggregated energy sector was built with the different ETEM technologies in the EE-IO to allow hybridization with Life Cycle Inventory (LCI) and enrich the process detail. The results show that the environmental impact slightly decreased overall from 2006 to 2009. Most of the impacts come from some imported commodities (natural gas, used to produce electricity, and metalliferous ores and metal scrap). The main energy production technology is the combined-cycle gas turbine plant “Twinerg”, representing almost 80% of the domestic electricity production in Luxembourg. In the hybrid EE-IO model, this technology contributes to around 7% of the total impact of the country’s net consumption. The causes of divergence between ETEM and LUXGEM are also thoroughly investigated to outline possible strategies of modeling improvements for future assessment of environmental impacts using EE-IO. Further analyses focus first on the completion of the models’ coupling and its application to the defined scenarios. Once the coupling is consistently accomplished, LUXGEM can compute the IO flows from 2010 to 2030, while the LCI processes in the hybrid system are harmonized with ETEM to represent the future domestic and imported energy technologies.
    Keywords: Life Cycle Assessment, Energy Scenarios, General Equilibrium Model, Techno-economic Model, Environmentally-extended Input-output, Hybridization
    JEL: Q40 C61 C67 C68
    Date: 2015–02

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