nep-ene New Economics Papers
on Energy Economics
Issue of 2017‒11‒12
thirty-one papers chosen by
Roger Fouquet
London School of Economics

  1. Energy Price Reform: A Guide for Policymakers By David Coady; Ian Parry; Baoping Shang
  2. A Market Mechanism for Sustainable and Efficient Resource Use under Uncertainty By Martin F. Quaas; Ralph Winkler
  3. Social norms and energy conservation beyond the US By Andor, Mark Andreas; Gerster, Andreas; Peters, Jörg; Schmidt, Christoph M.
  4. Correlation analysis of Environmental actions, Environmental consciousness, and Recognition of Environmental labels By Fujisawa, Mieko; Hirayu, Naoko
  5. Gli incentivi all’efficienza energetica nelle Gare per il Servizio di Distribuzione Gas: riflessi di Finanza Pubblica Locale By Roberto Fazioli; Donato Lenza
  6. Green Technology Adoption and the Business Cycle By Jean-Marc Bourgeon; Margot Hovsepian
  7. Effects of Changes in Wholesale Electricity Market Structure on Wind Generation in the Midwestern United States By Steve Dahlke
  8. Competitiveness and Ecological Impacts of Green Energy Technologies. Firm-level Evidence for the DACH Region By Michael Peneder; Spyros Arvanitis; Christian Rammer; Tobias Stucki; Martin Wörter
  9. Low-Emission Energy Outlook in a Small Island Developing States – The case of Sao Tome And Principe By Rita Sousa; Adérito Santana; Inês Mourão
  10. FleetPower: Creating Virtual Power Plants in Sustainable Smart Electricity Markets By Kahlen, M.T.; Ketter, W.; Gupta, A.
  11. The impact of Energy Prices on Employment and Environmental Performance : Evidence from French Manufacturing Establishments By Giovanni Marin; Francesco Vona
  12. The Effect of Oil Spills on Infant Mortality: Evidence from Nigeria By Anna Bruederle; Roland Hodler
  13. The Local Effects of the Texas Shale Boom on Schools, Students, and Teachers By Marchand, Joseph; Weber, Jeremy
  14. How the Tight Oil Boom Has Changed Oil and Gasoline Markets By Lutz Kilian
  15. Finders, Keepers? By Niko Jaakkola; Daniel Spiro; Arthur A. van Benthem
  16. Dynamic Connectedness and Causality between Oil prices and Exchange Rates By Jose Eduardo Gomez-Gonzalez; Jorge Hirs-Garzon; Jorge M. Uribe
  17. Recovery from Dutch Disease By Mardi Dungey; Renée Fry-McKibbin; Verity Todoroski; Vladimir Volkov
  18. Extractive Industries and Corruption: Investigating the Effectiveness of the EITI as a Scrutiny Mechanism By Elizabeth Kasekende; Charles Abuka; Marr Sar
  19. Los Biocombustibles: Desarrollos recientes y tendencias internacionales. By Arturo Leonardo Vásquez Cordano; Ricardo De la Cruz Sandoval; Francisco Coello Jaramillo
  20. Sorting on the Used-Car Market After the Volkswagen Emission Scandal By Anthony Strittmatter; Michael Lechner
  21. Transboundary Externalities and Reciprocal Taxes: A Differential Game Approach By Charles F. Mason
  22. EU ETS- broken beyond repair ? An analysis based on Faster principles By Xavier Timbeau; Pawel Wiejski
  23. Updating Allowance Allocations in Cap-and-Trade: Evidence from the NOx Budget Program By Ian Lange; Peter Maniloff
  24. Permit allocation rules and investment incentives in emissions trading systems By Florens Flues; Kurt van Dender
  25. Emissions Leakage, Environmental Policy and Trade Frictions By J. Scott Holladay; Mohammed Mohsin; Shreekar Pradhan
  26. Petchey's (2015) Extension of Oates & Schwab's (1988) Efficiency Result Revisited By Thomas Eichner; Rüdiger Pethig
  28. Economic Growth, Income Distribution, and Climate Change By Rezai, Armon; Taylor, Lance; Foley, Duncan K.
  29. The Basic Environmental Economics of The Circular Economy By Peter Birch Sørensen
  30. The Safe Carbon Budget By Rick van der Ploeg
  31. Paris after Trump: An Inconvenient Insight By Christoph Böhringer; Thomas F. Rutherford

  1. By: David Coady; Ian Parry; Baoping Shang
    Abstract: This essay reviews the conceptual and quantitative literature on the efficient system of fossil fuel energy prices in different countries for reflecting supply and environmental costs, as well as the environmental, fiscal, and economic benefits from energy price reform. Drawing on recent experiences in numerous countries, the ingredients for successful reform are then discussed (e.g., the need for a comprehensive reform strategy and for compensating vulnerable groups). Low energy prices, fiscal pressures, and momentum for climate action provide an especially conducive environment for price reform and much is happening rapidly on the ground, however there is a long way to go to reap the enormous benefits at stake (e.g., at the global level, over a 20 percent reduction in carbon emissions and revenues gains of 4 percent of GDP).
    Keywords: energy price reform, efficient taxation, environmental externalities, reform experiences
    JEL: Q31 Q38
    Date: 2017
  2. By: Martin F. Quaas; Ralph Winkler
    Abstract: Sustainability and efficiency are potentially conflicting social objectives in natural resource management. We propose a market mechanism to allocate use rights over a stochastic resource to private managers. The mechanism endogenously determines the maximal tenure length guaranteeing that the sustainability goal is obeyed for sure over the entire period. In addition, the mechanism achieves efficiency, i.e. it maximizes the expected present value of resource rents that accrue to society. Potential applications include improved fishing agreements between developing countries and distant-water fishing fleets.
    Keywords: auctioning-refunding-mechanism, efficient resource allocation, renewable resources, stochastic resource dynamics, sustainability
    JEL: Q20 D44 D82
    Date: 2017
  3. By: Andor, Mark Andreas; Gerster, Andreas; Peters, Jörg; Schmidt, Christoph M.
    Abstract: The seminal studies by Allcott and Mullainathan (2010), Allcott (2011), and Allcott and Rogers (2014) suggest that social comparison-based home energy reports (HER) are a cost-effective non-price intervention to stimulate energy conservation. The present paper demonstrates the context-dependency of this result. We show that, outside the US, electricity consumption levels and carbon intensities are typically much lower and, hence, HER interventions can only become cost-effective when treatment effect sizes are substantially higher. Yet, our evidence from a large-scale randomized controlled trial in Germany suggests that effect sizes are actually much lower than in the US.
    Keywords: social norms,energy demand,external validity,randomized field experiments,non-price interventions
    JEL: D12 D83 L94 Q41
    Date: 2017
  4. By: Fujisawa, Mieko; Hirayu, Naoko
    Abstract: The purpose of our research is to clarify the relationship between environmental actions, environmental consciousness, and the extent to which environmental labels are recognized. There are significant differences in the individual perception of environmental problems, and it is important to encourage environmental actions while taking into consideration these differences. Then in this research, we assumed a relationship between actions that are conscious of environmental problems (environmental actions), and the extent to which commonly known environmental labels are recognized, and how consciousness of environmental problems fluctuates high or low (environmental consciousness); and conducted an online questionnaire survey to investigate these issues. To illustrate concrete environmental actions, we took advantage of the registration for energy visualization provided by a power company (through the “electric household account book), and efforts to reduce electricity usage (reduction efforts) and the agreement on power peak shift (peak shift agreement). From the questionnaire result, we found that environmental actions are influenced by environmental consciousness, and differences in the extent to which environmental labels are recognized. We are able to explore the possibility of inducing environmental actions not only for consumers with high environmental consciousness, but also to others by using effective ways of explaining new concepts, etc. Therefore, we intend to examine the relationship between environmental actions, the mechanism of providing information, and how this information is understood by conducting a new survey.
    Keywords: Environmental Actions, Environmental Consciousness, Recognition of Environmental Labels, Electric Household account book, The Peak Shit of Electric Power, Questionnaire Survey, Intervention of Information, HEMS
    JEL: Q5
    Date: 2017–08–22
  5. By: Roberto Fazioli; Donato Lenza
    Abstract: This paper provides timely and updated analysis of the role of incentives to energy efficiency, namely to investments efficiency improving, conveyed through the “white certificate system†or “energy efficiency certificates†against annual obligations that fall at the expense of natural gas distributor. Are analyzed the ways of performance of the obligation to purchase and the role played in this matter by the institutional players (GME, GSE, AEEGSI, Ministry of Economic Development). The analysis is therefore developed on the subject of “additional energy efficiency certificates†that competitors (bidders) in the race for the award of natural gas distribution service can offer to Municipalities hanging in “Minimum Territorial Area†(ATEM) and on the fallout that such minimum offer has in the “Financial Plan†prepared by competitor in support of his offer. Finally the authors analyze some problems and critical aspects of the system and made synthetically any proposal to eliminate them.
    Keywords: Energy Efficiency; Regulated Utilities and Infrastructures; Sustainability Strategy; Local Public Finance.
    JEL: D44 D45 D62 D78 G28 H23 K23 L51 L95
    Date: 2017–10–30
  6. By: Jean-Marc Bourgeon; Margot Hovsepian
    Abstract: We analyze the adoption of green technology in a dynamic economy affected by random shocks where demand spillovers are the main driver of technological improvements. Firms’ beliefs and consumers’ anticipations drive the path of the economy. We derive the optimal policy of investment subsidy and the expected time and likelihood of reaching a targeted level of environmental quality under economic uncertainty. This allows us to estimate the value that should be given to the environment in order to avoid an environmental catastrophe as a function of the strength of spillover effects.
    Keywords: growth, sustainability, uncertainty
    JEL: E30 O30 O44 Q50
    Date: 2017
  7. By: Steve Dahlke (Division of Economics and Business, Colorado School of Mines)
    Abstract: This paper estimates the effect of starting the Midcontinent ISO electricity market in 2005 on wind generation. We find an average increase in wind plant capacity factors of 5.0-6.7% associated with the start of the market, relative to neighboring wind plants not in the market. These results are robust to potentially confounding variation associated with wind speed differences determined by weather. The increased capacity factors are likely attributed to reduced wind plant curtailment from operational improvements associated with starting the market, including improved transmission interconnections and more granular generator dispatch scheduling. We formulate a simulation model that demonstrates this mechanism. While there has been plenty of anecdotal evidence from technical experts and market participants that competitive wholesale markets are beneficial for wind energy, this analysis provides the first statistical evidence to support that claim.
    Keywords: electricity market, renewable energy, wind energy, energy economics, wind generation
    JEL: Q40 Q42
    Date: 2017–10
  8. By: Michael Peneder (WIFO); Spyros Arvanitis; Christian Rammer; Tobias Stucki; Martin Wörter
    Abstract: For a large sample of enterprises in Germany, Austria and Switzerland (the "DACH" region) we study the impact of policy instruments such as energy-related taxes, subsidies, standards and negotiated agreements, or other regulations on the firm's ecological and economic performance. To identify the causal linkages, we build a system of twelve equations, first tracking the impacts of policy on the adoption of green energy technologies for distinct areas. In a second set of equations, we estimate the perceived impacts of adoption on the firm's energy efficiency, carbon emissions and competitiveness. The results confirm a differentiated pattern of channels through which policy can affect the firm's energy efficiency and carbon emissions, while having a neutral impact on its competitiveness.
    Keywords: Environmental policy, energy efficiency, technology adoption, innovation, Porter hypothesis
    Date: 2017–10–30
  9. By: Rita Sousa (NIPE and School of Economics and Management, University of Minho); Adérito Santana (National Institute of Meteorology of Sao Tome and Principe); Inês Mourão (CAOS, Sustainability)
    Abstract: This work proposes a combination of a cost-efficacy, multicriteria and partial equilibrium analyses, to support the evaluation of viable options for low-carbon and resilient development, in a Small Island Developing State. We present reference and mitigation scenarios to 2030, including measures of renewable electricity, both in the grid and isolated; transports replacement; and energy efficiency in households and services sectors, including improved stoves, efficient street lighting and implementation of household LEDs. We report the marginal abatement cost curve for such measures and the results of a multicriteria qualitative assessment, showing strong support for the implementation of 4MW of renewable electricity in mini-hydropower plants, 12MW in solar PV power, and 1MW in an isolated minihydropower plant. We quantify energy and emissions saved in the mitigation scenario and a new energy balance. Overall, we estimate possible reductions in emissions in 2030 of 29% in electricity generation, and 0.25% in final energy demand, totalizing 9% fewer emissions in the country in 2030. The combined methodology shows higher emission savings than those reported by the country in its National Determined Contribution to the UNFCCC. This study aims to support the idea that SIDS should put forth robust low-carbon development roadmaps, in addition to adaptation strategies
    Keywords: Energy outlook; low emission scenarios; multi-criteria analysis; cost-efficacy analysis; LEAP; Small Island Developing States.
    Date: 2017
  10. By: Kahlen, M.T.; Ketter, W.; Gupta, A.
    Abstract: Electric vehicles have the potential to be used as virtual power plants to provide reliable back-up power. This generates additional profits for carsharing rental firms, who rent vehicles by the minute. We show this by developing a discrete event simulation platform based on real-time locational information (GPS) of 1,100 electric cars from Daimlers carsharing service Car2Go in San Diego, Amsterdam, and Stuttgart. We design trading prices (bids and asks) for participating in the respective operating reserve markets, markets for back-up power guaranteeing replacement when a power source fails, to sell the storage from idle electric vehicles. These trading prices are calibrated and tested with operating reserve market data. We investigate the influence of the charging infrastructure density, battery technology, and rental demand for vehicles on the payoff for the carsharing operator. We show that virtual power plants create sustainable revenue streams for electric vehicle carsharing companies without compromising their rental business.
    Keywords: FleetPower, car sharing, virtual power plants, sustainability, smart electricity markets
    Date: 2017–10–31
  11. By: Giovanni Marin (University of Urbino "Carlo Bo"; SEEDS, Ferrara, Italy.); Francesco Vona (OFCE, Sciences Po Paris, France)
    Abstract: This paper evaluates the historical influence of energy prices on a series of measures of environmental and economic performance for a panel of French manufacturing establishments over the period 1997-2010. The focus on energy prices is motivated by the fact that changes in environmental and energy policies have been dominated by substantial reductions in discounts for large consumers, making the evaluation of each policy in isolation exceedingly difficult. To identify price effects, we construct a shift-share instrument that captures only the exogenous variation in establishmentspecific energy prices. Our results highlight a trade-off between environmental and economic goals: although a 10 percent increase in energy prices brings about a 6 percent reduction in energy consumption and to a 11 percent reduction in CO2 emissions, such an increase also has a modestly negative impact on employment (-2.6 percent) and very small impact on wages and productivity. The negative employment effects are mostly concentrated in energyintensive and trade-exposed sectors. Simulating the effect of a carbon tax, we show that job losses for the most exposed sectors can be quite large. However, these effects are upper bounds and we show that they are significantly mitigated in multi-plant firms by labor reallocation across establishments.
    Keywords: Energy prices, establishment performance, environmental and energy policy
    JEL: Q52 Q48 H23 D22
    Date: 2017–10–23
  12. By: Anna Bruederle; Roland Hodler
    Abstract: Oil spills can lead to irreversible environmental degradation and pose hazards to human health. We are the first to study the causal effects of onshore oil spills on neonatal and infant mortality rates. We use spatial data from the Nigerian Oil Spill Monitor and the Demographic and Health Surveys, and rely on the comparison of siblings conceived before and after nearby oil spills. We find that nearby oil spills double the neonatal mortality rate. These effects are fairly uniform across locations and socio-economic backgrounds. We also provide some evidence for negative health effects of nearby oil spills on surviving children.
    Keywords: oil spills, Nigeria, infant mortality, child health
    JEL: I10 I18 J13 Q53
    Date: 2017
  13. By: Marchand, Joseph (University of Alberta, Department of Economics); Weber, Jeremy (University of Pittsburgh)
    Abstract: This study explores how the Texas shale boom affected schools, students, and teachers. Using variation in geology across school districts and oil prices over time, the evidence shows that test scores in the average shale district declined despite tripling the tax base and creating a revenue windfall. Greater spending went to capital projects and servicing debt, not to teachers. Higher labor market wages did not affect student completion rates, but a growing gap in wages between the private and education sectors contributed to greater teacher turnover and more inexperienced teachers, which helps explain the decline in test scores.
    Keywords: local labor markets; local public finances; resource booms; schools; students; teachers
    JEL: H70 I22 J24 J40 Q33 R23
    Date: 2017–10–31
  14. By: Lutz Kilian
    Abstract: Starting in late 2008, the U.S. production of tight oil surged, causing a renaissance in the U.S. oil sector that few industry analysts had anticipated. This tight oil boom reduced the dependence of the United States on petroleum imports and allowed it to become a major exporter of gasoline and diesel fuel. Since mid-2014 the global real price of crude oil has experienced a large and sustained decline. This review article addresses several questions of general interest. First, to what extent was the recent oil price decline caused by the tight oil boom? Second, how did the tight oil boom affect the price of gasoline in global markets and in the United States? Third, what determines the investment response of the oil sector to oil price fluctuations? Fourth, how has the tight oil boom affected the transmission of oil price shocks to the U.S. economy? Finally, what are the implications of the U.S. tight oil boom for European oil importing economies?
    Keywords: tight oil, shale oil, oil price, gasoline price, oil investment, real GDP growth
    JEL: Q43 Q33
    Date: 2017
  15. By: Niko Jaakkola; Daniel Spiro; Arthur A. van Benthem
    Abstract: Natural-resource taxation and investment exhibit cycles in a vast number of countries, driving political turmoil and power shifts. Using a rational-expectations model, we show cycles result from governments’ inability to commit to future taxes and firms’ inability to credibly exit a country indefinitely. A government sets a low initial tax inducing high investments, which in turn prompts it to increase taxes next period. This induces low investment thus low future taxes, and so on. We investigate which factors reinforce cycles and present ways of avoiding them, and document cycles across many countries including detailed case studies of two Latin-American countries.
    Keywords: resource taxation, tax cycles, limited commitment, expropriation
    JEL: H25 Q38
    Date: 2017
  16. By: Jose Eduardo Gomez-Gonzalez (Banco de la República de Colombia); Jorge Hirs-Garzon; Jorge M. Uribe
    Abstract: We study connectedness and causality between oil prices and exchange rates dynamically. Using data on the WTI and exchange rate returns for six countries in which oil production is a major production activity, we show that oil prices are net receptors of spillovers from excahnge rate markets. Connectedness exhibits important time variation and presents a positive trend during our sample period. We find evidence of bidirectional causality between oil prices and exchange rates, which presents also considerable time-variation. Causality is identified for longer periods of time from oil prices to exchange rates. However, we also find evidence of reverse causality, mainly in the period after the Subprime Financial Crisis. Our results provide evidence supporting the hypothesis of the financialization of oil markets. Classification JEL: G01; G12; C22
    Keywords: Time-varying causality; Oil price; Stock market returns; Emerging market economies.
    Date: 2017–10
  17. By: Mardi Dungey; Renée Fry-McKibbin; Verity Todoroski; Vladimir Volkov
    Abstract: Dutch Disease is thought to have ongoing negative effects on resource rich open economies. There is little evidence on how economies recover. We document the Australian case in the aftermath of the commodities price boom resulting from high input demand from China. We show that where the boom is contained in an export-oriented, small-employment sector of the economy and driven by external demand rather than price shocks, the economy recovers to its equilibrium relatively quickly. To show this we add a new tool to the SVAR toolbox which enables us to assess the source of deviations in the observed outcomes from an empirical steady-state implied by the model.
    Keywords: Dutch Disease, Australia, China, SVAR, historical decomposition, empirical steady-state gap.
    JEL: C51 E32 F43
    Date: 2017–11
  18. By: Elizabeth Kasekende; Charles Abuka; Marr Sar
    Abstract: AbstractAnecdotal evidence and resource curse literature suggest that many countries have failed to exploit their natural resource wealth to finance the growth of their economies. Developing countries appear to be most affected. It is believed that poor governance, lack of transparency, poor accountability to their citizens, and corruption are the main culprits. In 2002, an international initiative sponsored by the UK government and backed by activist groups launched the extractive industries transparency initiative (EITI) with a view to mitigating the potential negative effects of resource wealth. The objective of this study is to investigate the effectiveness of this initiative that has gained much traction over the past decade as a scrutiny mechanism that fosters corruption control. In particular, this paper addresses two key questions: First, what are the observable factors that lead a country to voluntarily join the EITI? Second, do members of the EITI show greater improvement in corruption control relative to non-members? Our results indicate that poor countries and countries perceived as corrupt are more likely to join the EITI to signal their commitment to greater transparency and to improve their investment climate. Furthermore, the results suggest that corruption scores have so far not improved as a result of EITI membership using the control of corruption index developed by the World Bank.JEL Classification Numbers: P4, Q3Key words:EITI, corruption, extractive industries
    Date: 2016–09
  19. By: Arturo Leonardo Vásquez Cordano (Chief Economist and Manager of the Bureau of Regulatory Policy and Economic Analysis at Osinergmin, Vice-President of the Commission of Free Competition at the Peruvian Antitrust and Consumer Protection Authority (Indecopi), as well as Professor at GERENS Graduate School of Business in Lima, Peru.); Ricardo De la Cruz Sandoval (Especialista económico de Hidrocarburos.); Francisco Coello Jaramillo (Analista económico de Hidrocarburos.)
    Abstract: En este documento de trabajo se realiza una síntesis de las características de los principales biocombustibles (biodiesel y etanol) y sus etapas de producción. Asimismo, se presenta un resumen del análisis del ciclo de vida que mide finalmente el balance energético de los biocombustibles realizado por Bruinsma (2009) para el caso de la palma y la jatropha. Se discuten posteriormente las principales características del mercado internacional de biocombustibles incluyendo los porcentajes mínimos en la participación de mercado, la evolución del consumo, la evolución de la oferta, los principales agentes en Europa y América Latina así como la evolución de los precios internacionales y las tendencias que organismos internacionales han identificado. Luego se analiza el mercado local de biocombustibles donde se realiza una síntesis del marco legal e institucional, la producción nacional, la demanda, comercio internacional, los costos de producción. Posteriormente, se analizan los riesgos y retos del mercado de biocombustibles incluyendo las barreras al comercio internacional, los problemas que se han identificado en el desarrollo de los biocombustibles y las disyuntivas implícitas en su promoción, todo ello bajo una mirada que enfatiza las lecciones de política para el Perú.
    JEL: C68 D91 O13 Q51 Q52 Q55
    Date: 2016–11
  20. By: Anthony Strittmatter; Michael Lechner
    Abstract: The disclosure of the VW emission manipulation scandal caused a quasi-experimental market shock in the observable quality of VW diesel vehicles. We consider a classical model for adverse selection and sorting to derive an empirically testable hypothesis about the impact of observable quality on the supply of used cars. We test the hypothesis with data collected from an online car selling platform which reflects about 50% of the German used-car market. The empirical approach is based on a conditional difference-in-differences method. We find that the supply of used VW diesel vehicles increases after the VW emission scandal. This finding is consistent with the predictions of the theoretical model. Furthermore, we find the positive supply effects increase with the probability of manipulation.
    Keywords: supply of used cars, quality of durable goods, sorting, difference-in-differences, management fraud
    JEL: D82 L15 L62
    Date: 2017
  21. By: Charles F. Mason
    Abstract: I investigate the interaction between a country that imports a commodity whose production contributes to a stock pollution, such as electricity, from a country that produces that commodity. If the transboundary externality is priced improperly, the application of a feed-in tariff or border tax adjustment can provide an indirect policy instrument. But the imposition of such a tariff or tax creates an incentive for the producing country to deploy some sort of pollution controlling instrument. This, in turn, creates a strategic interaction between the two countries. Because the externality is inked to a stock pollutant, this strategic interaction will play out over time, which induces a dynamic game. In this modeling context, I describe the nature of the strategic interaction, and characterize the Markov-perfect equilibrium.
    Keywords: transboundary pollution, differential game, tariff, tax
    JEL: C73 Q54 Q58
    Date: 2017
  22. By: Xavier Timbeau (OFCE-Sciences PO Paris, France); Pawel Wiejski (European Affairs Programme of Sciences Po Paris)
    Abstract: The EU ETS is one of the main European climate policies, covering 45 percent of EU’s greenhouse gas emissions. Its main goal is to limit emissions cost-effectively, and to trigger innovations using a strong price signal, making low-carbon technologies more competitive. While emissions reduction targets for 2020 have already been achieved, the exact role of the ETS in this success remains controversial. The assessment is crucial, as more and more countries and regions plan to adopt similar policies to achieve their targets expressed in the Intended Nationally Determined Contributions, communicated at the Paris Conference of the Parties. The EU ETS, as the longest running and largest carbon market in the world, will undoubtedly serve as a point of reference. This paper attempts to provide a comprehensive analysis of the policy. First part outlines the historical development of emission trading systems, as well as the development of the EU ETS since its inception in 2005. Second part uses FASTER principles developed by the World Bank and the OECD to perform a multi-criteria, qualitative analysis of the EU ETS in its current form. Third part concentrates on the upcoming revision for the fourth phase, evaluating whether the proposals correctly address the policy’s shortcomings. It also provides some alternative reform proposals.
    Keywords: Cap-and-trade, EU ETS, Market stability reserve, Carbon price
    JEL: H23 H87 Q56
    Date: 2017–10–26
  23. By: Ian Lange (Division of Economics and Business, Colorado School of Mines); Peter Maniloff (Division of Economics and Business, Colorado School of Mines)
    Abstract: The level and distribution of the costs of tradable allowance schemes are important determinants of whether the regulation is ultimately enacted. Theoretical and simulation models have shown that updating allowance allocations based on firm emissions or output can improve the efficiency of the scheme by acting as a production subsidy. Using the U.S. NOx Budget Program (NBP) as a case study, this analysis tests whether power plants in states which chose an updating allocation increase their electricity production relative to plants in states that chose a fixed allocation. Results find that updating allocations led to a 5 percentage point increase in capacity factors for natural gas combined cycle generators and no effect or a modest decrease for coal generators. These findings imply that an updating allocations confers a modest but meaningful subsidy to production relative to a fixed allocation and that firm responses are heterogeneous based on production technology and market conditions.
    Keywords: cap-and-trade, electricity, climate change
    JEL: Q48 Q58 L94
    Date: 2017–10
  24. By: Florens Flues (OECD); Kurt van Dender (OECD)
    Abstract: This paper argues that, in situations where choices are made between mutually exclusive investment projects and where there are economic rents, free allocation of tradable emission permits in emissions trading systems can weaken incentives for firms to invest in less carbon-intensive technologies compared to the case where permits would be auctioned. The reason is that permit allocation rules affect economic rents differentially when different product benchmarks apply to products that are close substitutes. Examples of permit allocation rules favouring more emission-intensive technologies for outputs that are close substitutes are found in the California Cap and Trade Program and in the European Union Emissions Trading System. This lack of technology-neutrality is exacerbated in the long run as future patterns of substitutability between technologies are uncertain. Free permit allocation can broaden support for carbon pricing, but this paper shows that this carries a cost in terms of environmental effectiveness if it discourages investment in low-carbon assets.
    Keywords: average carbon prices, benchmarks, California Cap and Trade Program, carbon pricing, decarbonisation, emissions trading systems, EU ETS, permit allocation, technology neutrality
    JEL: D04 H23 H32 L51 Q48
    Date: 2017–11–15
  25. By: J. Scott Holladay (Department of Economics, University of Tennessee); Mohammed Mohsin (Department of Economics, University of Tennessee); Shreekar Pradhan (King Abdullah Petroleum Studies And Research Center)
    Abstract: We develop a two-good general equilibrium model of a small open economy to decompose a country's unilateral strengthening of environmental policy's effects on pollution emissions in the rest of the world, known as emissions leakage. We show analytically and numerically that the level of emissions leakage depends on the level of trade friction in the service sector. In the model, production in the manufacturing sector is associated with pollution emissions, and production in the service sector is clean. In a special case with free trade in manufacturing and no trade in services, no leakage occurs. Allowing for trade in services, we solve for the relationship between trade frictions in the service sector and leakage. At lower levels of service sector's trade friction, leakage from a small strengthening of environmental regulation decreases (increases) if services are imported (exported). Finally, we simulate the model, calibrating the to the Canadian economy to compare these effects' relative sizes over a range of plausible parameter values. Leakage is about 18% lower when using trade friction levels estimated from the literature rather than assuming no trade friction in services.
    Keywords: Climate change, emissions leakage, trade costs, trade in services
    JEL: H23 Q54 F18
    Date: 2017–10
  26. By: Thomas Eichner; Rüdiger Pethig
    Abstract: Oates and Schwab (1988) consider an economy with mobil capital and jurisdictions that suffer from local pollution. They show that welfare-maximizing jurisdictions implement the first-best, if they take prices as given and have at their disposal a capital tax and an environmental standard. Petchey (2015) claims that the efficiency result of Oates and Schwab can be extended to a large price-influencing jurisdiction. In the present note we show that the concept of Pareto efficiency cannot be applied in Petchey’s model. Next, we expand his model by a second jurisdiction and prove that Petchey’s claim is false, i.e. we show that the allocation implemented by a large price-influencing jurisdiction that sets an environmental standard and a capital tax fails to be (Pareto) efficient.
    Keywords: pollution, environmental standards, mobile capital, taxes
    JEL: H23 H71
    Date: 2017
  27. By: Valeria Costantini; Giorgia Sforna; Anil Markandya; Elena Paglialunga
    Abstract: The UNFCCC Parties Paris Agreement entered into force on 4 November 2016 represents a step forward in involving all countries in mitigation actions, even though still based on a voluntary approach and lacking the involvement of some major polluting countries. The underinvestment in mitigation actions depends on market and policy failures and the absence of market signals internalizing the economic losses due to climatic damage contributes to underestimating potential benefits from global action. We highlight how crucial is the vulnerability of a country to climate change in defining the threat and action strategies. A dynamic climate-economy CGE model is developed by including a monetary evaluation of regional damages associated with climate change. By considering alternative damage estimations, results show that internalizing climatic costs changes the bargaining position of countries in climate negotiations. Consequently, damage costs should be given greater importance when defining the implementation of a global climate agreement.
    Keywords: Climate change damage costs; Climate negotiations; Burden sharing; Mitigation costs; GTAP; CGE.
    JEL: C68 H23 O44 Q54
    Date: 2017–10
  28. By: Rezai, Armon; Taylor, Lance; Foley, Duncan K.
    Abstract: We present a model based on Keynesian aggregate demand and labor productivity growth to study how climate damage affects the long-run evolution of the economy. Climate change induced by greenhouse gas lowers profitability, reducing investment and cutting output in the short and long runs. Short-run employment falls due to deficient demand. In the long run productivity growth is slower, lowering potential income levels. Climate policy can increase incomes and employment in the short and long runs while a continuation of business-as-usual leads to a dystopian income distribution with affluence for few and high levels of unemployment for the rest.
    Keywords: climate change, economic growth, integrated assessment, demand and distribution, energy productivity, unemployment
    Date: 2017
  29. By: Peter Birch Sørensen (Department of Economics, University of Copenhagen)
    Abstract: This paper sets up a Ramsey model with exhaustible natural resources to study the optimal recycling of polluting raw materials and household waste products. During the process of economic development it is optimal for the economy to go through an initial “linear” phase with no recycling followed by a “circular” phase where some materials and waste products are recycled to alleviate growing natural resource scarcity and environmental degradation. Ensuring the optimal degree of recycling in a market economy requires a Pigouvian tax on non-recycled raw materials combined with a subsidy to recycling of household waste and a tax on man-made wealth to internalize the environmental cost of capital accumulation.
    Keywords: Circular economy, linear economy, optimal recycling, Hotelling rule, Pigouvian taxation, Environmental Kuznets Curve
    JEL: Q53 Q58 H21
    Date: 2017–11
  30. By: Rick van der Ploeg
    Abstract: Cumulative emissions drive peak global warming and determine the safe carbon budget compatible with staying below 2oC or 1.5oC. The safe carbon budget is lower if uncertainty about the transient climate response is high and risk tolerance low. Together with energy costs this budget determines the constrained welfare-maximizing carbon price and how quickly fossil fuel is replaced by renewable energy and how much of it is abated. This price is the sum of a gradual damages component familiar from the unconstrained optimal carbon price highlighted in economic studies and a Hotelling component for the additional price needed to ensure that the safe carbon budget is never violated familiar from IAM studies. If policy makers ignore damages, as in the cost-minimizing temperature constraint literature, a more rapidly rising carbon price results. The alternative of adjusting damages upwards to factor in the peak warming constraint leads initially to a higher carbon price which rises less rapidly.
    Keywords: peak warming target, climate uncertainty, risk tolerance, Pigouvian damages, Hotelling rule, carbon price
    JEL: Q54
    Date: 2017
  31. By: Christoph Böhringer; Thomas F. Rutherford
    Abstract: With his announcement to pull the US out of the Paris Agreement US President Donald Trump has snubbed the international climate policy community. Key remaining parties to the Agreement such as Europe and China might call for carbon tariffs on US imports as a sanctioning instrument to coerce US compliance. Our analysis, however, reveals an inconvenient insight for advocates of carbon tariffs: given the possibility of retaliatory tariffs across all imported goods, carbon tariffs do not constitute a credible threat for the US. A tariff war with its main trading partners China and Europe might make the US worse off than compliance with the Paris Agreement but China, in particular, should prefer US defection to a tariff war.
    Keywords: Paris Agreement, US withdrawal, carbon tariffs, optimal tariffs, tariff war, computable general equilibrium
    JEL: Q58 D58
    Date: 2017

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