nep-reg New Economics Papers
on Regulation
Issue of 2014‒07‒28
eighteen papers chosen by
Natalia Fabra
Universidad Carlos III de Madrid

  1. The Renewables Influence on Market Splitting: the Iberian Spot Electricity Market By Nuno Carvalho Figueiredo; Patrícia Pereira da Silva; Pedro Cerqueira
  2. Combining tariffs, investment subsidies and soft loans in a renewable electricity deployment policy By Pere Mir-Artigues; Pablo del Río
  3. A Review of Distributed Generation for Rural and Remote Area Electrification By John Foster; Liam Wagner; Liam Byrnes
  4. China’s CO2 Emissions from Power Generating Stations – A First Exploration By Limin Du; Aoife Hanley; Katrin Rehdanz
  5. Household electricity demand in Spanish regions. Public policy implications By Desiderio Romero-Jordán; Pablo del Río; Cristina Peñasco
  6. What role of renewable and non-renewable electricity consumption and output is needed to initially mitigate CO2 emissions in MENA region? By Sahbi, Farhani; Shahbaz, Muhammad
  7. International experience with transformations in electricity markets: A Short Literature Review By John Foster; Liam Wagner
  8. Audits as Signals By Kotowski, Maciej Henryk; Weisbach, David A.; Zeckhauser, Richard Jay
  9. Beyond carbon pricing: The role of banking and monetary policy in financing the transition to a low-carbon economy By Emanuele Campiglio
  10. Proposed Coal Power Plants and Coal-To-Liquids Plants: Which Ones Survive and Why? By Dean Fantazzini; Mario Maggi
  11. Measuring the Performance of Banks: Theory, Practice, Evidence, and Some Policy Implications By Joseph P. Hughes; Loretta J. Mester
  12. Staple food market regulation in Algeria, what is the alternative policy? A CGE analysis for wheat By Hilel HAMADACHE; Sophie Drogue
  13. Online Appendix: How should we measure environmental policy stringency? A new approach By Caspar Sauter
  14. The Cost of Pollution on Longevity, Welfare and Economic Stability By Natacha Raffin; Thomas Seegmuller
  15. Small Business, Innovation, and Tax Policy: A Review By Gale, William; Brown, Samuel
  16. Bailouts and Financial Fragility By Todd Keister
  17. The dynamics of the leverage cycle By Christoph Aymanns; J. Doyne Farmer
  18. Collateral optimisation, re-use and transformation By Jeannette Capel; Anouk Levels

  1. By: Nuno Carvalho Figueiredo (EFS Initiative, University of Coimbra, Sustainable Energy Systems – MIT-P, Coimbra, Portugal and INESC Coimbra, Portugal); Patrícia Pereira da Silva (Faculty of Economics, University of Coimbra and INESC Coimbra, Portugal); Pedro Cerqueira (Faculty of Economics, University of Coimbra and GEMF, Portugal)
    Abstract: This paper aims to assess the influence of wind power generation on the market splitting behaviour of the Iberian electricity spot markets. We use logit models to express the probability response for market splitting of day-ahead spot electricity prices together with explanatory variables like, wind speed, available transmission capacity and electricity demand. The results show that the probability of market splitting increases with the increase of wind power generation. The European interconnection capacity target of 10% of the peak demand of the smallest interconnected market has to be reconsidered, in order to keep electricity market integration a reality. As demonstrated, investment in interconnection capacity has to follow the investment and deployment of further wind power capacity, so coordination policies governing both interconnection development and renewable incentives should be designed.
    Keywords: Electricity Market Integration, Market Splitting, Renewable Energy.
    JEL: C10 C35
    Date: 2014–06
  2. By: Pere Mir-Artigues (Universitat de Lleida); Pablo del Río (Institute of Public Goods and Policies. Consejo Superior de Investigaciones Científicas (CSIC))
    Abstract: Policy combinations and interactions have received a considerable attention in the energy policy realm. The aim of our working paper is to provide insight on the cost-effectiveness of combinations of deployment instruments for the same technology. A financial model is developed for this purpose, whereby feed-in tariffs (FITs) and premiums (FIPs) are combined with investment subsidies and soft loans. The results show that combining deployment instruments is not a cost-containment strategy. However, combinations may lead to different inter-temporal distributions of the same amount of policy costs which can affect the social acceptability and political feasibility of renewable energy support.
    Keywords: Renewable energy, policies, combinations, cost-effectiveness, feed-in tariffs
    JEL: H81 L51 Q48
    Date: 2014
  3. By: John Foster (School of Economics, University of Queensland); Liam Wagner (School of Economics, University of Queensland); Liam Byrnes (School of Economics, University of Queensland)
    Abstract: Distributed Generation (DG), which is electricity generation located close to the load/demand. While the definition of DG is far from “settled” [1], for the purpose of this project, DG will refer to electricity generation that is produced and consumed within the catchment area of the local Distribution Network Service Provider (DSNP). Many in the energy economics and policy literature also use the term “embedded generation”, which tends to reflect DG that has been incorporated into a larger electricity grid (but often still retains the ability to operate in isolation from the grid). Distributed power generation has been used for decades [2], and has been met with mixed success. There is a plethora of literature that examines the use of DG in developing countries [3-5], in relation to World Bank development projects [6], with respect to high penetration of DG in Australia [7-10], and for a more general discussion [5]. Furthermore, the DG literature has been growing and is now being examined in context of rural communities across different scales from household systems [11] to community mini-grids [12] and grid connected systems [13].
    Keywords: Energy Economics, Electricity Markets, Energy Policy, Resources Policy, Renewable Energy
    JEL: Q48 Q41 Q43
    Date: 2014–07
  4. By: Limin Du; Aoife Hanley; Katrin Rehdanz
    Abstract: Our analysis is the first of its kind to explore patterns of subsidization and CO2 emissions in China’s electricity producing sector. Applying data for all power plants across China and controlling for the age, capacity and location of generating stations, we find that plants attracting a higher government subsidy are also worryingly the plants generating a disproportionate share of CO2 emissions. This distortion is incongruent with China’s aspiration for a greener economy but may be eliminated if China delivers on its November 2013 announcement to review many industry subsidies on its way to a fully-fledged market economy (Bloomberg News, 28.02.2014)
    Keywords: CO2 emissions, China, energy sector, plant-level data
    JEL: Q53 Q48
    Date: 2014–06
  5. By: Desiderio Romero-Jordán (Universidad Rey Juan Carlos); Pablo del Río (Institute of Public Goods and Policies. Consejo Superior de Investigaciones Científicas (CSIC)); Cristina Peñasco (Institute of Public Goods and Policies. Consejo Superior de Investigaciones Científicas (CSIC))
    Abstract: This paper analyses the determinants of household electricity demand with a panel data, partial adjustment model of Spanish regions in the 1998-2009 period. The results show that electricity demand responds positively and significantly to electricity demand in the previous year, income, temperature range, penetration of electric water heating in households and the number of heating and cooling degree days. It is significantly and negatively related to electricity prices, gas prices, penetration of electric heating in households and whether households have at least one member being 64 years or older. Price elasticities in the preferred model are -0.26 (short-term) and -0.37 (long-term). Income elasticities are 0.31 (short-term) and 0.43 (long-term). Several implications for electricity-efficiency policies are derived from the results of the analysis.
    Keywords: Electricity demand, residential sector, partial adjustment model
    JEL: Q41 Q43 Q55
    Date: 2014
  6. By: Sahbi, Farhani; Shahbaz, Muhammad
    Abstract: This study attempts to explore the causal relationship between renewable and non-renewable electricity consumption, output and carbon dioxide (CO2) emissions for 10 Middle East and North Africa (MENA) countries over the period of 1980–2009. The results from panel Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) show that renewable and non-renewable electricity consumption add in CO2 emissions while output (real gross domestic product (GDP) per capita) exhibits an inverted U-shaped relationship with CO2 emissions i.e. environment Kuznets curve (EKC) hypothesis is validated. The short-run dynamics indicate the unidirectional causality running from renewable and non-renewable electricity consumption and output to CO2 emissions. In the long-run, there appears to be the bidirectional causality between electricity consumption (renewable and non-renewable) and CO2 emissions. The findings suggest that future reductions in CO2 emissions might be achieved at the cost of economic growth.
    Keywords: Electricity consumption, Output, CO2 emissions, MENA region
    JEL: C5
    Date: 2014–07–08
  7. By: John Foster (School of Economics, University of Queensland); Liam Wagner (School of Economics, University of Queensland)
    Abstract: This short review will provide an analysis of the key challenges faced by electricity markets and their participants in increasing the penetration of large scale renewables. This review will assess the key barriers purely from an economic perspective. The global of deployment of large scale renewable energy has yet to live up to its full potential and our experiences (Masini & Menichetti, 2012). However its future development is expected to have greater influence over electricity markets (Wüstenhagen & Menichetti, 2012).
    Keywords: Energy Economics, Electricity Markets, Energy Policy, Resources Policy, Renewable Energy
    JEL: Q48 Q41 Q43
    Date: 2014–07
  8. By: Kotowski, Maciej Henryk; Weisbach, David A.; Zeckhauser, Richard Jay
    Abstract: A broad array of law enforcement strategies, from income tax to bank regulation, involve self-reporting by regulated agents and auditing of some fraction of the reports by the regulating bureau. Standard models of self-reporting strategies assume that although bureaus only have estimates of the of an agent’s type, agents know the ability of bureaus to detect their misreports. We relax this assumption, and posit that agents only have an estimate of the auditing capabilities of bureaus. Enriching the model to allow two-sided private information changes the behavior of bureaus. A bureau that is weak at auditing, may wish to mimic a bureau that is strong. Strong bureaus may be able to signal their capabilities, but at a cost. We explore the pooling, separating, and semi-separating equilibria that result, and the policy implications. Important possible outcomes are that a cap on penalties increases compliance, audit hit rates are not informative of the quality of bureau behavior, and by mimicking strong bureaus even weak bureaus can induce compliance.
    Date: 2014
  9. By: Emanuele Campiglio
    Abstract: It is widely acknowledged that introducing a price on carbon represents a crucial precondition for filling the current gap in low-carbon investment. However, as this paper argues, carbon pricing in itself may not be sufficient. This is due to the existence of market failures in the process of creation and allocation of credit that may lead commercial banks – the most important source of external finance for firms willing to invest – not to respond as expected to price signals. Under certain economic conditions, banks would shy away from lending to low-carbon activities even in presence of a carbon price. This possibility calls for the implementation of additional policies not based on prices. In particular, the paper discusses the potential role of monetary policies and macroprudential financial regulation: modifying the incentives and constraints that banks face when deciding their lending strategy – through, for instance, a differentiation of reserve requirements according to the destination of lending – may fruitfully expand credit creation directed towards low-carbon sectors. This seems to be especially feasible in emerging economies, where the central banking framework usually allows for a stronger public control on credit allocation and a wider range of monetary policy instruments than the sole interest rate.
    Date: 2014–05
  10. By: Dean Fantazzini (Moscow School of Economics, Moscow State University, Russia); Mario Maggi (Department of Economics and Management, University of Pavia)
    Abstract: The increase of oil and natural gas prices since the year 2000 stimulated the planning and construction of new coal-fired electricity generating plants and coal-to-liquids plants in the US. However, a large number of these projects have been canceled or abandoned since 2007. Using a set of 145 proposed coal power plants and 25 coal-to- liquids plants, we examine the main determinants that influence the decision to abandon a project or to proceed with it. In case of coal power plants, the number of searches performed on Google relating to coal power plants and the prices of alternative fuels for electricity generation are the main factors. As for coal-to-liquids plants, the political affiliation of the state governor is the most important factor across several model specifications. An out-of-sample exercise confirms these findings. These results hold also with robustness checks considering alternative Google search keywords and the potential effects of the recession in the years 2008-2009.
    Keywords: Coal, Coal plants, Coal-to-Liquids, Logit, Probit, Training, Validation, Forecasting, Model Confidence Set, Google, Google Trends, Second Great Contraction, Global Financial Crisis
    JEL: C25 C52 C53 L94 Q40 Q41
    Date: 2014–07
  11. By: Joseph P. Hughes (Rutgers University); Loretta J. Mester (Federal Reserve Bank of Philadelphia)
    Abstract: The unique capital structure of commercial banking – funding production with demandable debt that participates in the economy’s payments system – affects various aspects of banking. It shapes banks’ comparative advantage in providing financial products and services to informationally opaque customers, their ability to diversify credit and liquidity risk, and how they are regulated, including the need to obtain a charter to operate and explicit and implicit federal guarantees of bank liabilities to reduce the probability of bank runs. These aspects of banking affect a bank’s choice of risk vs. expected return, which, in turn, affects bank performance. Banks have an incentive to reduce risk to protect the valuable charter from episodes of financial distress and they also have an incentive to increase risk to exploit the cost-of-funds subsidy of mispriced deposit insurance. These are contrasting incentives tied to bank size. Measuring the performance of banks and its relationship to size requires untangling cost and profit from decisions about risk versus expected-return because both cost and profit are functions of endogenous risk-taking. This chapter gives an overview of two general empirical approaches to measuring bank performance and discusses some of the applications of these approaches found in the literature. One application explains how better diversification available at a larger scale of operations generates scale economies that are obscured by higher levels of risk-taking. Studies of banking cost that ignore endogenous risk-taking find little evidence of scale economies at the largest banks while those that control for this risk-taking find large scale economies at the largest banks – evidence with important implications for regulation.
    Keywords: efficiency
    JEL: G1
    Date: 2013–08–01
  12. By: Hilel HAMADACHE (Marchés, Organisations, Institutions et Stratégies d'Acteurs, INRA; Institut Agronomique Méditerranéen de Montpellier, Centre International de Hautes Etudes Agronomiques Méditerranéennes); Sophie Drogue (Marchés, Organisations, Institutions et Stratégies d'Acteurs, INRA)
    Abstract: In this paper we present a Social accounting matrix and a computable general equilibrium model of the Algerian economy for 2009. The model is then use to perform scenarios simulation of reduction and removal of consumption subsidies on the wheat sector in Algeria.
    Keywords: social accounting matrix, general equilibrium, food subsidy, algeria, marché agricole, politique agricole, prix alimentaire, ble tendre, matricemodèle d'équilibre généralalgérie
    Date: 2014
  13. By: Caspar Sauter (Institute of economic research IRENE, Faculty of Economics and Business, University of Neuchâtel, Switzerland)
    Abstract: This is the online appendix to the paper “How should we measure environmental policy stringency? A new approach” (Sauter, 2014). The main paper outlines the general methodology proposed to construct environmental policy indexes and proposes a first implementation of a CO2 input index and a CO2 performance index. This online appendix reports the results of the implementation of a SO2 input index, a SO2 performance index, a CH4 input index, a CH4 performance index as well as the broad GHG input index. All of those indexes have been constructed using the methodology outlined in the main paper.
    Keywords: Greenhouse gas emissions, environmental regulation, environmental policy stringency, policy stringency index, CO2 emissions
    JEL: Q50 Q53 Q58 C18
    Date: 2014–07
  14. By: Natacha Raffin (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense, Climate Economics Chair - University Paris Dauphine); Thomas Seegmuller (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM))
    Abstract: This paper presents an overlapping generations model where pollution, private and public healths are all determinants of longevity. Public expenditure, financed through labour taxation, provide both public health and abatement. We study the complementarity between the three components of longevity on welfare and economic stability. At the steady state, we show that an appropriate fiscal policy may enhance welfare. However, when pollution is heavily harmful for longevity, the economy might experience aggregate instability or endogenous cycles. Nonetheless, a fiscal policy, which raises the share of public spending devoted to health, may display stabilizing virtues and rule out cycles. This allows us to recommend the design of the public policy that may comply with the dynamic and welfare objectives.
    Keywords: longevity; pollution; welfare; complex dynamics
    Date: 2014–07
  15. By: Gale, William; Brown, Samuel
    Abstract: Small businesses occupy an iconic place in American public policy debates. This paper discusses interactions between the federal tax code, small business, and the economy. We summarize the characteristics of small businesses, identify the tax provisions that most affect small businesses, and review evidence on the impact of tax and other policies on entrepreneurial activity. We also examine evidence suggesting that it is young firms, not small ones, where job growth and innovation tend to occur. Policies that aim to stimulate young and innovative firms are likely to prove different than policies that subsidize small businesses.
    Keywords: entrepreneurship, tax policy, innovation, small business
    JEL: H2
    Date: 2013–04–08
  16. By: Todd Keister (Rutgers University)
    Abstract: Should policy makers be prevented from bailing out investors in the event of a crisis? I study this question in a model of financial intermediation with limited commitment. When a crisis occurs, the policy maker will respond by using public resources to augment the private consumption of those investors facing losses. The anticipation of such a “bailout” distorts ex ante incentives, leading intermediaries to choose arrangements with excessive illiquidity and thereby increasing financial fragility. Prohibiting bailouts is not necessarily desirable, however: while it induces intermediaries to become more liquid, it may nevertheless lower welfare and leave the economy more susceptible to a crisis. A policy of taxing short-term liabilities, in contrast, can both improve the allocation of resources and promote financial stability.
    Keywords: bank runs, bailouts, moral hazard, financial regulation
    JEL: G28
    Date: 2014–01–29
  17. By: Christoph Aymanns; J. Doyne Farmer
    Abstract: We present a simple agent-based model of a financial system composed of leveraged investors such as banks that invest in stocks and manage their risk using a Value-at-Risk constraint, based on historical observations of asset prices. The Value-at-Risk constraint implies that when perceived risk is low, leverage is high and vice versa, a phenomenon that has been dubbed pro-cyclical leverage. We show that this leads to endogenous irregular oscillations, in which gradual increases in stock prices and leverage are followed by drastic market collapses, i.e. a leverage cycle. This phenomenon is studied using simplified models that give a deeper understanding of the dynamics and the nature of the feedback loops and instabilities underlying the leverage cycle. We introduce a flexible leverage regulation policy in which it is possible to continuously tune from pro-cyclical to countercyclical leverage. When the policy is sufficiently countercyclical and bank risk is sufficiently low the endogenous oscillation disappears and prices go to a fixed point. While there is always a leverage ceiling above which the dynamics are unstable, countercyclical leverage can be used to raise the ceiling. Finally, we investigate fixed limits on leverage and show how they can control the leverage cycle.
    Date: 2014–07
  18. By: Jeannette Capel; Anouk Levels
    Abstract: High-quality collateral is in greater demand than before the financial crisis, due to more prudent counterparty risk management as well as new regulations governing OTC derivatives and liquidity. Against this background financial institutions are currently reassessing their collateral management. Many institutions are or are considering investing in collateral information systems, optimising their collateral allocation or transforming their collateral to acquire the desired collateral assets. This study describes how the Dutch financial sector reacts to increasing collateral needs based on interviews with a select sample of banks, (pension fund) asset managers and insurance companies in the Netherlands. Collateral optimisation, re-use and transformation enable institutions to adapt to a world where collateral is in greater demand but there are also significant risks, such as new liquidity risks, greater interdependence and procyclicality. The study examines these potential risks and discusses implications for future policy.
    Date: 2014–07

This nep-reg issue is ©2014 by Natalia Fabra. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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