nep-reg New Economics Papers
on Regulation
Issue of 2015‒07‒18
eighteen papers chosen by
Natalia Fabra
Universidad Carlos III de Madrid

  1. Europe's Mechanism for Countering the Risk of Carbon Leakage By Aleksandar Zaklan; Bente Bauer
  2. A Welfare Analysis of the Electricity Transmission Regulatory Regime in Germany By Claudia Kemfert; Friedrich Kunz; Juan Rosellón
  3. The Private Net Benefits of Residential Solar PV: The Role of Electricity Tariffs, Tax Incentives and Rebates By Severin Borenstein
  4. Improving infrastructure in the United Kingdom By Mauro Pisu; Barbara Pels; Novella Bottini
  5. Reducing CO2 from cars in the European Union: Emission standards or emission trading? By Paltsev, Sergey; Chen, Y.-H. Henry; Karplus, Valerie; Kishimoto, Paul; Reilly, John; Loeschel, Andreas; von Graevenitz, Kathrine; Koesler, Simon
  6. The allocation of carbon emission permits; theoretical aspects and practical problems in the EU ETS By Simone Borghesi; Massimiliano Montini
  7. Usage-Based Pricing and Demand for Residential Broadband By Aviv Nevo; John L. Turner; Jonathan W. Williams
  8. Price Distortion under Fixed-Mobile Substitution By Marc Bourreau; Carlo Cambini; Steffen Hoernig
  9. The Dynamics of Linking Permit Markets By Holtsmark, Katinka; Midttømme, Kristoffer
  10. The political economy of renewable energy policies in Germany and the EU By Strunz, Sebastian; Gawel, Erik; Lehmann, Paul
  11. Lobbying for carbon permits in Europe By Julien HANOTEAU
  12. Clean energy firms’ stock prices, technology, oil prices, and carbon price By Mara Madaleno; Alfredo Marvão Pereira
  13. Parallel trade and reimbursement regulation By Birg, Laura
  14. An analysis of the effects of policies; the case of coal By Massimo Di Matteo; Silvia Ferrini; Virna Talia
  15. The Pass-Through of RIN Prices to Wholesale and Retail Fuels under the Renewable Fuel Standard By Christopher R. Knittel; Ben S. Meiselman; James H. Stock
  16. Competitive tendering versus performance-based negotiation in Swiss public transport By Massimo Filippini; Martin Koller; Giuliano Masiero
  17. Do Energy Efficiency Investments Deliver? Evidence from the Weatherization Assistance Program By Meredith Fowlie; Michael Greenstone; Catherine Wolfram
  18. Case study; Paper on the energy efficiency evolution in the European road freight transport sector By Riccardo Basosi; Franco Ruzzenenti

  1. By: Aleksandar Zaklan; Bente Bauer
    Abstract: The EU’s Emissions Trading System (EU ETS) is a regional cap-and-trade program in a world with no binding international climate agreement. This climate regulation may induce a relocation of production away from Europe, with potentially negative consequences for the European economy. This relocation could lead to carbon leakage, i.e. a shift of greenhouse gas emissions from Europe into regions with less stringent climate policy. In response, installations in sectors deemed to be vulnerable receive compensatory free emissions allowances. The European Commission compiles a carbon leakage list of vulnerable sectors. The current mechanism distinguishes two levels of leakage risk. The criteria used lead to the majority of European industry regulated under the EU ETS benefiting from the additional compensation. Whereas industry representatives argue that the current level of compensation should be maintained if not increased, the evidence suggests that under the current framework overcompensation may occur. We describe the mechanism currently used to address the risk of carbon leakage in Europe, and for comparison outline the more differentiated system of assessing leakage risk used in the Californian cap-and-trade system. Applying such a more differentiated mechanism in the European context would lead to a re-distribution of compensation from sectors with an intermediate level of leakage risk to highrisk sectors.
    Date: 2015
  2. By: Claudia Kemfert; Friedrich Kunz; Juan Rosellón
    Abstract: We analyze the current regulatory regime for electricity transmission in Germany, which combines network planning with both cost-plus and revenue-cap regulations. After reviewing international experiences on transmission investment, we first make a qualitative assessment of the overall German regime. The German TSOs have in general incentives to overinvest and inefficiently inflate costs. We further develop two models to analyze the transmission planning process. In the first model there is no trade-off between transmission expansion and generation dispatch. This is a modeling set-up similar to the one actually used in the German transmission planning (Netzentwicklungsplan). A second model alternatively allows for such a trade-off, and thus represents an optimal way of transmission network planning. Simulations with the two models are carried out and compared so as to illustrate the amount of excessive transmission capacity investment and welfare losses associated with the current regime.
    Keywords: Transmission planning, nodal prices, congestion management, electricity, Germany.
    JEL: L50 L94 Q40
    Date: 2015
  3. By: Severin Borenstein
    Abstract: With dramatic declines in the cost of solar PV technology over the last 5 years, the electricity industry is in the midst of discussions about whether to use this low-polluting renewable energy source in grid-scale generation or in distributed generation (DG), mostly with rooftop solar PV. California has led the growth in DG solar in the U.S. I use 2007 to early 2014 residential data from Pacific Gas & Electric – the utility with largest number of residential solar customers in the U.S. – to examine the full range of private incentives for installing residential solar, from the direct payments and tax credits to the indirect incentives that result from the residential tariff design and the crediting of solar production under “net energy metering.” I then study the income distribution of solar adopters and how that has changed over time. I find the skew to wealthy households adopting solar is still significant, but has lessened since 2011. Adoption continues to be dominated by the heaviest electricity-consuming households, probably because the steeply-tiered tariff structure greatly increases the private value of solar to such customers while reducing the incentive for consumers who are below median consumption. In fact, the financial incentive for those who adopt solar over the sample period may have been due nearly as much to California's tiered tariff structure as to the 30% federal tax credit. The California experience suggests that rate design can greatly influence the economic incentives for residential solar adoption and which customers receive those benefits.
    JEL: L94 Q42 Q52 Q58
    Date: 2015–07
  4. By: Mauro Pisu; Barbara Pels; Novella Bottini
    Abstract: The United Kingdom (UK) has spent less on infrastructure compared to other OECD countries over the past three decades. The perceived quality of UK infrastructure assets is close to the OECD average but lower than in other G7 countries. Capacity constraints have emerged in some sectors, such as electricity generation, air transport and roads. Developing and regularly updating a national infrastructure strategy, with the National Infrastructure Plan being a welcome first step in this direction, would contribute to reduce policy uncertainty and tackle capacity constraints in a durable way. The design of coherent development plans by local authorities congruent with the national and local planning systems should continue to improve project delivery. The government intends to finance a large share of infrastructure spending to 2020 and beyond through private capital. Unlocking private investment in a cost effective and transparent way could be supported by further improving incentives for greenfield investment, continuing to carefully assess and record public-private partnerships, and promoting more long-term financing instruments. This Working Paper relates to the 2015 OECD Economic Survey of the United Kingdom (<P>Améliorer les infrastructures au Royaume-Uni<BR>Au Royaume-Uni, les dépenses dans les infrastructures ont été inférieures à ce qu’elles ont été dans d’autres pays de l’OCDE au cours des trois dernières décennies. La perception de la qualité des actifs d’infrastructure y est comparable à la moyenne de l’OCDE, mais est plus faible que dans les autres pays du G7. Des contraintes de capacité se sont fait jour dans certains secteurs comme la production d’électricité, le transport aérien ou le réseau routier. L’élaboration et l’actualisation régulière d’une stratégie nationale en matière d’infrastructures, avec le Plan National d’Infrastructure étant une première étape bienvenue en ce sens, contribuerait à réduire les incertitudes au niveau de l’action publique et de s’attaquer de manière durable aux contraintes de capacité. La conception, par les collectivités locales, de plans de développement cohérents conformes aux systèmes de planification nationaux et locaux améliorerait la livraison de projets. Le gouvernement a l’intention de financer une grande partie des dépenses d’infrastructures jusqu’en 2020 et au-delà en mobilisant des capitaux privés. Le déverrouillage de l’investissement privé de manière transparente et avec un bon rapport coût/efficacité pourrait être soutenu en améliorant les incitations à investir dans des installations entièrement nouvelles, de recenser et d’évaluer soigneusement les partenariats public-privé et de promouvoir de nouveaux instruments de financement à long terme.
    Keywords: transport, energy, infrastructure, railways, private investment, public-private partnerships, road transport
    JEL: H54 L91 L92 L93 L94 L95 L96 L98
    Date: 2015–07–09
  5. By: Paltsev, Sergey; Chen, Y.-H. Henry; Karplus, Valerie; Kishimoto, Paul; Reilly, John; Loeschel, Andreas; von Graevenitz, Kathrine; Koesler, Simon
    Abstract: CO2 emissions mandates for new light-duty passenger vehicles have recently been adopted in the European Union (EU), which require steady reductions to 95 g CO2/km in 2021. Using a computable general equilibrium (CGE) model, we analyze the impact of the mandates on oil demand, CO2 emissions, and economic welfare, and compare the results to an emission trading scenario that achieves identical emissions reductions. We find that vehicle emission standards reduce CO2 emissions from transportation by about 50 MtCO2 and lower the oil expenditures by about €6 billion, but at a net added cost of €12 billion in 2020. Tightening CO2 standards further after 2021 would cost the EU economy an additional €24-63 billion in 2025 compared with an emission trading system achieving the same economy-wide CO2 reduction. We offer a discussion of the design features for incorporating transport into the emission trading system.
    Date: 2015
  6. By: Simone Borghesi (University of Siena); Massimiliano Montini (University of Siena)
    Abstract: The paper investigates the effectiveness of the progressive shift towards the auctioning system within the EU ETS and the practical difficulties that such a shift is encountering on its way. For this purpose, it first examines the theoretical debate on the optimal allocation method underlying the ETS and describes the current allocation regime of the European Union Allowances, presenting the general rules as well as the special provisions to address specific sectors (e.g. aviation and electricity generation). Then it discusses the main problems that have been emerging so far in terms of:(i) possible carbon leakage arising in some of the ETS sectors, (ii) unsatisfactory results of the NER (New Entrant Reserve) program, (iii) intertemporal evolution of the auction price and corresponding revenues, and (iv) the much debated backloading proposal, that is the idea of temporarily halting and postponing further auctions due to the lack of permits’ demand. The comparison of the theoretical debate with the practical difficulties arising in real world applications, highlights that a long way is still to go to achieve an optimal allocation method.
    Keywords: Emission Trading Scheme, Grandfathering, Auctioning, Backloading, New Entrants Reserve.
    JEL: L11 Q42 Q43 Q48
    Date: 2015–01–01
  7. By: Aviv Nevo; John L. Turner; Jonathan W. Williams
    Abstract: We estimate demand for residential broadband using high-frequency data from subscribers facing a three-part tariff. The three-part tariff makes data usage during the billing cycle a dynamic problem; thus, generating variation in the (shadow) price of usage. We provide evidence that subscribers respond to this variation, and use their dynamic decisions to estimate a flexible distribution of willingness to pay for different plan characteristics. Using the estimates, we simulate demand under alternative pricing and find that usage-based pricing eliminates low-value traffic. Furthermore, we show that the costs associated with investment in fiber-optic networks are likely recoverable in some markets, but that there is a large gap between social and private incentives to invest.
    JEL: L1 L13 L96
    Date: 2015–07
  8. By: Marc Bourreau; Carlo Cambini; Steffen Hoernig
    Abstract: This paper analyses the impact of substitution between fixed and mobile tele- phony on call prices. We develop a model where consumers difer in the benefits of mobility and firms price discriminate between on-net and off-net calls. We find that call prices are distorted downwards due to substitution possibilities and customer heterogeneity, and that this distortion increases with the fixed-mobile termination mark-up. JEL codes: L51, L92
    Keywords: Network competition, fixed-mobile substitution, price discrimination
    Date: 2015
  9. By: Holtsmark, Katinka (Dept. of Economics, University of Oslo); Midttømme, Kristoffer (Dept. of Economics, University of Oslo)
    Abstract: We present a novel benefit of linking emission permit markets. We consider a dynamic setting, and let the countries issue permits non-cooperatively. With exogenous technology levels, there are only gains from permit trade if countries are different. With endogenous technology, however, we show that there are gains from trade even if countries are identical. In this case, linking the permit markets of different countries will turn permit issuance into intertemporal strategic complements: If one country issues fewer permits today, other countries will respond by issuing fewer permits in the future. This happens because issuing fewer permits today increases current investments in green energy capacity in all permit market countries, and countries with a higher green energy capacity will respond by issuing fewer permits in the future. Hence, each country faces incentives to withhold emission permits. Even though countries cannot commit to reducing their own emission, or punish other countries that do not, the outcome is reduced emissions, higher investments, and increased welfare, compared to a benchmark with only domestic permit trade. The more frequently participating countries reset their caps, the higher the gain from linking permit markers.
    Keywords: International agreements; permit markets; dynamic games; green technology investments
    JEL: F53 H87 Q54
    Date: 2015–01–30
  10. By: Strunz, Sebastian; Gawel, Erik; Lehmann, Paul
    Abstract: In this paper, we employ a public choice perspective to analyze the development of policies for renewable energy sources (RES) in the EU in general and in Germany more specifically. In doing so, we explain the main characteristics of current RES policies in the EU by reference to the selfinterest driven motivations of voters, stakeholders and political actors. One important puzzle, which we address, is the following: How could effective RES-policies be introduced against the political opposition of fossil-fuel interest groups in the past? Via analyzing the German example in more detail, we show how over time a self-reinforcing interplay of ideological and financial RES support has emerged. Moreover, we demonstrate that observed specific design choices for EU RES policies, such as largely riskless remuneration schemes, high degrees of technology differentiation and decentralized decision-making across Member States, can be traced back to politicians' need to balance a variety of partly opposing interests. A major benefit of the presented analysis is that it provides a realistic assessment of the challenges for RES policy reform - any reform effort critically depends on its ability to balance stakeholder interests.
    Keywords: lobbying,public choice,renewable energy sources,subsidies,support policies
    JEL: D72 D78 H25 K32 Q42
    Date: 2015
  11. By: Julien HANOTEAU (KEDGE Business School and Université d’Aix-Marseille, GREQAM)
    Abstract: Using cross-sector and cross-country data, this paper evidences that rent seeking influenced the allocation of CO2 emission permits in the two first phases of the European emissions trading scheme. Industry lobbies effectively used the ‘job loss’ and ‘competitiveness’ arguments, as unemployment proxy variables significantly impacted the allocation in both phases, and carbon intensity influenced it in the second phase. The countries that adopted a partial auction scheme also gave relatively more permits and in particular to the politically more powerful sectors. This suggests a compensation mechanism and supports the assumption of a political tradeoff between the quantity of permits issued and the decision between free grant and auction. It also confirms that the initial allocation is not neutral in the presence of special interest lobbying.
    Keywords: Lobbying, Emission trading, Permits allocation
    JEL: D72 Q58 C10
    Date: 2014–03–01
  12. By: Mara Madaleno (Department of Economics, Management and Industrial Engineering, University of Aveiro Aveiro, Portugal); Alfredo Marvão Pereira (Department of Economics, The College of William and Mary)
    Abstract: Production costs of alternative energies are still high, but increased demand for oil, future oil supply shortage concerns and climate change concerns, have led to the fast development of renewable energy firms. The sector accomplished has accomplished remarkable progress and attracted attention to clean energy, both at the industry level and at the academic side. With this work we attempt to determine whether or not the placement of a price on carbon emissions encourages investments in clean energy firms. Unlike previous literature we focus on the German case and we address the issue at the individual company level. We were able to verify this link but only for the case of companies whose weight over the amount of total energy produced is relevant, which is the case of solar in Germany.
    Keywords: Clean Energy; Firm Stock Prices; Oil Prices; Carbon Prices; Technology.
    Date: 2015–07–05
  13. By: Birg, Laura
    Abstract: This paper studies interaction of pharmaceutical regulation and parallel trade in a North-South framework. An innovative Örm located in the North can sell its drug only in the North or in both countries. Governments may limit reimbursement for the drug. Reimbursement limits reduce the Örmís incentive to supply the South, with the threat of withdrawal from the South being larger if both countries regulate as compared to only the South limiting reimbursement. Stricter regulation, i.e. a lower reimbursement limit in the Northern country increases the incentive to sell in the South. Under parallel trade, the welfare maximing reimbursement limit in the North is lower than under segmented markets, while the reimbursement limit in the South is not a§ected. If both countries cooperate in reimbursement policies, both of them adopt less strict reimbursement regimes. Cooperation results in a decrease in social welfare in the North but in an increase in welfare in the South.
    Keywords: pharmaceutical regulation,reimbursement limit,parallel trade
    JEL: F12 I11 I18
    Date: 2015
  14. By: Massimo Di Matteo (Department of Political Science and International studies, University of Siena.); Silvia Ferrini (Department of Political Science and International studies, University of Siena.); Virna Talia (Department of Political Science and International studies, University of Siena.)
    Abstract: The shift to more sustainable energy regimes requires the implementation of the right mix of policy options to internalize fossil fuel externalities. In this paper the attention is dedicated to the coal. Coal is the main fossil fuel for energy production and also the key driver of emerging economies (China, India). On the other end, the coal has been the driver of developed economies (EU, US) and a systematic review of policy options can offer several insights on the path to sustainability. Whereas coal combustion externalities (mainly CO2) are well regulated, policies for coal mining externalities are mainly neglected. Policy options present several characteristics and a formal discussion of the nexus externality and efficiency is provided. The result of a systematic web search for the coal mining externalities is presented. The strength of this search is to review several national and international reports/papers on coal mining effects. Policies for environmental and societal externalities are reviewed. Results show that the command and control is still the most popular instrument. However, mature economies (e.g. US) have successfully shifted towards voluntary agreements. These instruments promote efficiency and minimize distributional effects. It also emerges that landscape and biodiversity lost are not well regulated.
    Keywords: Externalities, Redistributive Effects, Valuation of Environmental Effects, Valuation of Environmental Policies Correlation Index
    JEL: Q51 Q58 H23 Q48
    Date: 2015–01–01
  15. By: Christopher R. Knittel; Ben S. Meiselman; James H. Stock
    Abstract: The U.S. Renewable Fuel Standard (RFS) requires blending increasing quantities of biofuels into the U.S. surface vehicle fuel supply. In 2013, the fraction of ethanol in the gasoline pool effectively reached 10%, the ethanol capacity of the dominant U.S. gasoline blend (the “E10 blend wall”). During 2013-2015, the price of RINs—tradeable electronic certificates for complying with the RFS—fluctuated through a wide range, largely because of changes in actual and expected policy combined with learning about the implications of the E10 blend wall. RINs are sold by biofuels producers and purchased by obligated parties (refiners and importers), who must retire RINs in proportion to the petroleum they sell for surface transportation. As a result, RINs in effect serve as a charge on obligated fuels and a corrective subsidy for lower-carbon renewable fuels, and are neutral for fuels outside the RFS. In theory, RIN prices provide incentives to consumers to use fuels with a high renewable content and to biofuels producers to produce those fuels, and as such are a key mechanism of the RFS. This paper examines the extent to which RIN prices are passed through to the price of obligated fuels, and provides econometric results that complement the graphical analysis in Burkholder (2015). We analyze daily data on RINs and fuel prices from January 1, 2013 through March 10, 2015. When we examine wholesale prices on comparable obligated and non-obligated fuels, for example the spread between diesel and jet fuel in the U.S. Gulf, we find that that roughly one-half to three-fourths of a change in RIN prices is passed through to obligated fuels in the same day as the RIN price movement, and this fraction rises over the subsequent few business days. Using six different wholesale spreads between obligated and non-obligated fuels, we estimate a pooled long-run pass-through coefficient of 1.01 with a standard error of 0.12. We also examine the transmission of RIN prices to retail fuel prices. The net RIN obligation on E10 is essentially zero over this period, and indeed we find no statistical evidence linking changes in RIN prices to changes in E10 prices. We also examine the price of E85 which, with an estimated average of 74% ethanol, generates more RINs than it obligates and thus in principle receives a large RIN subsidy. In contrast to the foregoing results, which are consistent with theory, the pass-through of RIN prices to the E85-E10 spread is precisely estimated to be zero if one adjusts for seasonality (as we argue should be done), or if not, is at most 30%. Over this period, on average high RIN prices did not translate into discounted prices for E85.
    JEL: C32 Q42
    Date: 2015–07
  16. By: Massimo Filippini (Institute of Economics (IdEP), University of Lugano; Swiss Federal Institute of Technology (ETH), Zurich, Switzerland); Martin Koller (Swiss Federal Institute of Technology (ETH), Zurich, Switzerland); Giuliano Masiero (Department of Management, Information and Production Engineering (DIGIP), University of Bergamo, Italy; Institute of Economics (IdEP), University of Lugano, Switzerland)
    Abstract: The purpose of this study is to assess differences in the levels of cost efficiency of bus lines operated under competitively tendered contracts and performance-based negotiated contracts. Following the revision of the Swiss railways act in 1996, regional public authorities were given the choice between two different contractual regimes to procure public passenger transport services. We directly compare the impact of competitive tendering and performance-based negotiation by applying a stochastic frontier analysis to the complete dataset of bus lines (n=630) operated by the main Swiss company (Swiss Post) at the same time (in 2009) throughout the country. The overall results show that the differences in the levels of cost efficiency between the two contractual regimes are not signi?cant. Our findings are in line with recent evidence of cost convergence between competitive tendering and performance-based negotiation, and suggest that the practice of using both contractual regimes is challenging for the operators in terms of competitive pressure. The threat of competitive tendering may have a disciplining effect on negotiation since it prevents bus companies from bargaining inadequate rents and inducing asymmetric information advantages.
    Keywords: public bus contracts, competitive tendering, performance-based negotiation, cost efficiency
    JEL: C21 D24 H57 L92
    Date: 2015–06
  17. By: Meredith Fowlie; Michael Greenstone; Catherine Wolfram
    Abstract: Conventional wisdom suggests that energy efficiency (EE) policies are beneficial because they induce investments that pay for themselves and lead to emissions reductions. However, this belief is primarily based on projections from engineering models. This paper reports on the results of an experimental evaluation of the nation’s largest residential EE program conducted on a sample of more than 30,000 households. The findings suggest that the upfront investment costs are about twice the actual energy savings. Further, the model-projected savings are roughly 2.5 times the actual savings. While this might be attributed to the “rebound” effect – when demand for energy end uses increases as a result of greater efficiency – the paper fails to find evidence of significantly higher indoor temperatures at weatherized homes. Even when accounting for the broader societal benefits of energy efficiency investments, the costs still substantially outweigh the benefits; the average rate of return is approximately -9.5% annually.
    JEL: Q4 Q48 Q5
    Date: 2015–07
  18. By: Riccardo Basosi (Department of Biotechnology, Chemistry and Pharmacy, University of Siena, Italy); Franco Ruzzenenti (Department of Biotechnology, Chemistry and Pharmacy, University of Siena, Italy)
    Abstract: One of the goals of WP7 is that of analyzing the energy crisis within the global economic crisis and assess to what extent fuel prices can promote the transition towards a more sustainable and efficient energy regime. This paper addresses the European freight transport system, national and cross-boarder, and assesses the evolution of its efficiency and intensity during the period 1998-2011, when oil prices globally increased, up the hike of the 2008. It will also be investigated the rebound effect in the sector according to two different approaches: 1) a standard, econometric approach based on regressing the elasticity of energy efficiency and energy service; 2) a new methodology based on network theory and statistical mechanics. According to the econometric approach to the European freight transport sector there was a positive rebound of about 40% globally and 38% on cross-border trade, whereas there was no significant (cross-border) rebound in Europe according to the model based on network theory. Interestingly, this latter model showed that the cross-border European freight transport network is more efficient compared to other regional networks and to the world, because weights more mass than money in its exchanges.
    Keywords: Energy Efficiency, European Freight Transport Sector, Rebound Effect, Network Theory
    JEL: R4 Q4
    Date: 2014–01–01

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