nep-reg New Economics Papers
on Regulation
Issue of 2015‒08‒25
eighteen papers chosen by
Natalia Fabra
Universidad Carlos III de Madrid

  1. Reaping the carbon rent: Abatement and overallocation profits in the European cement industry, insights from an LMDI decomposition analysis By Frédéric Branger; Philippe Quirion
  2. An optimal trading problem in intraday electricity markets * By René Aïd; Pierre Gruet; Huyên Pham
  3. Article type: Opinion The European Union Emissions Trading Scheme: should we throw the flagship out with the bathwater? By Frédéric Branger; Oskar Lecuyer; Philippe Quirion
  4. Local Consequences of Global Uncertainty: Capacity Development and LNG Trade under Shale Gas and Demand Uncertainty and Disruption Risk By Ruud Egging; Franziska Holz
  5. Investment under uncertainty, competition and regulation By Adrien Nguyen Huu
  6. Regulating a Manager-Controlled Monopoly with Unknown Costs By Ismail Saglam
  7. Economic Features of the Internet and Network Neutrality By Nicholas Economides
  8. Controlling carbon emissions from U.S. power plants: how a tradable performance standard compares to a carbon tax By Warwick J. McKibbin; Adele Morris; Peter J. Wilcoxen
  9. Energy transition under irreversibility: a two-sector approach By Prudence Dato
  10. Robert Stavins on the carbon-pricing regime, The New York Times, 1 June 2014: dodgy arguments By Michel Damian
  11. Toward the adaptation to new regulation on water pricing in the agricultural sector: a case study from northern Italy By Galioto, Francesco; Guerra, Elisa; Raggi, Meri; Viaggi, Davide
  12. High-Speed Rail Performance in France: From Appraisal Methodologies to Ex-post Evaluation By Yves Crozet
  13. The Financial and Economic Assessment of China's High Speed Rail Investments: A Preliminary Analysis By Jianhong WU
  14. Research and Development of an Optimally Regulated Monopolist with Unknown Costs By Ismail Saglam
  15. Do Consumers Recognize the Value of Fuel Economy? Evidence from Used Car Prices and Gasoline Price Fluctuations By James M. Sallee; Sarah West; Wei Fan
  16. Pathways toward Zero-Carbon Electricity Required for Climate Stabilization By Richard Audoly; Adrien Vogt-Schilb; Céline Guivarch
  17. Seven Points to Remember when Conducting Behavioural Studies in Support of EU Policy-making By René van Bvel; Nuria Rodríguez-Priego; Ioannis Maghiros
  18. Is it possible for China to reduce its total CO2 emissions? By Huanan Li; Yi-Ming Wei

  1. By: Frédéric Branger (CIRED - Centre International de Recherche sur l'Environnement et le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - CIRAD - Centre de coopération internationale en recherche agronomique pour le développement - École des Ponts ParisTech (ENPC) - CNRS, AgroParisTech); Philippe Quirion (CNRS, CIRED - Centre International de Recherche sur l'Environnement et le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - CIRAD - Centre de coopération internationale en recherche agronomique pour le développement - École des Ponts ParisTech (ENPC) - CNRS)
    Abstract: We analyse variations of carbon emissions in the European cement industry from 1990 to 2012, at the European level (EU 27), and at the national level for six major producers (Germany, France, Spain, the United Kingdom, Italy and Poland). We apply a Log-Mean Divisia Index (LMDI) method, cross-referencing data from three databases: the Getting the Numbers Right (GNR) database developed by the Cement Sustainability Initiative, the European Union Transaction Log (EUTL), and the Eurostat International Trade database. Our decomposition method allows seven channels of emission change to be distinguished: activity, clinker trade, clinker share, alternative fuels, thermal and electrical energy efficiency, and electricity decarbonisation. We find that, apart from a slow trend of emission reductions coming from technological improvements (first from a decrease in the clinker share, then from an increase in alternative fuels), most of the emission change can be attributed to the activity effect. Using counterfactual scenarios, we estimate that the introduction of the EU ETS brought small but positive technological abatement (2.2% ± 1.3% between 2005 and 2012). Moreover, we find that the European cement industry has gained 3.5 billion Euros of " overallocation profits " , mostly due to the slowdown of production.
    Date: 2014–11–15
  2. By: René Aïd (FiME Lab - Laboratoire de Finance des Marchés d'Energie - Université Paris IX - Paris Dauphine - CREST - EDF R&D); Pierre Gruet (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS - UP7 - Université Paris Diderot - Paris 7 - UPMC - Université Pierre et Marie Curie - Paris 6); Huyên Pham (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS - UP7 - Université Paris Diderot - Paris 7 - UPMC - Université Pierre et Marie Curie - Paris 6, ENSAE Paris-Tech & CREST, Laboratoire de Finance et d'Assurance - ENSAE Paris-Tech & CREST)
    Abstract: We consider the problem of optimal trading for a power producer in the context of intraday electricity markets. The aim is to minimize the imbalance cost induced by the random residual demand in electricity, i.e. the consumption from the clients minus the production from renewable energy. For a simple linear price impact model and a quadratic criterion, we explicitly obtain approximate optimal strategies in the intraday market and thermal power generation, and exhibit some remarkable properties of the trading rate. Furthermore, we study the case when there are jumps on the demand forecast and on the intraday price, typically due to error in the prediction of wind power generation. Finally, we solve the problem when taking into account delay constraints in thermal power production.
    Date: 2015–01–19
  3. By: Frédéric Branger (CIRED - Centre International de Recherche sur l'Environnement et le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - CIRAD - Centre de coopération internationale en recherche agronomique pour le développement - École des Ponts ParisTech (ENPC) - CNRS, AgroParisTech); Oskar Lecuyer (Department of Economics and Oeschger Centre for Climate Change Research - University of Bern); Philippe Quirion (CNRS, CIRED - Centre International de Recherche sur l'Environnement et le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - CIRAD - Centre de coopération internationale en recherche agronomique pour le développement - École des Ponts ParisTech (ENPC) - CNRS)
    Abstract: The European Union Emissions Trading System (EU ETS), presented as the " flagship " of European climate policy, is subject to many criticisms from different stakeholders: it does not reduce carbon emissions nor generate enough low-carbon innovation, it induces competitiveness losses and carbon leakage, its distributional effects are unfair and finally, it is susceptible to fraud. We review these criticisms and recognize that: abatement is real (though small), innovation is insufficient, competitiveness losses and carbon leakage did not seem to take place, distributional effects have indeed been unfair and fraud has been important. Some of these problems could have been avoided. They can still be corrected by reforming the ETS through the introduction of price limits and by developing complementary policies, both because the ETS reform may fail and because the ETS cannot address all the relevant market failures.
    Date: 2014
  4. By: Ruud Egging; Franziska Holz
    Abstract: Recent supply security concerns in Europe have revived interest into the natural gas market. Here, we investigate investment behavior and trade in an imperfect market structure under uncertainty in both supply and demand. We focus on three uncertain events: i) transit of Russian gas via Ukraine that may be disrupted from 2020 on; ii) natural gas intensity of electricity generation in OECD countries that may lead to higher or lower natural gas demand after 2025; and iii) availability of shale gas around the globe after 2030. We illustrate how timing of investments is affected by inter-temporal hedging behavior of market agents, such as when LNG capacity provides ex-ante flexibility (e.g., in Ukraine to hedge for a possible Russian supply disruption) or an expost fallback option if domestic or nearby pipeline supply sources are low (e.g., uncertain shale gas resources in China). Moreover, we find that investment in LNG capacities is more determined by demand side pull (due to higher needs in electric power generation) than by supply side push (higher shale gas supplies needing an outlet).
    Keywords: Stochasticity, mixed complementarity model, natural gas
    JEL: C73 L71 Q34
    Date: 2015
  5. By: Adrien Nguyen Huu (IMPA - Instituto Nacional de Matemática Pura e Aplicada - Instituto Nacional de matematica pura e aplicada)
    Abstract: We investigate a randomization procedure undertaken in real option games which can serve as a basic model of regulation in a duopoly model of preemptive investment. We recall the rigorous framework of [M. Grasselli, V. Leclère and M. Ludkovsky, Priority Option: the value of being a leader, International Journal of Theoretical and Applied Finance, 16, 2013], and extend it to a random regulator. This model generalizes and unifies the different competitive frameworks proposed in the literature, and creates a new one similar to a Stackelberg leadership. We fully characterize strategic interactions in the several situations following from the parametrization of the regulator. Finally, we study the effect of the coordination game and uncertainty of outcome when agents are risk-averse, providing new intuitions for the standard case.
    Date: 2014–10–01
  6. By: Ismail Saglam (Department of Economics, Ipek University)
    Abstract: We study the regulation of a manager-controlled monopoly with unknown costs, borrowing from the earlier work of Baron and Myerson (BM) (1982), where the monopoly is controlled by the owner. Our regulatory environment involves the case where the regulator can tax the owner as well as the case where she cannot. We show that the optimal price schedule in our model generally lies below the one in the BM model. In addition, if the compensation parameter is sufficiently small, the optimal price can be as low as the marginal cost, provided that the regulator cannot tax the owner of the monopoly. We also examine how the size of the managerial compensation affects the welfare of the owner of the monopoly as well as the social welfare. Moreover, we show that in settings where the owner of a manager-controlled monopoly cannot be taxed, the owner prefers to separate management from ownership, provided that the marginal cost of production is sufficiently large. However, the owner always prefers to manage the monopoly herself when the marginal cost of production is sufficiently small.
    Keywords: Monopoly, Regulation,Firm Ownership, Firm Control
    JEL: D82 L51
    Date: 2015–07
  7. By: Nicholas Economides (Stern School of Business, New York University. 44 West 4th Street, New York, NY 10012)
    Abstract: We discuss the issue of a possible abolition of network neutrality and the introduction of paid prioritization by residential broadband access networks.We show that, in short run analysis where bandwidth is fixed, and in the absence of congestion, network neutrality tends to maximize total surplus. When an ISP violates network neutrality and invests the extra profits to bandwidth expansion, the presence of more bandwidth alleviates the allocative distortion, and can even reverse it. We also discuss the network neutrality issue under the assumption of congestion, and characterize the set of utility functions for which network neutrality is optimal, as well as utility functions where it is optimal to prioritize. Finally, we review regulatory rules in the United States on network neutrality.
    Keywords: Internet, pricing, network neutrality, price discrimination, prioritization
    JEL: D43 L11 L1
    Date: 2015–04
  8. By: Warwick J. McKibbin; Adele Morris; Peter J. Wilcoxen
    Abstract: Different pollution control policies, even if they achieve the same emissions goal, could have importantly different effects on the composition of the energy sector and economic outcomes. In this paper, we use the G-Cubed model of the global economy to compare two basic policy approaches for controlling carbon emissions from power plants: a tradable performance standard and a carbon tax. We choose these two approaches because they resemble two key options facing policymakers: continue implementing a performance standard approach under the Clean Air Act or adopt an excise tax on the carbon content of fossil fuels instead. Our goal is to highlight the important high-level differences in these basic approaches, abstracting from the details of specific policy proposals. We explore a wide variety of the illustrative policies’ economic outcomes including: changes in capital stocks and electricity production across eight types of generators, changes in end-user electricity prices, changes in gross domestic product (GDP), overall welfare impacts on the household sector and, finally, one outcome represented in the G-Cubed model and few others: short to medium-run changes in aggregate employment.
    Date: 2015–08
  9. By: Prudence Dato (IREGE - Institut de Recherche en Gestion et en Economie - Université de Savoie)
    Abstract: In this paper, we analyze the optimal energy transition of a two-sector economy (energy and final goods) with exhaustible oil reserves, a renewable source of energy and a pollution threat. The latter corresponds to a pollution threshold above which a part of the capital is lost (following flooding for instance). We show that the optimal energy transition path may correspond to a corner regime in which the economy starts using both resources, then crosses the pollution threshold and therefore loses a part of its capital. At the end, the sole adoption of the renewable energy is optimal only in the long run. This result is in line with the asymptotic energy transition arguments stating that the transition to "clean" energy may happen only in the long run. We also show that economy reduces the use of energy resource as long as the productivity of capital and energy services is high. Therefore , public policies should promote investments in energy innovation that targets productive sector, home appliances and buildings and helps to save both money and energy. We extend the present model to allow for additional investment in energy saving technologies. Our main results show that this additional investment favours the energy transition in the sense that it increases the time within which the economy may experience the catastrophe and the welfare of the society. For policy implications, economic instruments such as taxes on "dirty" energy, subsidies on "clean" energy or incentives for energy saving technologies need to be implemented in order to promote the energy transition. This is particularly important for developing countries that mostly rely on polluting energy resources and are the most vulnerable to climate change. But those economic instruments should be carefully designed in line with the asymptotic energy transition result.
    Date: 2015–07–06
  10. By: Michel Damian (équipe EDDEN - PACTE - Politiques publiques, ACtion politique, TErritoires - CNRS - Grenoble 2 UPMF - Université Pierre Mendès France - IEPG - Sciences Po Grenoble - Institut d'études politiques de Grenoble - Grenoble 1 UJF - Université Joseph Fourier)
    Abstract: This commentary discusses the opinion piece published on 1 June 2014 by Professor Robert Stavins in The New York Times. Professor Robert Stavins argues that "The Only Feasible Way of Cutting Emissions" is to set up a market for tradable permits. We review and criticize his mains arguments. Our purpose here is not to deny the possibility of carbon trading, but to call for a realistic assessment of the deployment of cap-and-trade systems and their limitations.
    Date: 2014
  11. By: Galioto, Francesco; Guerra, Elisa; Raggi, Meri; Viaggi, Davide
    Abstract: As the Water Framework Directive (WFD) expects, Italian Regions established new criteria for pricing rules the design, according to which Reclamation and Irrigation Boards (RIBs) allocate supply costs among users. A novelty is the attainment of full-cost recovery, introducing mixed tariffs, covering both fixed and variable costs. This paper evaluates the feasibility and the effectiveness of new water pricing criteria, in northern Italy case-study. Specifically, the impact of current pricing criteria are compared to a new hypothetical pricing scenario, based on irrigation consumption, land allocation, and irrigation technology adoption. The methodology followed a two-step approach. First, crops water requirements, and irrigation reduction effects on crop yields were simulated for different irrigation systems. Then, the derived water-crop production functions were input into an economic model, following a positive mathematical programming approach (PMP). Main assumptions were that farmers seek to maximize profits, that observed cropdesigns and water-uses are optimal, and that the authority acts on behalf of its users, aiming to both supply cost recovery and minimize impact on farm profits. Results highlight that there are no substantial variations between current and new hypothetical pricing scenarios, for three reasons. First, the variable charge is low, and it does not significantly affect water consumption. Second, incentive water pricing is feasible only in a limited area, served by pressured pipes. Third, irrigation water demand is inelastic, and it depends on the distribution system adopted. Moreover, the adoption rate of more precise irrigation systems would rise by increasing variable charges, when the ratio between fixed and variable components is flexible, hence also directly affecting irrigation demand. In fact, since fixed costs are usually greater than variable costs, mixed tariff adoption in this area could both recover water supply costs, and co-finance subsidies on irrigation technology investments, as was otherwise prevented by latest CAP-reform.
    Keywords: WFD, PMP, water pricing, irrigation, Agricultural and Food Policy, Q5,
    Date: 2015–06
  12. By: Yves Crozet
    Abstract: France embarked on high-speed rail travel almost 40 years ago. Today it carries more passengers by far on its high-speed trains than any other European country. Regarded as something of a niche activity initially, high-speed rail has become a national priority in France as evidenced by its 1 900-km network of high-speed lines (LGV). The lines currently under construction will bring this total to 2 600 by 2017.
    Date: 2013–12–13
  13. By: Jianhong WU
    Abstract: China has suffered railway capacity constraints for more than several decades and the need for a large increase in rail capacity has been viewed as the primary challenge. The former Chinese Ministry of Railways believed that building a national wide high speed railway (HSR) network was the most efficient solution to China’s rail capacity problems. By 2012, 9 000 km of HSR line has been completed which accounted more than half of the total in the World and the other 9 000 km HSR line is either under construction or in the planning stage. This paper attempts to discuss the initial operational, financial and economic result of such a large scale HSR investment in China where the establishment of an appraisal system for a HSR project is still underway and the public data in need are not available. Based on some trial studies carried out on several HSR projects, however, the paper shows that except for a limited amount of HSR projects in the most developed areas of the country, the initial financial and economic performance of most HSR lines are generally much poorer than expected. The scale of investment seems to be difficult to justify, given that investment in HSR lines is very expensive, especially for those with design speed of 350 km/h, and the high level of debt funding. Moreover the values of time of the ordinary Chinese are still low by European standards. For a developing country planning HSR projects, one lesson that can be learnt from China is that it would be ideal if a comprehensive appraisal can be taken into account before investing in HSR. Such appraisal includes examination of different options for technical and operational standards, timing of investment, construction scale and pace, train operational scheme and service level, pricing and regional development policy (political consideration). At the very least, a step by step development strategy should be adopted to cope with the huge uncertainties and risks.
    Date: 2013–12–19
  14. By: Ismail Saglam (Department of Economics, Ipek University)
    Abstract: This paper studies whether a monopolist with private marginal cost information has incentives to make cost-reducing innovations through research and development (R&D) when its output and price are regulated according to the incentive-compatible mechanism of Baron and Myerson (1982). Under several assumptions concerning the cost of R&D and the regulator's beliefs about the marginal cost, we characterize the optimal level of R&D activities for the regulated monopolist when these activities are observed by the regulator as well as when they are not. We show that the regulated monopolist always chooses a higher level of R&D activities when its activities are unobserved. In situations where the social welfare attaches a sufficiently high weight to the monopolist welfare, the monopolist's R&D activities in the unobservable case even realize at a higher level than its activities when its output and price are not regulated. Moreover, whenever R&D activities increase productive efficiency, a less efficient monopolist would choose a higher level of R&D activities than a more efficient monopolist, irrespective of the observability of R&D.
    Keywords: Monopoly, Regulation,Research and Development
    JEL: D82 L51 O32
    Date: 2015–07
  15. By: James M. Sallee; Sarah West; Wei Fan
    Abstract: Debate about the appropriate design of energy policy hinges critically on whether consumers might undervalue energy efficiency, due to myopia or some other manifestation of limited rationality. We contribute to this debate by measuring consumers' willingness to pay for fuel economy using a novel identification strategy and high quality microdata from wholesale used car auctions. We leverage differences in future fuel costs across otherwise identical vehicles that have different current mileage, and therefore different remaining lifetimes. By seeing how price differences across high and low mileage vehicles of different fuel economies change in response to shocks to the price of gasoline, we estimate the relationship between vehicle prices and future fuel costs. Our data suggest that used automobile prices move one for one with changes in present discounted future fuel costs, which implies that consumers fully value fuel economy.
    JEL: H23
    Date: 2015–07
  16. By: Richard Audoly (CIRED - Centre International de Recherche sur l'Environnement et le Développement - CNRS - CIRAD - Centre de coopération internationale en recherche agronomique pour le développement - EHESS - École des hautes études en sciences sociales - École des Ponts ParisTech (ENPC) - AgroParisTech); Adrien Vogt-Schilb (The World Bank - The World Bank, CIRED - Centre International de Recherche sur l'Environnement et le Développement - CNRS - CIRAD - Centre de coopération internationale en recherche agronomique pour le développement - EHESS - École des hautes études en sciences sociales - École des Ponts ParisTech (ENPC) - AgroParisTech); Céline Guivarch (CIRED - Centre International de Recherche sur l'Environnement et le Développement - CNRS - CIRAD - Centre de coopération internationale en recherche agronomique pour le développement - EHESS - École des hautes études en sciences sociales - École des Ponts ParisTech (ENPC) - AgroParisTech)
    Abstract: This paper covers three policy-relevant aspects of the carbon content of elec-tricity that are well established among integrated assessment models but under-discussed in the policy debate. First, climate stabilization at any level from 2 • C to 3 • C requires electricity to be almost carbon-free by the end of the century. As such, the question for policy makers is not whether to decarbonize electricity but when to do it. Second, decarbonization of electricity is still possible and required if some of the key zero-carbon technologies — such as nuclear power or carbon capture and storage — turn out to be unavailable. Third, progres-sive decarbonization of electricity is part of every country's cost-effective means of contributing to climate stabilization. In addition, this paper provides cost-effective pathways of the carbon content of electricity — computed from the results of AMPERE, a recent integrated assessment model comparison study. These pathways may be used to benchmark existing decarbonization targets, such as those set by the European Energy Roadmap or the Clean Power Plan in the United States, or inform new policies in other countries. These pathways can also be used to assess the desirable uptake rates of electrification technolo-gies, such as electric and plug-in hybrid vehicles, electric stoves and heat pumps, or industrial electric furnaces.
    Date: 2014
  17. By: René van Bvel (European Commission – JRC - IPTS); Nuria Rodríguez-Priego (European Commission – JRC - IPTS); Ioannis Maghiros (European Commission – JRC - IPTS)
    Abstract: This policy brief is a follow-up to the JRC Policy Brief "Applying Behavioural Sciences to EU Policy-making", and aims to provide policy-makers with practical guidance for planning and managing a behavioural study. It draws substantially (though not exhaustively or exclusively) on the experience gathered after three years of conducting behavioural studies in support of EU policy. More specifically, it relies on the insights of policy officers and behavioural researchers involved in these studies, as shared at the Good Behavioural Research for EU Policy-making workshop (Seville, May 2014).
    Keywords: behavioural studies, EU policy, experimental economics, behavioural economics
    Date: 2015–07
  18. By: Huanan Li; Yi-Ming Wei (Center for Energy and Environmental Policy Research (CEEP), Beijing Institute of Technology)
    Abstract: China's CO2 emissions have been the focus of attention for domestic and foreign scholars. However, very few articles have analysed whether and how a reduction of China's total CO2 emissions can be achieved. This is of great significance for meeting China's future CO2 emissions reduction targets. Based on input-output decomposition analysis model and dynamic programming approach, this paper analyses the factors affecting China's total carbon emissions and discuss whether and how it could be possible for China to reduce its total CO2 emissions. The results show that carbon intensity is a major driver for the reduction of China's CO2 emissions and that the impact of industry structure on the increment of China's CO2 emissions has changed from positive to negative in recent years. Under the premise of economic growth, carbon intensity decline and industrial structure adjustment should be coordinated. A reduction in the total amount of China's CO2 emissions is difficult to achieve in the short term, but an effective development mode can be selected with some policy implications suggested.
    Keywords: CO2 reduction, Input-Output model, SDA, dynamic programming approach, China
    JEL: Q54 Q40
    Date: 2014–10–02

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