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on Regulation |
| By: | Marion Leroutier (Paris School of Economics (PSE), Université Paris I-Panthéon-Sorbonne, Centre International de Recherche pour l'Environnement et le Développement (CIRED)) |
| Abstract: | The electricity and heat generation sector represents about 40 % of global greenhouse gas (GHG) emissions in 2016. Policy-makers have implemented a variety of instruments to decarbonise their power sector. This paper examines the UK Carbon Price Floor (CPF), a novel carbon pricing instrument implemented in the United Kingdom in 2013. After describing the potential mechanisms behind the recent UK power sector decarbonisation, I apply the synthetic control method on country-level data to estimate the impact of the CPF on per capita emissions. I discuss the importance of potential confounders and the amount of net electricity imports imputable to the policy. Depending on the specification, the abatement associated with the introduction of the CPF range from 106 to 185 millions tons of equivalent CO2 over the 2013-2017 period. This implies a reduction of between 41% and 49% of total power sector emissions by 2017. Several placebo tests suggest that these estimates capture a causal impact. This paper shows that a carbon levy on high-emitting inputs used for electricity generation can lead to successful decarbonisation. |
| Keywords: | carbon tax, electricity generation, synthetic control method |
| JEL: | D22 H23 Q41 Q48 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:fae:wpaper:2019.12&r=all |
| By: | Kerr, Suzi; Leining, Catherine |
| Abstract: | New Zealand is facing a challenging low-emission transition, and effective emission pricing needs to be part of the solution. In its pure form, an emissions trading system (ETS) fixes the quantity of emissions in regulated sectors and the market sets the emission price. In New Zealand’s current policy and market context, there is value in managing both unit supply and emission prices under the NZ ETS. While emission price changes in response to policy and market conditions are desirable to drive efficient abatement, excessive price instability can deter low-emission investment. This working paper, which evolved under Motu’s ETS Dialogue process from 2016 to 2018, explores key considerations for emission price management in the context of a specific working model for unit supply in the NZ ETS. Emission price instability can be reduced at its source by reinforcing policy commitment and improving market regulation and development. Emission price instability can be mitigated by incorporating a price ceiling (cost containment reserve backed by a fixed-price option) and a price floor (auction reserve price) into the auction mechanism. Decisions on price management should be coordinated with other decisions affecting unit supply, guided by an indicative ten-year trajectory for both unit supply and emission prices, and informed by independent advice. Two companion working papers address interactions between ETS price management and the choice of cap and linking to overseas markets. The three working papers elaborate on an integrated proposal for managing unit supply, prices, and linking in the NZ ETS that was presented in Kerr et al. (2017). |
| Keywords: | Demand and Price Analysis, Risk and Uncertainty |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:ags:motuwp:290396&r=all |
| By: | Holmberg, Pär (Research Institute of Industrial Economics (IFN)); Ritz, Robert A. (Energy Policy Research Group (EPRG), Judge Business School, University of Cambridge) |
| Abstract: | Capacity mechanisms are increasingly used in electricity market design around the world yet their role remains hotly debated. In this paper, we introduce a new benchmark model of a capacity mechanism in a competitive electricity market with many different generation technologies. We consider two policy instruments, a wholesale price cap and a capacity payment, and show which combinations of these instruments induce socially-optimal investment by the market. Changing the price cap or capacity payment affects investment only in peak generation plant, with no equilibrium impact on baseload or mid-merit plant. We obtain a rationale for a capacity mechanism based on the internalization of a system-cost externality – even where the price cap is set at the value of lost load. In extensions, we show how increasing renewables penetration enhances the need for a capacity mechanism, and outline an optimal design of a strategic reserve with a discriminatory capacity payment. |
| Keywords: | Investment; Wholesale electricity market; Capacity mechanism; Capacity auction; Strategic reserve |
| JEL: | D41 L94 |
| Date: | 2019–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1292&r=all |
| By: | Adrien Fabre (Paris School of Economics, Université Paris 1 Panthéon-Sorbonne) |
| Abstract: | The EROI –for Energy Returned On Invested– of an energy technology measures its ability to provide energy efficiently. Previous studies draw a link between the affluence of a society and the EROI of its energy system, and show that EROIs of renewables are lower than those of fossil fuels. Logically, concerns have been expressed that system-wide EROI may decrease during a renewable energy transition. First, I explain theoretically that the EROIs of renewables themselves could then decrease as energy-efficient fossil fuels would be replaced by less energy-efficient renewables in the supply-chain. Then, using the multiregional input-output model THEMIS, I estimate the evolution of EROIs and prices of electric technologies from 2010 to 2050 for different scenarios. Global EROI of electricity is predicted to go from 12 in 2010 to 11 in 2050 in a business-as-usual scenario, but down to 6 in a 100% renewable one. Finally, I study the economic implication of a declining EROI. An inverse relation between EROI and price is suggested empirically, even though theory shows that both quantities may move in the same direction. |
| Keywords: | EROI, input-output, energy transition, MRIO, sustainability |
| JEL: | Q40 Q47 Q49 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:fae:ppaper:2018.09&r=all |
| By: | Martin Kegnenlezom; Patrice Takam Soh; Antoine-Marie Bogso; Yves Emvudu Wono |
| Abstract: | We propose a new model for electricity pricing based on the price cap principle. The particularity of the model is that the asset price is an exponential functional of a jump L\'evy process. This model can capture both mean reversion and jumps which are observed in electricity market. It is shown that the value of an European option of this asset is the unique viscosity solution of a partial integro-differential equation (PIDE). A numerical approximation of this solution by the finite differences method is provided. The consistency, stability and convergence results of the scheme are given. Numerical simulations are performed under a smooth initial condition. |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1906.10888&r=all |
| By: | Tapas Kundu (Oslo Business School, Oslo Akershus University College of Applied Sciences); Tore Nilssen (Oslo Business School, Oslo Akershus University College of Applied Sciences) |
| Abstract: | We develop a model to discuss a government’s incentives to delegate to bureaucrats the regulation of an industry. The industry consists of a polluting firm with private information about its production technology. Implementing a transfer-based regulation policy requires the government to make use of a bureaucracy; this has a bureaucratic cost, as the bureaucracy diverts a fraction of the transfer. The government faces a trade-off in its delegation decision: bureaucrats have knowledge of the firms in the industry that the government does not have, but at the same time, they have other preferences than the government, so-called bureaucratic drift. We study how the bureaucratic drift and the bureaucratic cost interact to affect the incentives to delegate. Furthermore, we discuss how partial delegation, i.e., delegation followed by laws and regulations that restrict bureaucratic discretion, increases the scope of delegation. We characterize the optimal delegation rule and show that, in equilibrium, three different regimes can arise that differ in the extent of bureaucratic discretion. Our analysis has implications for when and how a government should delegate its regulation of industry. We find that bureaucratic discretion reduces with bureaucratic drift but that, because of the nature of the regulation problem, the effect of increased uncertainty about the firm’s technology on the bureaucratic discretion depends on how that uncertainty is reduced. |
| Keywords: | Bureaucracy, Delegation, Regulation, Procurement |
| JEL: | D02 H10 L51 |
| Date: | 2017–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:oml:wpaper:201703&r=all |
| By: | Leining, Catherine; Kerr, Suzi |
| Abstract: | The fundamental purpose of an emissions trading system (ETS) is to constrain emissions and enable the market to set an emissions price path that facilitates an effective transition to a low-emissions economy. In a conventional ETS, the emissions constraint is defined by a cap (a fixed limit) on tradable, government-issued emission units together with a quantity limit on any external units allowed in the system (e.g. via an offsets mechanism). Essentially, an ETS cap underpins the ambition, cost-effectiveness, distributional implications, and credibility of a jurisdiction’s approach to decarbonisation. From 2008 to mid-2015, the New Zealand Emissions Trading Scheme (NZ ETS) broke from convention by linking to the global Kyoto cap without its own limit on domestic emissions. NZ ETS participants met compliance obligations using unlimited overseas units at low prices and faced little incentive to reduce their own emissions. The NZ ETS delinked from the Kyoto market in mid-2015, creating uncertainty over the future of domestic unit supply and an efficient price path for domestic decarbonisation. This working paper, which evolved under Motu’s ETS Dialogue process from 2016 to 2018, explores key considerations for ETS cap setting and proposes the design for a cap on units auctioned and freely allocated in the NZ ETS. The recommendations focus on issues of cap architecture rather than ambition. The proposed cap is defined in tonnes of emissions per year, fixed for five years in advance, extended by one year each year, and guided by an indicative ten-year cap trajectory. The fixed cap and cap trajectory need to reflect consideration of New Zealand’s domestic decarbonisation objectives, international targets, mitigation potential and costs in both ETS and non-ETS sectors, and prospects for cost-effective investment in overseas emission reductions. Two companion working papers address how the choice of cap will interact with decisions on ETS price management mechanisms and linking to overseas markets. The three working papers elaborate on an integrated proposal for managing unit supply, prices, and linking in the NZ ETS that was presented in Kerr et al. (2017). |
| Keywords: | Environmental Economics and Policy |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:ags:motuwp:290395&r=all |
| By: | Emma Boswell Dean (University of Miami) |
| Abstract: | With the goal of driving down drug costs, governments across the globe have instituted various forms of pharmaceutical price control policies. Understanding the impacts of such policies is particularly important in low- and middle-income countries, where lack of insurance coverage means that prices can serve as a barrier to access for patients. In this paper, we examine the theoretical and empirical effects of one implementation of pharmaceutical price controls, in which the Indian government placed price ceilings on a set of essential medicines. We find that the legislation resulted in broadly declining prices amongst both directly impacted products and competing products. However, the legislation also led to decreased sales of price-controlled and closely related products, preventing trade that would have otherwise occurred. The sales of small, local generics manufacturers were most impacted by the legislation, seeing a 14.5 percent decrease in market share and a 5.3 percent decrease in sales. These products tend to be inexpensive, but we use novel data to show that they are also of lower average quality. We provide evidence that the legislation impacted consumer types differentially. The benefits of the legislation were largest for quality-sensitive consumers, while the downsides largely affected poor and rural consumers, two groups already suffering from low access to medicines. |
| Date: | 2019–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:509&r=all |
| By: | Marina Friedrich; Michael Pahle |
| Abstract: | The Emissions Trading Scheme of the European Union is a central instrument of EU's climate policy. Looking at the development of allowance prices shows that prices have been low for a long time and previous research indicates that a link to fundamental price drivers is hard to establish. Only recently, prices have started to increase. This new price development has received a lot of attention in political discussions in which it has been attributed to the recent reform of the EU ETS -- the strengthening of the Market Stability Reserve through cancellation. It is, however, challenging to find empirical evidence which can link the two, or more generally, to provide evidence about the true cause of the upward trend. In this paper, we obtain first empirical results pointing in the direction of a period of exuberance in EUA prices. This period overlaps with the recent upward trend in prices. We further investigate several abatement-related fundamentals and show that they do not display explosive behavior which could have driven the allowance price movements. We conjecture that this price exuberance could either be caused by an adaption process or an overreaction of prices to the announcement of the reform. In addition, we revisit the effects of fundamental price drivers, such as coal prices, gas prices and measures of economic activity, on allowance prices in the EU ETS using a time-varying coefficient regression model. |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1906.10572&r=all |
| By: | Lynch, Muireann Á.; Devine, Mel |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:rb201911&r=all |
| By: | Bernhardt, Dan (University of Illinois & University of Warwick); Liu, Tingjun (The University of Hong Kong); Sogo, Takeharu (Osaka University of Economics) |
| Abstract: | We analyze optimal auction mechanisms when bidders base costly entry decisions on their valuations, and bidders pay with a fixed royalty rate plus cash. With sufficient valuation uncertainty relative to entry costs, the optimal mechanism features asymmetry so that bidders enter with strictly positive but different (ex-ante) probabilities. When bidders are ex-ante identical, higher royalty rates—which tie payments more closely to bidder valuations—increase the optimal degree of asymmetry in auction design, further raising revenues. When bidders differ ex-ante in entry costs, the seller favors the low cost entrant ; whereas when bidders have different valuation distributions, the seller favors the weaker bidder if entry costs are low, but not if they are high. Higher royalty rates cause the seller to favor the weaker bidder by less, and the strong bidder by more. |
| Keywords: | Auctions with participation costs : Royalty payments ; Optimal auctions ; Asymmetric auctions ; Heterogeneous bidders |
| JEL: | D44 G3 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1200&r=all |
| By: | Costa, Helia; Veiga, Linda |
| Abstract: | Investment in wind power has grown remarkably in the past decades in Portugal. Although economic development is an argument for investment incentive policies, little evidence exists as to their net impact on local-level unemployment. Using a panel of all 278 Portuguese mainland municipalities for the years 1997-2017, we assess the existence, distribution and duration of local level labor impacts of wind power investment. Our results show there are short term effects during the construction phase. We estimate a decrease of 0.05 percentage points in the total unemployment rate for each KW per capita installed. These effects are confined to unskilled labor and male workers. Further analysis of spatial interaction finds positive spatial spillovers for municipalities that are 30km or less away but not farther, implying workers are willing to commute but not migrate. We find no evidence of sustained effects or impact during the operations and maintenance phase, despite both short and long term impacts in municipalities' revenues. |
| Keywords: | Wind power; labor effectsf panel data |
| Date: | 2019–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:123160&r=all |
| By: | Lynch, Muireann Á.; Nolan, Sheila; Devine, Mel; O’Malley, Mark |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:rb201910&r=all |