nep-reg New Economics Papers
on Regulation
Issue of 2020‒06‒29
eighteen papers chosen by
Natalia Fabra
Universidad Carlos III de Madrid

  1. How to Spend it: A Proposal for a European Covid-19 Recovery Programme By Jérôme Creel; Mario Holzner; Francesco Saraceno; Andrew Watt; Jérôme Wittwer
  2. Do sound infrastructure governance and regulation affect productivity growth? New insights from firm level data By Lilas Demmou; Guido Franco
  3. The Direct Rebound Effect of Electricity Energy Services in Spanish Households: Evidence from Error Correction Model and System GMM estimates. By Martín Bordon Lesme; Jaume Freire-González; Emilio Padilla Rosa
  4. An Experimental Comparison of Carbon Pricing Under Uncertainty in Electricity Markets By Trevor L. Davis; Mark C. Thurber; Frank A. Wolak
  5. Do British wind generators behave strategically in response to the Western Link interconnector? By Intini, Mario; Waterson, Michael
  6. Corrective Tax Design and Market Power By O'Connell, Martin; Smith, Kate
  7. The Environmental Benefits from Transportation Electrification: Urban Buses By Stephen P. Holland; Erin T. Mansur; Nicholas Z. Muller; Andrew J. Yates
  8. Understanding Consumer Vehicle Choice: A New Car Fleet Model for France By ITF
  9. The cost of CO2 abatement from Britain’s only PWR: Sizewell B By Newbery, D.
  10. Is the NEM broken? Policy discontinuity and the 2017-2020 investment megacycle By Simshauser, P.; Gilmore, J.
  11. Simplified Electricity Market Models with Significant Intermittent Renewable Capacity: Evidence from Italy By Christoph Graf; Federico Quaglia; Frank A. Wolak
  12. Assessing Consumer Welfare Impacts of Aviation Policy Measures By Guillaume Burghouwt
  13. Assessing the Impacts of Vehicle Emissions and Safety Regulations By Bert van Wee
  14. Mapping fuel poverty risk at the municipal level: A Small-Scale Analysis of Italian Energy Performance Certificate, Census and Survey data By Riccardo Camboni; Alberto Corsini; Raffaele Miniaci; Paola Valbonesi
  15. Merchant utilities and boundaries of the firm: vertical integration in energy-only markets By Simshauser, P.
  16. Do Environmental Markets Cause Environmental Injustice? Evidence from California’s Carbon Market By Danae Hernandez-Cortes; Kyle C. Meng
  17. Search Frictions and Efficiency in Decentralized Transportation Markets By Giulia Brancaccio; Myrto Kalouptsidi; Theodore Papageorgiou; Nicola Rosaia
  18. On competitive nonlinear pricing By Andrea Attar; Thomas Mariotti; Francois Salanie

  1. By: Jérôme Creel; Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Francesco Saraceno; Andrew Watt; Jérôme Wittwer
    Abstract: The Recovery Fund recently proposed by the EU Commission marks a sea-change in European integration. Yet it will not be enough to meet the challenges Europe faces. There has been much public debate about financing, but little about the sort of concrete projects that the EU should be putting public money into. Here we propose a 10-year, €2tn investment programme focusing on public health, transport infrastructure and energy/decarbonisation. It consists of two pillars. In a national pillar Member States – broadly as in the Commission proposal – would be allocated €500bn. Resources should be focused on the hardest-hit countries and front-loaded we suggest over a three-year horizon. The bulk of the money – €1.5tn – would be devoted to finance genuinely European projects, where there is an EU value added. We describe a series of flagship initiatives that the EU could launch in the fields of public health, transport infrastructure and energy/decarbonisation. We call for a strengthened EU public health agency that invests in health-staff skills and then facilitates their flexible deployment in emergencies, and is tasked with ensuring supplies of vital medicines (Health4EU). We present costed proposals for two ambitious transport initiatives a dedicated European high-speed rail network, the Ultra-Rapid-Train, with four-routes cutting travel times between EU capitals and regions, and, alternatively, an integrated European Silk Road initiative that combines transport modes on the Chinese model. In the area of energy/decarbonisation we seek to “electrify” the Green Deal. We call for funding to accelerate the realisation of a smart and integrated electricity grid for 100%-renewable energy transmission (e-highway), support for complementary battery and green-hydrogen projects, and a programme, modelled on the SURE initiative, to co-finance member-state decarbonisation and Just Transition policies. The crisis induced by the pandemic, coming as it does on top of the financial and euro crises, poses a huge challenge. The response needs to take account of the longer-run structural challenges, and above all that of climate change. The European Union should rise to these challenges in the reform of an ambitious medium-run recovery programme, appropriately financed. An outline of such a programme is set out here by way of illustration, but many permutations and options are available to policymakers.
    Keywords: Recovery Fund, European Green Deal, Just Transition, transport infrastructure, electricity transmission, public health, Covid-19, EU, investment
    JEL: H51 H54 I18 Q21 Q28 Q41 Q42 Q43 Q48 R41 R42 R48
    Date: 2020–06
  2. By: Lilas Demmou; Guido Franco
    Abstract: Measuring the quality of governance and regulation in various ways and focusing on energy, transport and telecommunications, this paper shows that both sound governance of infrastructure investment and pro-competitive regulation in network industries are associated with stronger productivity growth in firms operating downstream.
    Keywords: governance, infrastructure, investment, regulation, total factor productivity
    JEL: D24 H54 K23 L50
    Date: 2020–06–25
  3. By: Martín Bordon Lesme (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona); Jaume Freire-González (ENT Foundation); Emilio Padilla Rosa (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: We review the empirical literature concerning the magnitude of the direct rebound effect in households, ocusing on econometric studies, and analyze the theoretical and methodological aspects for the estimation of the direct rebound effect. We then estimate the magnitude of the direct rebound effect of households’ electricity consumption in Spain. Using panel data from 2007 to 2016 for all the Spanish provinces, we estimate the short- and long-run direct rebound effects. In order to deal with cointegration of variables and to solve potential spurious relationships between them, we use a two-step Error Correction Model. We also estimate the dynamic model through a GMM system. The results indicate a direct rebound effect between 26% and 35% in the short- run and around 36% in the long-run. These findings suggest that, in Spain, energy efficiency policies with the aim of saving electricity consumption are significantly less effective without complementary measures to tackle the direct rebound effect. Moreover, one can expect a greater electricity savings response from households to price changes than to income or weather changes. We find a significant influence of other energy sources that appear to be complementary to electricity consumption according to our estimation.
    JEL: Q43 Q48
    Date: 2020–05
  4. By: Trevor L. Davis; Mark C. Thurber; Frank A. Wolak
    Abstract: We report on an economic experiment that compares outcomes in electricity mar- kets subject to carbon-tax and cap-and-trade policies. Under conditions of uncertainty, price-based and quantity-based policy instruments cannot be truly equivalent, so we compared three matched carbon-tax/cap-and-trade pairs with equivalent emissions tar- gets, mean emissions, and mean carbon prices, respectively. Across these matched pairs, the cap-and-trade mechanism produced much higher wholesale electricity prices (38.5% to 52.6% higher) and lower total electricity production (2.5% to 4.0% lower) than the “equivalent” carbon tax, without any lower carbon emissions. Market participants who forecast a lower price of carbon in the cap-and-trade games ran their units more than those who forecast a higher price of carbon, which caused emissions from the dirtiest generating units (Coal and Gas Peakers) to be significantly higher (15.2% to 33.0%) than in the carbon tax games. These merit order “mistakes” in the cap-and-trade games suggest an important advantage of the carbon tax as policy: namely, that the cost of carbon can treated by firms as a known input to production.
    JEL: Q4 Q52 Q54
    Date: 2020–05
  5. By: Intini, Mario (University of Bari Aldo Moro); Waterson, Michael (University of Warwick)
    Abstract: In Britain, the key source of renewable generation is wind, most abundant on the west coast of Scotland, where there is relatively little demand. For this reason, an interconnector, the Western Link, was built to take electricity closer to demand. When the Link is operating, payments by National Grid to constrain wind farms not to produce will be lower, we may predict, since fewer or less restrictive constraints need be imposed. But the Link has not been working consistently. We empirically estimate the link’s value. Focusing on the three most recent episodes of outage, starting on 4th May 2018 up to 25th September 2019, our essential approach is to treat these outages as a natural experiment using hourly data. Our results reveal that the Link had an important role in costs saved and price constrained and MWh curtailed reductions. We estimate a cost-saving of almost £30m. However, the saving appears to drop over time, so we investigate wind farms’ behavior. We find that wind farms behave strategically since the accuracy of wind forecasting depends on the relevant prices impacting their earnings
    Keywords: Interconnector, Electricity Market, Wind forecasting, Wind Generators, Pricing Strategies JEL Classification: D22 ; D47 ; H54 ; L22 ; Q41 ; Q47
    Date: 2020
  6. By: O'Connell, Martin; Smith, Kate
    Abstract: We study the design of taxes aimed at limiting externalities in markets characterized by differentiated products and imperfect competition. In such settings policy must balance distortions from externalities with those associated with the exercise of market power; the optimal tax rate depends on the nature of external harms, how the degree of market power among externality generating products compares with non-taxed alternatives, and how consumers switch across these products. We apply the framework to taxation of sugar sweetened beverages. We use detailed data on the UK market for drinks to estimate consumer demand and oligopoly pricing for the differentiated products in the market. We show the welfare maximizing tax rate leads to welfare improvements over 2.5 times as large as that associated with policy that ignores distortions associated with the exercise of market power.
    Keywords: corrective tax; externality; market power; oligopoly
    JEL: D12 D43 D62 H21 H23 L13
    Date: 2020–04
  7. By: Stephen P. Holland; Erin T. Mansur; Nicholas Z. Muller; Andrew J. Yates
    Abstract: We determine the environmental benefit of using electric buses rather than diesel or CNG for urban transit. For diesel and CNG we calculate air pollution damages by combining emission rates with damage valuations from the AP3 integrated assessment model and the social cost of carbon. For electric buses we calculate air pollution damages by combining the damage valuations with estimates of the marginal increase in emissions from electricity usage. The environmental benefit is positive on average across all counties in the contiguous U.S. when comparing electric to either diesel or CNG. The environmental benefit of operating an electric bus fleet (rather than diesel) is about $65 million per year in Los Angeles and above $10 million per year in six other MSAs. Including the environmental benefit, we calculate the net present value (NPV) of bus investment. Relative to diesel, the NPV benefit of an electric bus is positive in about two thirds of urban counties. Relative to CNG, the NPV benefit is negative in all counties.
    JEL: D62 H23 Q53 R40
    Date: 2020–05
  8. By: ITF
    Abstract: This report presents a model that helps to better understand how consumers in France choose their cars. It presents the results for different scenarios for the future development of the French vehicle fleet and projections for related CO2 emissions to 2050. The model distinguishes conventional, plug-in hybrid, battery-electric and fuel cell cars. It looks at the privately-owned as well as company car fleets and considers non-monetary factors for vehicle choice. Among these are personal preferences, the availability of recharging infrastructure for electric vehicles, and policy incentives such as subsidies or preferential vehicle use rights. The methodology and the data used for this new passenger car fleet model are described in detail.
    Date: 2019–11–04
  9. By: Newbery, D.
    Abstract: This paper calculates the cost per tonne of CO2 abated by Sizewell B (SZB, the nuclear power station commissioned in 1995). Other zero-carbon renewables received contractual support. A long-term Contract-for-Difference (CfD) is modelled with a strike price reset every 5 yrs. by the regulator under the Regulatory Asset Base model of electric utilities. The answer depends on the Weighted Average Cost of Capital (WACC), given the range of observed utility WACCs. At a low WACC the cost is £201934.1/tonne CO2 abated and £201949.2/t. CO2 at the high WACC, compared with the roughly £40/t. CO2 paid by GB generators in 2019. Had the design for SZB been replicated for the 6.4 GW new nuclear the saving might have been £9-18 billion.
    Keywords: Cost of CO2, Nuclear power, RAB, WACC, Cost Benefit Analysis
    JEL: D61 H23 L94 C54 E43 H54 L94 Q54
    Date: 2020–05–21
  10. By: Simshauser, P.; Gilmore, J.
    Abstract: The recent history of Australia’s National Electricity Market (NEM) from 2012-2017 has been problematic with sudden coal plant closures, a tight domestic gas market and sharply rising electricity prices. The supply-side response that followed from 2017-2020 was an investment megacycle – 12000MW of plant commitments comprising $20+ billion across 105 projects – most of them Variable Renewables. Problems emerged including entry lags, connection delays, system Frequency careering outside normal bands, failing system strength, rising Frequency Control Ancillary Service costs and increasing Operator interventions in the security-constrained dispatch process. Market institutions were caught out. Yet instead of identifying and addressing urgent problems, a suite of market redesign proposals emerged which focus on future investment and Resource Adequacy. In this article, we analyse recent NEM performance and find all pressing issues relate to realtime power system security, not Resource Adequacy, and reflect a Rate of Change problem stemming from record levels of simultaneous (asynchronous) new entry. Resolution requires establishment of ‘missing markets’ to restore power system resilience. Fundamental market redesign is a distraction – it may well become necessary but there is no united agreement as to why this is the case nor when it is required. As it stands, no reform proposal comes even close to resolving the NEM’s existing, and pressing, problems.
    Keywords: Renewables, energy markets, investment cycles
    JEL: D24 G31 L94
    Date: 2020–05–28
  11. By: Christoph Graf; Federico Quaglia; Frank A. Wolak
    Abstract: Using hourly offer curves from the Italian day-ahead market and the real-time re-dispatch market for the period January 1, 2017 to December 31, 2018, we show how thermal generation unit owners are able to profit from differences between a simplified day-ahead market design that ignores system security constraints as well as generation unit operating constraints, and real-time system operation where these constraints must be respected. We find that thermal generation unit owners increase or decrease their day-ahead offer prices depending on the probability that their final output will be increased or decreased relative to their day-ahead schedules because of real-time operating constraints. First, we estimate generation unit-level models of the probability of each of these outcomes conditional on forecast demand and renewable production in Italy and neighboring countries. Our most conservative estimate of the impact of a change in the probability a unit owner will have its day-ahead schedule increased in the real-time re-dispatch market implies a day-ahead offer price increase of 5 EUR/MWh if this probability changes by 0.1. If the probability of a day-ahead schedule decrease rises by 0.1 the unit owner's offer price is predicted to be 6 EUR/MWh less. Over our sample period, we find that the economic re-dispatch cost averaged approximately 15% of the total cost of energy consumption valued at the day-ahead price.
    JEL: Q4 Q41
    Date: 2020–05
  12. By: Guillaume Burghouwt (SEO Amsterdam Economics)
    Abstract: This paper presents a model framework for estimating second-order network effects and the resulting consumer welfare impacts at hub and non-hub airports. It emphasizes the benefits of looking beyond the initial demand and welfare impacts and identifying risks associated with policy interventions which may arise through the supply side.
    Date: 2019–11–13
  13. By: Bert van Wee (Delft University of Technology)
    Abstract: This paper discusses how regulations can determine environmental and safety outcomes in transport systems. It explores the relationships between regulations and direct and indirect costs, and between regulations and benefits. It also discusses the ethical issues, such as the fact that cost-benefit analysis evaluates welfare effects but tends to ignore equity issues.
    Date: 2019–11–13
  14. By: Riccardo Camboni (Department of Economics and Management - University of Padova and OIPE); Alberto Corsini (Université Côte d’Azur - CNRS, GREDEG and OIPE); Raffaele Miniaci (Department of Economics and Management - University of Brescia and OIPE); Paola Valbonesi (Department of Economics and Management - University of Padova and OIPE)
    Abstract: We use the nearest neighbour propensity score matching to link dwellings holding Energy Performance Certificates (EPCs) in the Italian province of Treviso with information on the socio-economic characteristics of households most likely to inhabit them. We construct a database of 17,405 dwellings for which information on standardized energy needs is matched to data on (potential) inhabitants and their imputed income, based respectively on census records and survey data. Our analysis shows that EPC registers can be exploited to investigate how income and housing conditions affect fuel poverty and to identify municipal areas with higher fuel poverty risk. Our findings highlight that when designing interventions to reduce fuel poverty, policymakers should target households based not only on their income but also on type of heating fuel, and on efficiency and the size of their accommodation.
    Keywords: Fuel Poverty, Energy Performance Certificates (EPCs), Building and dwelling Efficiency, Energy: Government Residential Policy
    JEL: C21 I32 Q48
    Date: 2020–06
  15. By: Simshauser, P.
    Abstract: A central feature of electricity market reforms involved restructuring monopoly utilities. In the Generation segment, policies promoting restructuring and competition could not be faulted on the grounds of scale economies. But the partitioning of Generation from Retail received little focus. When proposals for industry restructuring emerged, multi-stage scope economies should have been of unquestionable interest but surprisingly little empirical evidence existed. Governments proceeded in the 1990s with an industrial organisation blueprint which separated Generation from Networks, and combined Retail with Distribution Networks. A second wave of industrial organisation was orchestrated by capital markets in the 2000s, splitting Retail from Distribution, and merging Retail with Generation. Many policymakers and regulators view the practice of vertical integration in a neoclassical sense; presenting risks of withholding capacity, increasing prices, raising barriers to entry, non-integrated rival foreclosure and damaging consumer welfare. But the weight of theoretical and empirical evidence points to the contrary, with transaction costs featuring prominently. In this article, a Generator and Retailer are simulated over 15 years of trade in Australia’s National Electricity Market as stand-alone businesses, and then as a merged entity. A comparison of the Sum-Of-The-Parts with the Vertical Firm reveals non-trivial transaction costs and multi-stage economies of integration – the Vertical Firm reduces costs by 17% and volatility of earnings by 83%, which produces a 26% improvement in credit quality and lifts statutory profits by 34% holding prices and volumes constant.
    Keywords: vertical integration, electricity markets, energy-only markets, transaction costs, credit ratings
    JEL: D23 D24 G34 L94
    Date: 2020–05–12
  16. By: Danae Hernandez-Cortes; Kyle C. Meng
    Abstract: Market-based environmental policies are widely adopted on the basis of allocative efficiency. However, there is a growing distributional concern that market forces could increase the pollution exposure gap between disadvantaged and other communities by spatially reallocating pollution. We estimate how this “environmental justice gap” changed following the 2013 introduction of California’s carbon market, the world’s second largest and the one most subjected to environmental justice critiques. Embedding a pollution transport model within a program evaluation framework, we find that while the EJ gap was widening prior to 2013, it has since fallen by 21-30% across pollutants due to the policy.
    JEL: H4 I14 Q5 Q51 Q52 Q53 Q54
    Date: 2020–05
  17. By: Giulia Brancaccio; Myrto Kalouptsidi; Theodore Papageorgiou; Nicola Rosaia
    Abstract: In this paper we explore efficiency and optimal policy in decentralized transportation markets that suffer from search frictions, such as taxicabs, trucks and bulk shipping. We illustrate the impact of two externalities: the well-known thin/thick market externalities and what we call pooling externalities. We characterize analytically the conditions for efficiency, show how they translate into efficient pricing rules, as well as derive the optimal taxes for the case where the planner is not able to set prices. We use our theoretical results to explore welfare loss and optimal policy in dry bulk shipping. We find that the constrained efficient allocation achieves 6% welfare gains, while the first-best allocation corresponding to the frictionless world, achieves 14% welfare gains. This suggests that policy can achieve substantial gains, even if it does not alleviate search frictions, e.g. through a centralizing platform. Finally, we demonstrate that simple policies designed to mimic the optimal taxes perform well.
    JEL: F1 L0 L91 R4 R48
    Date: 2020–06
  18. By: Andrea Attar (TSE - Toulouse School of Economics - EHESS - École des hautes études en sciences sociales - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique - UT1 - Université Toulouse 1 Capitole); Thomas Mariotti (TSE - Toulouse School of Economics - EHESS - École des hautes études en sciences sociales - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique - UT1 - Université Toulouse 1 Capitole); Francois Salanie (TSE - Toulouse School of Economics - EHESS - École des hautes études en sciences sociales - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique - UT1 - Université Toulouse 1 Capitole)
    Abstract: We study a discriminatory limit-order book in which market makers compete in nonlinear tariffs to serve a privately informed insider. Our model allows for general nonparametric specifications of preferences and arbitrary discrete distributions for the insider's private information. Adverse selection severely restricts equilibrium outcomes: in any pure-strategy equilibrium with convex tariffs, pricing must be linear and at most one type can trade, leading to an extreme form of market breakdown. As a result, such equilibria exist only under exceptional circumstances that we fully characterize. These results are strikingly different from those of existing analyses that postulate a continuum of types. The two approaches can be reconciled when we consider epsilon-equilibria of games with a large number of market makers or a large number of types.
    Keywords: adverse selection,competing mechanism,limit-order book
    Date: 2019

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