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Economics of Energy & Environmental Policy
Volume 3, Number 1

Symposium on ‘Energy Price Reform’

Energy subsidies: How large are they and how can they be reformed?

Benedict Clements, David Coady, Stefania Fabrizio, Sanjeev Gupta, and Baoping Shang

DOI: http://dx.doi.org/10.5547/2160-5890.3.1.bcle
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Energy subsidies are pervasive. Pretax subsidies, which arise when energy consumers pay less than the supply cost of energy, are high in many developing and emerging economies. Although pretax subsidies are not prevalent in advanced economies, they have large tax subsidies. These arise when energy is taxed below the rate of other consumption goods and are not high enough to capture the negative externalities from energy consumption, including the effects on climate change, local pollution, and traffic congestion. Posttax subsidies (the sum of pretax and tax subsidies) are estimated at about US$2 trillion (2.9 percent of global GDP) in 2011, with advanced economies accounting for a substantial share of the total. Energy subsidies aggravate fiscal imbalances, depress growth, damage the environment, and reinforce inequality. Country experience suggests that well-designed energy subsidy reform strategies can win public support. A far-reaching communications strategy, appropriately phased energy price increases, and targeted mitigating measures to protect the poor are among the most important elements of these strategies.

Taxing Energy Use in the OECD

Michelle Harding, Chiara Martini and Alastair Thomas

DOI: http://dx.doi.org/10.5547/2160-5890.3.1.mhar
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This article compares effective tax rates, in energy and carbon terms, on the full spectrum of energy use across the OECD, highlighting notable differences in the taxation of energy in OECD countries. The analysis strongly suggests that current taxes are not well geared towards attaining environmental, budgetary and distributional policy objectives. Incoherencies from an environmental policy perspective include the lower taxation of diesel relative to gasoline for road use and the low tax rates applied to many fuels employed for heating and process use, and particularly to coal, which has considerably higher emissions of carbon and air pollutants per unit of energy than other fuels.

Energy Reforms and Consumer Prices in the EU over twenty Years

Massimo Florio

DOI: http://dx.doi.org/10.5547/2160-5890.3.1.mflo
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To what extent have the European households benefited from the energy reforms of the last two decades in the EU? The core ingredients of change have been, in different proportions and timing across countries: privatization of formerly state-owned enterprises, unbundling of networks, market liberalization and regulation. This paper summarizes some empirical findings of a team of researchers at the University of Milan about the impact of the reforms on energy prices (1990-2007) for EU-15 households. Econometric testing of the impact of the reforms (measured by OECD/ECTR scores) on prices of electricity and gas finds that public ownership of the incumbents is correlated with lower prices for households; unbundling per se has no statistically significant effect; the evidence about liberalization is mixed. Price inertia, sources of primary energy in electricity, and oil price in gas are still the core price determinants. Customers' satisfaction with prices confirms these findings. There is some evidence that consumers are subjectively happy with the opportunity to switch their electricity supplier, even if the objective evidence about the actual benefit of doing this is limited.


Do Consumers Want Smart Meters? Incentives or Inertia: Evidence from North Carolina and Lessons for Policy

Peter A. Groothuis and Tanga McDaniel Mohr

DOI: http://dx.doi.org/10.5547/2160-5890.3.1.pgro
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In an effort to improve efficiency of electrical markets the U.S. government hopes to encourage changing household use patterns, such as dishwasher and clothes dryer use, to off-peak times. One strategy has been to subsidize the installation of smart meters. In addition the government has encouraged electrical energy conservation by providing incentives for energy saving technologies such as the purchase of energy star appliances or increased insulation in the home. Households have sometimes been slow to respond. Using a survey of public opinion, we explore which individuals are more likely to adopt energy saving technologies and smart meters. We also explore the incentives required to adopt smart meters in the home.

Demand Side Response: Patterns in Europe and Future Policy Perspectives under Capacity Mechanisms

Jacopo Torriti and Philipp Grunewald

DOI: http://dx.doi.org/10.5547/2160-5890.3.1.jtor
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Demand Side Response (DSR) has been slow to emerge in European electricity markets. This paper aims to both examine the reasons for low levels of DSR in Europe and reflect on factors that might affect the participation of DSR in capacity mechanisms. It relies on available evidence from the literature, secondary data on existing DSR programmes and energy aggregator's data from industries participating in DSR. Findings show that changes to the duration of contracted loads under existing or new programmes might increase the penetration of DSR. The introduction of capacity mechanisms may increase DSR from demand turn down if longer response times were available.

Germany's Nuclear Phase-out: Sensitivities and Impacts on Electricity Prices and CO2 Emissions

Brigitte Knopf, Michael Pahle, Hendrik Kondziella, Fabian Joas, Ottmar Edenhofer, and Thomas Bruckner

DOI: http://dx.doi.org/10.5547/2160-5890.3.1.bkno
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Following the nuclear meltdown in Fukushima Daiichi, in summer 2011 the German parliament decided to phase-out nuclear power by 2022. When this decision was taken, a number of model-based analyses investigated the influence this decision would have on electricity prices and CO2 emissions. They concluded that CO2 emissions would be kept at levels that are in line with national reduction targets but that the phase-out would result in an increase in wholesale electricity prices. We show by means of a sensitivity analysis that results crucially hinge on some fundamental model assumptions. These particularly include the development of fossil fuel and CO2 prices, which have a much larger influence on the electricity price than the nuclear phase-out itself. Since the decision of the nuclear phase-out, CO2 prices have decreased and deployment of renewables increased ever since. This partly counteracts the negative effect of the nuclear phase-out on electricity prices, but on the other hand challenges the mitigation of CO2 emissions and security of supply. This underlines the importance of sensitivity analyses and suggests that policy-makers need to consider scenarios that analyze the whole range of possible future developments.

New Alignments? The Geopolitics of Gas and Oil Cartels and the Changing Middle East

Songying Fang, Amy Myers Jaffe and Ted Loch-Temzelides

DOI: http://dx.doi.org/10.5547/2160-5890.3.1.sfan
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The ongoing democratic movements and civil wars in the Middle East have challenged the stability of regimes across the region. On the other hand, the commercial exploitation of large reserves of unconventional oil and gas in the United States is poised to significantly change the current equilibrium in energy markets. What are the implications of these developments on Saudi Arabia's energy policy? Will the long-standing U.S.-Saudi alliance remain the cornerstone of the kingdom's relationship with the outside world? We study these questions using a game-theoretic approach. Specifically, we investigate whether the new political and economic trends may warm the Saudi regime to a workable energy cartel with Russia. We analyze the outcomes from different coalitions that could form among major energy suppliers and show that this is indeed a possibility. We discuss the implications of our results for U.S. policy toward Saudi Arabia.

Book Reviews

Book Reviews

The Economics of Electricity Markets—Theory and Policy, edited by Pippo Ranci and Guido Cervigni - Book Review by: Nils-Henrik M. von der Fehr

Evolution of Global Electricity Markets—New Paradigms, New Challenges, New Approaches, edited by Fereidoon P. Sioshansi - Book Review by: Nils-Henrik M. von der Fehr

Moving Towards Low Carbon Mobility, edited by Moshe Givoni and David Banister - Book Review by: Gunnar S. Eskeland

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