Facebook LinkedIn Twitter
Recent Issues

View Cart   

Economics of Energy & Environmental Policy
Volume 7, Number 2

Winners and Losers of EU Emissions Trading: Insights from the EUTL Transfer Dataset

Johanna Cludius

DOI: 10.5547/2160–5890.7.2.jclu
View Abstract

This paper analyses distributional effects between participants of the EU Emissions Trading System (EU ETS) during its first trading period. To this end, a selection model is formulated and applied to a dataset based on account information and transfer data from the EU Transaction Log (EUTL). Four different ways of adding carbon prices to the dataset are explored. Findings confirm that whether a company made a gain during the first period of EU emissions trading is highly dependent on the level of free allocation it received. Consequently, large industrial companies, especially in the iron and steel and cement sectors emerge as the biggest 'winners' as they were the companies with the highest allocation surplus. This also applies to a number of electricity generators located in Central and Eastern Europe. Policy makers therefore have to be mindful about decisions regarding the level of free allocation to individual sectors and companies, as those design choices have a large influence on the way in which gains and costs are distributed under the system, which in turn has repercussions on its political acceptability. Rules for free allocation are harmonised at EU-level since the beginning of the third trading period, but relatively generous free allocation to industrial sectors and additional sources of unequal treatment remain. The analysis also confirms that small companies were less likely to participate, which points to the existence of significant transaction costs preventing many small companies from realising potential gains on the market (as well as jeopardising the efficiency of the system). It is therefore important to reduce transaction costs for small companies, in particular at the beginning of an ETS, in order to incentivise market entry.

How Renewable Energy is Reshaping Europe’s Electricity Market Design

L.J. De Vries and R.A. Verzijlbergh

DOI: 10.5547/2160–5890.7.2.ldev
View Abstract

We present a systematic review of the challenges to the regulation of electricity markets that are posed by the integration of variable renewable energy sources. System integration is the key to developing the required flexibility, because flexibility options exist at all system levels and within the competitive as well as in the regulated (network) domains. The fluctuating nature of variable renewable energy changes the dynamics of investment decisions. We develop a framework for analysing relations between aspects of the regulation of the power sector that need to be coordinated in order to achieve (or at least improve) economic efficiency. We base the framework on the technical functionalities of the electricity infrastructure, which we group along three dimensions: system level (from retail/distribution to transmission/wholesale), geographic scope (the connection between electricity systems) and time scales (from real-time operations and balancing markets to the investment time scale). The framework helps identify regulatory challenges - potential inefficiencies due to a lack of coordination - and to place them into context. The picture that emerges from this approach is that the institutional fragmentation of the European electricity sector will become increasingly burdensome as the development variable renewable energy requires ever closer coordination between countries, between the different levels of the electricity system and between markets that serve different time scales. Interactions between elements of market design and regulation such as congestion management, renewable energy policy and system adequacy policy affect each other and are an additional reason for a system integration approach to regulation.

How Do Low Gas Prices Affect Costs and Benefits of US New Vehicle Fuel Economy Standards?

Joshua Linn, Virginia McConnell, and Benjamin Leard

DOI: 10.5547/2160-5890.7.2.jlin
View Abstract

In their initial benefit-cost analysis of the 2012-2016 passenger vehicle fuel economy standards, the U.S. regulatory agencies estimated that the benefits of the standards would be three times greater than the costs. However, their analysis was based on the high gasoline prices forecasted at the time; after their analysis, expected gasoline prices fell by 25 percent. We augment the agencies' benefit-cost framework and use recent evidence on behavioral responses to gasoline prices to estimate the effects of low gasoline prices on benefits and costs. Accounting for consumer changes in miles traveled and vehicle choice, we find that the 25 percent reduction in future gasoline prices reduces the value of fuel savings by 22 percent. Because of consumer changes in vehicle choice, lower gasoline prices raise compliance costs by about $0.5 billion per year, or about 9 percent of the total net benefits of the program. Accounting for these responses does not overturn the agencies' initial conclusions that benefits exceed costs.

From COP21 pledges to a fair 2°C pathway

F. Babonneau, A. Haurie, and M. Vielle

DOI: 10.5547/2160–5890.7.2.fbab
View Abstract

At the COP21, about 160 countries proposed the so-called INDCs that define GHG abatement objectives by 2030. While encouraging, these commitments are not ambitious enough to achieve the 2�C threshold by 2100, and further negotiations are needed. There is, therefore, a necessity to assess the economic consequence of a pathway to 2�C and the fair sharing of this burden. In this paper, we use a game theoretic approach for the design of fair agreements concerning additional abatements up to 2050. The simulations performed with our model confirm the weakness of INDC pledges but show that, with political determination, an equitable burden-sharing agreement can be achieved with very reasonable costs for all nations of approximately 0.8% of total discounted household consumption. With a more ambitious 1.5�C target, global cost is multiplied by a factor of four revealing the stringency of such an objective. Numerical results also show that the implementation of an international carbon market and participation of all countries in the game are crucial elements for reaching equitable burden-sharing among countries. For example, considering a reduced G20 coalition, welfare losses are multiplied by a factor of three for coalition members. Our simulations also permit a first evaluation of the possible impacts of the recently announced USA withdrawal from the Paris agreement.

The Coupled Cycles of Geopolitics and Oil Prices

Mahmoud A. El-Gamal and Amy Myers Jaffe

DOI: 10.5547/2160-5890.7.2.melg
View Abstract

We analyze the coupled cycles of Middle-East geopolitical violence and oil prices. Building on earlier work that shows that low oil prices are regularly followed by geopolitical strife, and that the latter is usually followed by higher oil prices, due to actual or feared disruption in oil supply, we focus in this paper on one particular factor: Which geopolitical events are most likely to lead to sustained supply disruptions? Using discrete wavelet analysis of oil production at the country level, we find that military conflicts that destroy production installations or disrupt oil transportation networks are the most significant antecedents of sustained, long term, disruptions in oil supply; whereas nonviolent regime change, internal political strife, and low level geopolitical tensions have more limited sustained impact. We discuss a framework to analyze whether conflict-related disruptions to oil supply could be endogenous to the oil cycle and offer some policy considerations for ameliorating that cycle's impacts.

Not a member of IAEE and wish to regularly receive EEEP? Click here to join IAEE.