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Economics of Energy & Environmental Policy
Volume 4, Number 2

Symposium on ‘International Climate Negotiations’

Negotiating effective institutions against climate change

Christian Gollier and Jean Tirole

DOI: http://dx.doi.org/10.5547/2160-5890.4.2.cgol
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In environmental matters, the free riding generated by the lack of collective action is aggravated by concerns about leakages and by the desire to receive compensation in future negotiations. The dominant "pledge and review" approach to mitigation will deliver appealing promises and renewed victory statements, only to prolong the waiting game. The climate change global commons problem will be solved only through coherent carbon pricing. We discuss the roadmap for the negotiation process. Negotiators must return to the fundamentals: the need for uniform carbon pricing across countries, for verification, and for a governance process to which countries would commit. Each country would enjoy subsidiarity in its allocation of efforts within the country. We suggest an enforcement scheme based on financial and trade penalties to induce all countries to participate and comply with the agreement. Finally, the choice among economic approaches, whether a carbon price commitment or a cap-and-trade, is subject to trade-offs, on which alternative reasonable views may co-exist. We discuss monitoring reasons for why we personally favor an international cap-and-trade agreement.

Overcoming the Copenhagen Failure with Flexible Commitments

Joseph E. Stiglitz

DOI: http://dx.doi.org/10.5547/2160-5890.4.2.jsti
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The fundamental issues presented by climate change are first, that the global environment is a global public good and second, the question of how to share the burden of providing a better climate. Everyone would like to "free ride" on the efforts of others, but there is disagreement over who is free riding. The Kyoto approach, based on dividing up emission rights, has an inherent problem in that such rights could easily reach a monetary value of over a trillion dollars a year. The approach suggested here avoids any attempt at a grand solution to the fair allocation of these rights. A low-carbon economy could be achieved through the imposition of a moderate carbon price, which would raise substantial revenue and allow a reduction in other taxes, thereby keeping the deadweight loss small. Countries should be given flexibility in how they meet their obligations - whether through a carbon tax, a system of cap and trade, or even possibly certain regulatory mechanisms. But a fully voluntary agreement likely cannot include countries that export a significant amount of fossil fuel. A green fund financed by allocating say 20% of carbon revenues collected in developed countries could be used to implement "differentiated responsibilities."

Internalizing the Climate Externality: Can a Uniform Price Commitment Help?

Martin L. Weitzman

DOI: http://dx.doi.org/10.5547/2160-5890.4.2.mwei
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It is difficult to resolve the global warming free-rider externality problem by negotiating many different quantity targets. By contrast, negotiating a single internationally-binding minimum carbon price (the proceeds from which are domestically retained) counters self-interest by incentivizing agents to internalize the externality. In this contribution I attempt to sketch out, mostly with verbal arguments, the sense in which each agent's extra cost from a higher emissions price is counter-balanced by that agent's extra benefit from inducing all other agents to simultaneously lower their emissions in response to the higher price. Some implications are discussed. While the paper could be centered on a more formal model, here the tone of the discussion resembles more that of an exploratory think piece directed to policy-makers and the general public.

An International Carbon-Price Commitment Promotes Cooperation

Peter Cramton, Axel Ockenfels, and Steven Stoft

DOI: http://dx.doi.org/10.5547/2160-5890.4.2.aock
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To promote cooperation in international climate negotiations, negotiators should focus on a common commitment. Such commitments have the advantage of facilitating reciprocal "I will if you will" agreements in a group. Reciprocity is the basis for cooperation in repeated public goods games, and a uniform price would provide a natural focal point for a common international commitment. Such a price is also essential for efficient abatement. Countries would retain flexibility in how to implement the price - with cap-and-trade, a carbon tax, or a hybrid approach. Country risk is reduced relative to risk under international cap-and-trade since carbon revenues stay within the country. Price commitments also tend to equalize effort intensity and can facilitate enforcement. To encourage participation by less-developed countries, a green fund is needed to transfer money from richer to poorer countries. Transfers are smaller and more predictable with a uniform price commitment than with international cap and trade.


Security of Supply, the Role of Interconnectors and Option Values : insights from the GB Capacity Auction

David Newbery and Michael Grubb

DOI: http://dx.doi.org/10.5547/2160-5890.4.2.dnew
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The UK Government has carefully designed a Capacity Mechanism to deliver reliable electricity. This paper criticises the determination of the amount to procure, and argues that the amount set for the first auction was excessive, particularly (but not exclusively) in ignoring the contribution from interconnectors. Too little attention was given to either the political economy or the option value aspects. Procuring too little raises fears of 'the lights going out', but over-procurement increases consumer costs; undermines renewables by transferring capped finance to fossil generators; and impedes the Single Market including by weakening the business case for interconnectors. Making more use of the demand-side and potentially available 'latent' capacity lowers risk and increases options allowing more capacity procurement to be deferred. Capacity markets are intended to address problems of 'missing money' in terms of energy-only market incentives to invest; but over-procurement risks exacerbating the underlying problem, whereas addressing market failures and missing markets, and properly accounting for interconnectors, reduces the underlying problem.

The Green Paradox of U.S. Biofuel Subsidies: Impact on Greenhouse Gas Emissions

Maura Allaire and Stephen P. A. Brown

DOI: http://dx.doi.org/10.5547/2160-5890.4.2.mall
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This paper presents the first comprehensive estimates of the impact of U.S. biofuel subsidies on greenhouse gas emissions. Although U.S. support for biofuels is large and growing, the associated impact on greenhouse gas emissions remains unclear. The effect of biofuel subsidies on emissions is determined by the relative magnitudes of countervailing substitution and price effects. Regulators typically ignore the price effect of biofuel policies, and therefore do not fully account for market and climate impacts. We develop an economic simulation model of U.S. energy markets to estimate the impact of biofuel subsidies on greenhouse gas emissions from 2005 through 2009. The model represents end-use consumption of oil, natural gas, coal and electricity in four sectors. We find that the subsidies for ethanol increased greenhouse gas emissions, while those for biodiesel have an ambiguous effect. Thus, ethanol subsidies create a green paradox. Although ethanol has lower lifecycle greenhouse gas emissions than gasoline, the subsidies lower the market price of blended fuel, which increases overall fuel consumption and increase total greenhouse gas emissions. These findings question the suitability of using ethanol subsidies to achieve climate goals and highlight the importance of accounting for the price effect of biofuel policies.

Revisiting the Cost Escalation Curse of Nuclear Power: New Lessons from the French Experience

Lina Escobar Rangel and Francois Leveque

DOI: http://dx.doi.org/10.5547/2160-5890.4.2.lran
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In several OECD countries such as the United Kingdom, the United States and France, nuclear power is envisioned as having a role to play alongside renewables to reduce greenhouse gas emissions. Leaving aside post-Fukushima-Daiichi safety concerns, the major issue for nuclear power is whether new builds could be achieved at reasonable costs. In fact, ever since the completion of the first wave of nuclear reactors in 1970, and continuing with the ongoing construction of new reactors in Europe, nuclear power seems to be doomed with the curse of cost escalation. This phenomenon has been studied for the U.S., and it has been argued that a heterogeneous nuclear fleet, which has made it difficult to learn from experience, can partially explain the escalation. The French nuclear power programme has followed a standardization strategy; however, previous cost assessments have also pointed to an increase in capital costs. This observation implies that even in the best economic conditions, cost escalation is inherent to nuclear power. In this paper we re-examine the drivers of cost escalation in France, based on construction costs taken from a recent report by the French Court of Auditors (i.e. Cour des Comptes). Using this information, we found that the cost escalation observed in previous studies was lower than argued. Our results indicate that the scale-up resulted in more costly reactors, but we also found evidence of learning effects from these same reactors. This finding shows that the standardization strategy adopted in the French nuclear programme has led to significant cost reductions.

Evaluating Renewable Portfolio Standards for In-State Renewable Deployment: Accounting for Policy Heterogeneity

Gireesh Shrimali, Gabriel Chan, Steffen Jenner, Felix Groba and Joe Indvik

DOI: http://dx.doi.org/10.5547/2160-5890.4.2.gshr
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Renewable portfolio standards (RPS) are the most common state-level policies for promoting renewable electricity in the United States. State RPS policies are heterogeneously designed, particularly with respect to their use of flexibility mechanisms that allow obligations to be met with renewable energy generated in other states. However, the renewable energy that is produced within an RPS-enacting state itself is of high political importance, making in-state renewable energy deployment an important evaluation metric for RPS policies. In this paper, we develop a novel dataset of state-level RPS policies and renewable energy deployment. We show that failing to effectively limit comparisons to similarly designed RPS policies may lead to the misperception that more stringent RPS policies do not necessarily lead to higher renewable deployment. We then show that after controlling for specific policy design features, states with more stringent RPS policies tend to have greater in-state renewable energy deployment. Specifically, we find that a 1 percentage point increase in the stringency of an RPS policy is associated with a 0.28-0.29 percentage point increase in the share of in-state renewable electricity capacity. Articulate modeling of policy variety has been largely lacking from past studies and is essential for accurate econometric analysis of heterogeneous energy policies.

Towards a general “Europeanization” of EU Member States’ energy policies?

Sebastian Strunz, Erik Gawel, and Paul Lehmann

DOI: http://dx.doi.org/10.5547/2160-5890.4.2.sstr
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It is often argued that energy policy is too fragmented across EU Member States and should be "Europeanized" to pave the way towards an efficiently organized European power system, which rests on the internal market for energy and a pan-European super-grid. However, this view neglects i) the heterogeneity of European energy policies in terms of harmonization and centralization, ii) economic arguments in favor of decentralization and iii) legal as well as political-economic obstacles against centralization of decision making. In this vein, we point out that a plea for a stronger role of the EU needs to be made with care and differentiation.

All quiet on the western front? Transmission capacity development in the Nordic electricity market

Mari Makkonen, Mats Nilsson and Satu Viljainen

DOI: http://dx.doi.org/10.5547/2160-5890.4.2.mmak
View Abstract

Infrastructure plays an obvious and crucial role in electricity markets. Physical infrastructure must exist for the supply to meet demand in real time. In addition, it accommodates the efficient exchange of cost-efficient production across borders, and can bean important part ofsharingresourcesforreliabilitypurposes.However, in the historically successful Nordic electricity market, the cross-border transmission grid investments are lagging behind the original schedule agreed between the Nordic TSOs. Moreover, in early 2013, the Norwegian and Swedish Transmission System Operators (TSOs) cancelled the planned, by many considered critical, Hasle (Westlink) transmission capacity increase. This paper addresses several issues concerning the cross-border transmission planning and its role for successful integration of the electricity markets. We aim at evaluating the impact of different institutional requirements for key entities as well as the changing governance structure to highlight how the infrastructure development paths are dependent on these. The evaluation of the governance structure presented in this paper is based on the historical experiences of the Nordic electricity market. Our findings suggest that the national goals in transmission development contradict the Nordic capacity development targets.

Book Reviews

Book Reviews

Climate Policy and Nonrenewable Resources. The Treen Paradox and Beyond, edited by Karen Pittel, Rick van der Ploeg, and Cees Withagen - Book Review by: Scott Barrett

The Economics of Electricity Markets, by Daryl R. Biggar and Mohammed Reza Hesamzadeh - Book Review by: Frode Skjeret

International Energy Governance. Selected Legal Issues, by Rafael Leal-Arcas, Andrew Filis, and Ehab S. Abu Gosh - Book Review by: Iva Mihaylova

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