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Energy Journal Issue

The Energy Journal
Volume 40, Number 1



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The Political Economy of a Carbon Price Floor for Power Generation

David M. Newbery, David M. Reiner, and Robert A. Ritz

DOI: 10.5547/01956574.40.1.dnew

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Abstract:
The EU carbon price lies well below estimates of the social cost of carbon and "target-consistent" carbon prices needed to deliver ambitious targets such as the 40% reduction target for 2030. In light of this, the UK introduced a carbon price floor (CPF) for its electricity sector in 2013 and the new Dutch Government has recently made a similar commitment, while successive French Governments have called for an EU-wide CPF. This paper analyzes the impacts and design of a power-sector CPF, both at the EU and national level, using a political-economy approach. We find a good case for introducing such a price-based instrument into the EU ETS. We suggest that a CPF should be designed to "top up" the EUA price to �25-30/tCO2, rising annually at 3-5% above inflation, at least until 2030. We argue that the new EU Market Stability Reserve enhances the value of a CPF in terms of delivering climate benefits, and discuss the potential for a regional CPF in North-West Europe. We also review international policy experience with price floors (and ceilings).




Explaining the Evolution of Passenger Vehicle Miles Traveled in the United States

Benjamin Leard, Joshua Linn, and Clayton Munnings

DOI: 10.5547/01956574.40.1.blea

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Abstract:
After growing steadily for several decades, passenger vehicle miles traveled (VMT) in the United States unexpectedly leveled off in the 2000s. The growth rate of VMT has since rebounded, and determining the factors that explain these developments has implications for future U.S. oil consumption and vehicle pollution. We show that changes in the demographics and economic characteristics of households in the United States, rather than in driving habits, explain most of the recent dynamics. This suggests that over the next decade, VMT in the United States will continue to grow roughly at historical rates, causing substantially higher oil consumption and pollution than if persistent changes in driving habits explained the recent changes in VMT. The projected VMT growth will raise the cost of meeting energy security, climate, and local air quality objectives.




External Costs of Transporting Petroleum Products: Evidence from Shipments of Crude Oil from North Dakota by Pipelines and Rail

Karen Clay, Akshaya Jha, Nicholas Muller, and Randall Walsh

DOI: 10.5547/01956574.40.1.kcla

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Abstract:
Using data for crude oil transported out of North Dakota in 2014, this paper constructs new estimates of the air pollution, greenhouse gas, and spill and accident costs from long-distance movement of petroleum products by rail and pipelines. Our analysis has three main findings. First, air pollution and greenhouse gas costs are nearly twice as large for rail as for pipelines. Second, air pollution and greenhouse gas costs are much larger than estimates of spill and accidents costs. Third, air pollution and greenhouse gas costs of transporting fuel by rail and pipelines are one-fifth to one-tenth of the costs of combusting fuel in motor vehicles. These results suggest that the policy debate surrounding crude oil transportation may be putting too much relative weight on spills and accidents, while overlooking a far more serious external cost: air pollution and greenhouse gas emissions.




Efficient and Equitable Policy Design: Taxing Energy Use or Promoting Energy Savings?

Florian Landis, Sebastian Rausch, Mirjam Kosch, and Christoph Böhringer

DOI: 10.5547/01956574.40.1.flan

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Abstract:
Should energy use be lowered by using broad-based taxes or through promoting and mandating energy savings through command-and-control measures and targeted subsidies? We integrate a micro-simulation analysis, based on a representative sample of 9,734 households of the Swiss population, into a numerical general equilibrium model to examine the efficiency and equity implications of these alternative regulatory approaches. We find that at the economy-wide level taxing energy is five times more cost-effective than promoting energy savings. About 36% of households gain under tax-based regulation while virtually all households are worse off under a promotion-based policy. Tax-based regulation, however, yields a substantial dispersion in household-level impacts whereas heterogeneous household types are similarly affected under a promotion-based approach. Our analysis points to important trade-offs between efficiency and equity in environmental policy design.




Short- to Mid-term Day-Ahead Electricity Price Forecasting Using Futures

Rick Steinert and Florian Ziel

DOI: 10.5547/01956574.40.1.rste

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Abstract:
Due to the liberalization of markets, the change in the energy mix and the surrounding energy laws, electricity research is a dynamically altering field with steadily changing challenges. One challenge especially for investment decisions is to provide reliable short to mid-term forecasts despite high variation in the time series of electricity prices. This paper tackles this issue in a promising and novel approach. By combining the precision of econometric autoregressive models in the short-run with the expectations of market participants reflected in future prices for the short- and mid-run we show that the forecasting performance can be vastly increased while maintaining hourly precision. We investigate the day-ahead electricity price of the EPEX Spot for Germany and Austria and setup a model which incorporates the Phelix future of the EEX for Germany and Austria. The model can be considered as an AR24-X model with one distinct model for each hour of the day. We are able to show that future data contains relevant price information for future time periods of the day-ahead electricity price. We show that relying only on deterministic external regressors can provide stability for forecast horizons of multiple weeks. By implementing a fast and efficient lasso estimation approach we demonstrate that our model can outperform several other models in the literature.




Aid, Growth, Remittances and Carbon Emissions in Nepal

Kishor Sharma, Badri Bhattarai, and Salma Ahmed

DOI: 10.5547/01956574.40.1.ksha

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Abstract:
Using historical data from Nepal - one of the largest recipients of aid among South Asian countries - this paper investigates the link between foreign aid, growth, remittances and carbon dioxide (CO2) emissions. The investigation of this issue is particularly important, as policy makers in the least developed countries are increasingly concerned about growing reliance on energy imports, particularly fossil fuels, and increasing CO2 emissions. Mounting energy consumption has not only made their economies vulnerable to environmental disasters and increased health costs, but also to external shocks due to frequent fluctuations in international market prices for petroleum products. Since available studies are largely based on cross-sectional data - which lump together countries with different characteristics - empirical evidence is contradictory. In-depth case studies of countries with different backgrounds would certainly provide better insights into the link between aid, growth, remittances and CO2 emissions, and contribute to ongoing policy dialogue. Our empirical results, based on an in-depth case study of Nepal, suggest that more foreign aid and remittances reduce CO2 emissions, whereas financial development and higher income increase CO2 emissions. These findings point to the importance of market mechanisms for regulating financial development and higher income to control CO2 emissions, without undermining competitiveness.




Measuring and Assessing the Evolution of Liquidity in Forward Natural Gas Markets: The Case of the UK National Balancing Point

Lilian M. de Menezes, Marianna Russo, and Giovanni Urga

DOI: 10.5547/01956574.40.1.lmen

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Abstract:
Following the development of natural gas trading hubs in Europe, forward products have become a response to the higher exposure to price risk faced by energy companies. Yet, a significant share of trade occurs over-the-counter (OTC), where inter-dealer brokers act as intermediaries and deals may be customized. Hence, there are concerns about transparency and market quality, of which liquidity is a main indicator. This study investigates liquidity in the largest one-month-ahead European forward market for natural gas in the period from May 2010 to December 2014, using asynchronous high-frequency data and time-varying measures of spread and price impact from the financial market microstructure literature. The usefulness of these measures in the seasonal and evolving National Balancing Point (NBP) is assessed. Different aspects of liquidity and transaction costs are unveiled.




Price Adjustments and Transaction Costs in the European Natural Gas Market

Rafael Garaffa, Alexandre Szklo, André F. P. Lucena, and José Gustavo Féres

DOI: 10.5547/01956574.40.1.rgar

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Abstract:
The presence of long-term contracts indexed to oil prices is a key feature of the evolution of the European natural gas industry. During the 2000's, the European Commission (EC) promoted reforms to establish a single and integrated natural gas market, leading to the development of short-term regional markets based on hubs. This paper tests the hypothesis that asymmetric price responses in the continental European hubs derive from transaction costs. By applying linear and nonlinear error correction models, it assesses the price transmission dynamics and the degree of integration between the German, the Belgium and the Dutch spot markets. The models identified cointegration relations, price asymmetries and transaction costs in these markets. Results show a high degree of integration across regions, with prices converging rapidly to their long-run equilibrium. However, asymmetric price adjustments reveal the presence of transaction costs in the German regional hub.




Response to Extreme Energy Price Changes: Evidence from Ukraine

Anna Alberini, Olha Khymych, and Milan Šcasný

DOI: 10.5547/01956574.40.1.aalb

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Abstract:
Large but temporary price increases are sometimes deployed on days when the demand for electricity is extremely high due to exceptionally warm or cold weather. But what happens when the extreme price changes are permanent? Between January 2013 and April 2016, natural gas and electricity prices in Ukraine increased dramatically (up to 300% of the initial rates). We exploit variation in tariffs over time and across customers to estimate the price elasticity of electricity demand using a panel dataset with monthly meter readings from households in Uzhhorod in Ukraine. The price elasticity of electricity demand is -0.2 to -0.5, with the bulk of our estimates around -0.3. The elasticity becomes up to 50% more pronounced over the first three months since prices change. We find only limited evidence that persons who are attentive about their consumption levels, their bills, or the tariffs are more responsive to the price changes.




Is a Wetter Grid a Greener Grid? Estimating Emissions Offsets for Wind and Solar Power in the Presence of Large Hydroelectric Capacity

Miguel Castro

DOI: 10.5547/01956574.40.1.mcas

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Abstract:
I use random fluctuations in hourly wind and solar generation in California to estimate how much they reduce emissions of carbon dioxide, sulfur dioxide, and nitrogen oxides. These offsets depend on the direct displacement of high-cost natural gas generators, and on the hydropower reallocation that occurs to the hours with the lowest increase in renewable generation. Solar power daily intermittency shifts hydro from the afternoon to the evening, which increases its emissions offsets since the gas generators displaced in the evening are dirtier than those kept running in the afternoon. In contrast, wind offsets are less sensitive to hydropower reallocation, since it leads to a substitution of generators with similar emissions intensities. These findings highlight the importance of accounting for interactions between wind, solar, and hydro capacity in assessing their environmental benefits. Similar lessons will apply to electric grids with storage capacity.