To download pre-release publications, please log in as an Associate.
The Paris Agreement has achieved one of two key necessary conditions for ultimate success – a broad base of participation among the countries of the world. But another key necessary condition has yet to be achieved – adequate collective ambition of the individual nationally determined contributions. How can the climate negotiators provide a structure that will include incentives to increase ambition over time? An important part of the answer can be international linkage of regional, national, and sub-national policies, that is, formal recognition of emission reductions undertaken in another jurisdiction for the purpose of meeting a Party’s own mitigation objectives. A central challenge is how to facilitate such linkage in the context of the very great heterogeneity that characterizes climate policies along five dimensions – type of policy instrument; level of government jurisdiction; status of that jurisdiction under the Paris Agreement; nature of the policy instrument’s target; and the nature along several dimensions of each Party’s Nationally Determined Contribution. We consider such heterogeneity among policies, and identify which linkages of various combinations of characteristics are feasible; of these, which are most promising; and what accounting mechanisms would make the operation of respective linkages consistent with the Paris Agreement.
Key words: Linking; Climate Policy; Paris Agreement; Article 6
JEL classification: Q54
We examine the pass-through of wholesale prices to retail prices in the market for E85, which contains 51% – 83% ethanol, and in the much larger market for E10 (regular unleaded gasoline), which contains 10% ethanol. We use a panel data set consisting of monthly observations from 2007-March 2015 on wholesale and retail prices for 274 Minnesota gas stations that sell both E10 and E85. The E10 market is dense and highly competitive, and we estimate a cumulative pass-through coefficient for E10 of 1.00 after one month. In contrast, the E85 market is sparse, and although the pass-through rate increased over time, we estimate it to be only 0.53 statewide from January 2012 to March 2015. Pass-through is higher at stations with more local E85 competitors. In the Twin Cities, which has a high density of E85 stations, pass-through is nearly complete, but outside the Twin Cities slightly less than half the wholesale discount of E85, relative to E10, is passed on to the consumer. Statewide, of the RIN subsidy to E85 under the Renewable Fuel Standard that is present in the wholesale price paid by the retailer, roughly half is passed on to the consumer and half is retained at the station level.
JEL codes: Q42, C32
Key words: fuels markets, energy prices, E85, E10, retail fuel spreads
Measurement of the full costs and benefits of energy-saving technologies is often difficult, confounding adoption decisions. We study consequences of the adoption of energy-efficient LED lighting in garment factories around Bangalore, India. We combine daily production line-level data with weather data and estimate a negative, nonlinear productivity-temperature gradient. We find that LED lighting, which emits less heat than conventional bulbs, decreases the temperature on factory floors, and thus raises productivity, particularly on hot days. Using the firm’s costing data, we estimate the pay-back period for LED adoption is one-sixth the length after accounting for productivity co-benefits.
Keywords: climate change mitigation, co-benefits, temperature, energy-saving technology, firm productivity
JEL Codes: O14, Q56, J24
Local air pollution problems have led authorities in many cities around the world to impose limits on car use, increasingly through driving restrictions or license-plate bans. With few exceptions, these restrictions tend to be poorly designed, creating incentives for drivers to buy additional, more polluting cars. We study vintage-specific designs that place heavy restrictions on older, polluting vehicles and none on newer, clean ones. A novel model of the car market and evidence from Santiago’s 1992 program, the earliest attempt to use vintage-specific restrictions, are used to show that these restrictions can be welfare enhancing by accelerating fleet turnover towards cleaner cars. These policies can be particularly effective in fighting local air pollution when alternative instruments such as scrappage subsidies and pollution-based taxes are not available.
With respect to electrical grids and power systems there is a trend towards a greater penetration and subsequent utilization of distributed energy resources (“DERs”). DERs can provide services to both Distribution System Operators (“DSOs”) and Transmission System Operators (“TSOs”). Distributed energy resources are typically installed and interconnected to electricity networks that may or may not be completely controlled, monitored or analyzed by the power system operators themselves. If and when DERs are operated to provide system services and/or market actions, this may lead to system benefits and efficiency improvements, but can come with technical, economic, and jurisdictional challenges. Aggregators, DSOs, and TSOs, must be able to coordinate, monitor and dispatch resources as well as study and share information in a timely manner. Examples and recommendations for future coordination and interactions between the TSO, DSO, DER owners, and aggregators are presented and examined, in operation and market-based contexts, relevant to European and US electricity networks.
Keywords: Distribution system operator, utility, transmission system operator, distributed energy resources, wholesale markets, distribution-level markets, transmission-distribution coordination functions, electricity services.
Household preferences for goods with a bundle of attributes may have complex substitution patterns when one attribute is changed. For example, a household faced with an exogenous increase in the size of one television may choose to decrease the size of other televisions within the home. We deploy a novel identification strategy to examine how an exogenous change in the fuel economy of a kept vehicle aeffects a household's choice of a second vehicle. Our findings suggest that attribute substitution exerts a strong force that may erode a substantial portion of the gasoline savings from fuel economy standards.
We examine an open economy’s strategy to reduce its carbon emissions by replacing its consumption of coal—very carbon intensive—with gas—less so. Unlike the standard analysis of carbon leakage, unilateral carbon-reduction policies with more than one carbon energy source may turn counter-productive, ultimately increasing world emissions. Thus, we establish testable conditions as to whether a governmental emission-reduction commitment warrants the exploitation of gas, and whether such a strategy increases global emissions. We also characterize the extent to which this unilateral policy makes the rest of the world’s emission commitments more difficult to meet. Finally, we apply our results to the case of the US.
JEL classification: Q41; Q58; H73; F18
Keywords: Unilateral climate policy; Carbon emission reduction; Shale gas; Gas-coal
substitution; Coal exports; Carbon leakage; US policy; Counter-productive policy
Output-based allocations (OBAs) are typically used in emission trading systems (ETS) with a fixed cap to mitigate leakage in sectors at risk. Recent work has shown they may also be welfare enhancing in markets subject to supply and demand shocks by introducing some flexibility in the total cap, resulting in a carbon price closer to marginal damage. We extend previous work to simultaneously include both leakage and volatility. We study how OBA permits can be implemented under an overall cap that may change with the level of production in contrast with a design that deducts OBA permits from the overall permit allocation as is the current practice in the EU-ETS and California. We show that introducing OBA permits while keeping the overall cap fixed would only increase price fluctuations and induce severe welfare losses to non-OBA sectors.
JEL Classication: D24, L13, H23, L74
Keywords: pollution markets, carbon price volatility, output-based allocations,
We study pollution permit markets in which a fraction of permits are allocated to firms based on their output. Output-based allocations, which are receiving increasing attention in the design of carbon markets around the world (e.g., Europe, California, New Zealand), are shown to be optimal under demand and supply volatility despite the output distortions they may create. In a market that covers multiple sectors, the optimal design combines auctioned permits with output-based allocations that are specific to each sector and increasing in its volatility. When firms are better informed about the latter or must self select, the regulator resorts to some free (i.e., lump-sum) allocations to sort firms out.
JEL Classication: D24, L13, H23, L74
Keywords: pollution markets, output-based allocations, market volatility, rent-
seeking, self-selection, climate policy
The adverse effects of black carbon (BC) emissions from diverse sources are significant in human and economic terms. BC emissions are a public health problem, as they annually cause premature deaths on the order of millions worldwide. BC also has detrimental effects on food supplies, with crop production reduced by millions of tonnes per year. In addition, BC has significant climate change consequences, with a Global Warming Potential per tonne on the order of thousands of times greater than carbon dioxide’s over a 20-year period; in terms of total global warming impact, BC is second after carbon dioxide and thus greater than other greenhouse gases, including methane. Emissions mitigation technologies and government policies offer potential health, food and climate co-benefits. Within the transportation sector, there are many technologies and policies that can mitigate BC emissions; for example, inter-modal transfers of diesel particulate filter (DPF) technology from motor vehicles to maritime shipping offer a promising BC mitigation path. BC not only poses significant tangible technological issues; it also poses important political-economy conceptual issues with practical implications for industry and government policymaking. First, because of its short atmospheric lifetime average of about one week and concentrated localized depositions, BC poses “local-commons” and “regional-commons” problems as well as “global-commons” problems. Second, because of its localized and regionalized multiple negative externalities, BC challenges the economic efficiency rationale for one-policy-instrument-per-goal. The BC policy agenda thus extends over many levels of governance, and it entails a wide range of policy instruments. The multiplicity of policy instruments at multiple levels of governance are reflected in the assessment of existing policies and in the diversity of recommendations for further policymaking and research: (1) BC emission measurement deficiencies for motor vehicles and aviation need to be corrected, and a maritime shipping protocol in the International Maritime Organization should be finalized and adopted. (2) In addition to on-road motor vehicles, local BC emission reduction initiatives should be adopted, especially in large cities with seaports and airports. These programs should encompass all diesel engine sources of BC in maritime shipping and aviation port infrastructure areas, including off-road vehicles, loading/unloading equipment, and diesel locomotives. (3) Mitigating BC emissions should be an urgent objective in the International Civil Aviation Organization (ICAO) and International Maritime Organization (IMO). (4) Technology transfer issues, including transfers of diesel particulate filter technologies in motor vehicles and maritime shipping, should be included on the agenda of the Technology Mechanism of the UNFCCC. (5) All maritime shipping Emission Control Areas (ECAs) should include BC emission limits. (6) An Arctic Black Carbon Agreement in the form of a “carbon club” should be developed. (7) Annual COP meetings and other activities of the UNFCCC should expand recognition that BC mitigation can be included in countries’ Nationally Determined Contributions. (8) The prevailing climate change paradigm should be revised.
Key words: Black Carbon; Soot; Carbon Clubs; Paris Agreement.
JEL classification: F13; F18; O38; Q54; Q58.
Pigovian regulation provides monetary penalties/rewards to incentivize prosocial behavior, and may thereby trigger behavioral effects beyond a more standard response associated with a change in relative prices. This paper quantifies the magnitude of these behavioral effects using data from an experiment on real product choices together with a structural model of consumer behavior. First, we show that information about external effects (products’ embodied carbon emissions) triggers voluntary substitution towards cleaner alternatives, and we estimate that this effect is equivalent to a change in relative prices of GBP30.69-165.15/tCO2. Second, comparing a Pigovian intervention (GBP19/tCO2) with a neutrally-framed price change of the same magnitude, we find a negative behavioral effect associated with regulation. Compensating this bias would require increasing the Pigovian price signal by up to 48.06/tCO2. Finally, based on a cross-product comparison, we show that the magnitude of behavioral effects declines with substitutability between clean and dirty product alternatives, a measure of effort to reduce emissions.
Keywords: Externalities; Pigovian regulation; Consumer behavior; Information; Field experiments; Environmental policy.
JEL Codes: C93; D03; D12; H23; Q58.
Nico Keyaerts, Michelle Hallack, Jean-Michel Glachant and William D'haeseleer, September 2010
This paper analyses the value and cost of line-pack flexibility in liberalized gas markets through the examination of the techno-economic characteristics of gas transport pipelines and the trade-offs between the different ways to use the infrastructure: transport and flexibility. Line-pack flexibility is becoming increasingly important as a tool to balance gas supply and demand over different periods. In the European liberalized market context, a monopolist unbundled network operator offers regulated transport services and flexibility (balancing) services according to the network code and the balancing rules. Therefore, gas policy makers should understand the role and consequences of line-pack regulation. The analysis shows that the line-pack flexibility service has an important economic value for the shippers and the TSO. Furthermore, the analysis identifies distorting effects in the gas market due to inadequate regulation of line-pack flexibility: by disregarding the fixed cost of the flexibility in the balancing rules, the overall efficiency of the gas system is decreased. Because a full market based approach to line-pack pricing is unlikely, a framework is presented to calculate a cost reflective price for pipeline flexibility based on the trade-offs and opportunity costs between the right to use the line-pack flexibility and the provision of transport services.