Reprints are listed in order of publication and numbered sequentially. You can view an abstract by clicking on the Abstract link. Where copyright laws allow, you can download an electronic copy of the printed version by clicking on the PDF link. Otherwise, you can find a link to the publisher’s external website.
Antonin S. Mello and John E. Parsons, Journal of Applied Corporate Finance, Vol. 25, No. 1, Winter 2013, pp. 34-43, 2013
Recent financial reforms, such as the Dodd-Frank Act in the U.S. and the European Market Infrastructure Regulation, encourage greater use of clearing and therefore increased margining of derivative trades. They also impose margining requirements on noncleared derivative trades. Such requirements have sparked a debate about whether a margin mandate increases the cost of hedging by nonfinancial corporations - the so-
John E. Parsons, Journal of Energy Markets, Vol. 5, No. 1, Spring 2012, pp. 3-28, 2012
For the first seven years following its creation in 2000, Constellation Energy Group was a leader in the merchant power business, and its stock significantly outperformed the industry. Then, in 2008, in the space of less than two months, the company found itself in a liquidity crisis in which its stock lost more than 70% of its value, leading to a forced sale at a low price. What happened? Constellation's crisis illustrates the hidden dangers that arise when a power company's trading operation stops playing a subordinate function and becomes the strategic focus of the business. The case highlights the illiquidity of many commodity trading portfolios, which increases the danger of potentially large contingent capital requirements. These are often overlooked in traditional value-at-risk calculations. It is therefore easy to underestimate exposure and the capital implicitly dedicated to the trading operation, exaggerating its profitability. When the trading unit shares a balance sheet with other operations, such as generation and customer supply, the capital required for trading is often borrowed from these other units at zero cost. Trading can improve the profitability of generation and customer supply if it is organized as a support function. If it is to be a profit center of its own, it should be organized on its own balance sheet, separate from the other operations.
Richard Schmalensee and Robert N. Stavins, Journal of Economic Perspectives, Vol. 27, No. 1, Winter 2013, pp. 103-122, 2013
Two decades have passed since the Clean Air Act Amendments of 1990 launched a grand experiment in market-based environmental policy: the SO2 cap-and-trade system. That system performed well but created four striking ironies: First, by creating this system to reduce SO2 emissions to curb acid rain, the government did the right thing for the wrong reason. Second, a substantial source of this system's cost-effectiveness was an unanticipated consequence of earlier railroad deregulation. Third, it is ironic that cap-and-trade has come to be demonized by conservative politicians in recent years, as this market-based, cost-effective policy innovation was initially championed and implemented by Republican administrations. Fourth, court decisions and subsequent regulatory responses have led to the collapse of the SO2 market, demonstrating that what the government gives, the government can take away.
Richard Schmalensee, Energy Economics, Vol. 34, Supplement 1, Nov. 2012, pp. S2-S6, 2012
“Green growth” is an attractive slogan with a variety of possible meanings. This essay critically examines several potential meanings of this slogan and provides a brief overview of some of the main implications of the other papers in this special issue. Taken together, these papers argue for the importance of careful analysis of energy/environmental policies, particularly ambitious ones claiming to offer huge benefits with little or no cost.
Gilbert E. Metcalf, Tax Policy and the Economy, Vol. 24, No. 1, pp. 1-34, 2010
Federal tax policy provides a broad array of incentives for energy investment. I review those policies and construct estimates of marginal effective tax rates for different energy capital investments as of 2007. Effective tax rates vary widely across investment classes. I then consider investment in wind generation capital and regress investment against a user cost of capital measure along with other controls. I find that wind investment is strongly responsive to changes in tax policy. On the basis of the coefficient estimates, the elasticity of investment with respect to the user cost of capital is in the range of ?1 to ?2. I also demonstrate that the federal production tax credit plays a key role in driving wind investment over the past 18 years.
John E. Parsons and Luca Taschini, Environmental and Resource Economics, doi: 10.1007/s10640-012-9614-y, 2012
Recent literature showed that the choice between a price or quantity control depends, in part, on the dynamic structure of cost uncertainty. Temporary shocks to abatement cost favors the use of a price control, while permanent shocks favor a quantity control. Unfortunately, the importance of this assumption to the optimal choice has not yet received wide attention among economists. We analyze the regulatory sproblem in an alternative setting and reproduce these results. Our contribution is the simplicity of the model and the accessibility of the results, which reinforce the critical role played by the assumed structure of uncertainty.
James L. Smith, Energy Policy, Vol. 44, pp. 68-78, 2012
Economists have studied various indicators of resource scarcity but largely ignored the phenomenon of ‘‘peaking’’ due to its connection to non-economic (physical) theories of resource exhaustion. I consider peaking from the economic point of view, where economic forces determine the shape of the equilibrium extraction path. Within that framework, I ask whether the timing of peak production reveals anything useful about scarcity. I find peaking to be an ambiguous indicator. If someone announced the peak would arrive earlier than expected, and you believed them, you would not know whether the news was good or bad. However, I also show that the traditional economic indicators of resource scarcity (price, cost, and rent) fare no better, and argue that previous studies have misconstrued the connection between changes in underlying scarcity and movements in these traditional indicators.
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Michael Greenstone and Adam Looney, Daedalus, Vol. 141, No.2, pp. 10-30, 2012
Energy consumption is critical to economic growth and quality of life. America's energy system, however, is malfunctioning. The status quo is characterized by a tilted playing field, where energy choices are based on the visible costs that appear on utility bills and at gas pumps. This system masks the "external" costs arising from those energy choices, including shorter lives, higher health care expenses, a changing climate, and weakened national security. As a result, we pay unnecessarily high costs for energy. New "rules of the road"
Ernest J. Moniz, Daedalus, Vol. 141, No.2, pp. 81-93, 2012
The innovation system has interrelated components of invention, translation, adoption, and diffusion. Energy technology innovation has lagged that in other domains, and there is a compelling public interest in picking up the pace through appropriate government action. Government and universities are creating new approaches in the invention and translation stages. The Department of Energy (DOE) has implemented novel programs such as ARPA-E. Research universities have moved closer to the marketplace through more diversified industry collaboration models, such as convening research-sponsoring companies both horizontally in a sector and vertically across the innovation chain. Much more needs to be done to expand public-private partnerships and to define a broadly accepted government role in the adoption and diffusion stages. An administration-wide Quadrennial Energy Review process, informed by technical analysis and social science research, offers the best opportunity in this regard.
David J. Ramberg and John E. Parsons, The Energy Journal, Vol. 33, No.2, pp. 13-37, 2012
Several recent studies establish that crude oil and natural gas prices are cointegrated. Yet at times in the past, and very powerfully in the last two years, many voices have noted that the two price series appear to have “decoupled”. We explore the apparent contradiction between these two views. We find that recognition of the statistical fact of cointegration needs to be tempered with two additional points. First, there is an enormous amount of unexplained volatility in natural gas prices at short horizons. Hence, any simple formulaic relationship between the prices will leave a large portion of the natural gas price unexplained. Second, the cointegrating relationship does not appear to be stable through time. The prices may be tied, but the relationship can shift dramatically over time. Therefore, although the two price series may be cointegrated, the confidence intervals for both short and long time horizons are large.
Keywords: Oil price, Natural gas price, Cointegration
Denny Ellerman, Economics of Energy & Environmental Policy, Vol. 1, No. 1, pp. 11-23, 2012
This essay reviews the evolution of energy policy and climate policy in the United States and notes that the difference between the two has become increasingly less. In the nearly forty years that energy has been a public policy issue, it has always been characterized by impossible goals concerning reduced oil imports, but in the early years (the 1970s), a reasonably coherent set of measures dealt effectively with the pricing problems that were causing energy shortages. This stands in marked contrast to later energy policy which has evolved into a generalized justification for measures that have little in common other than some relation, however slight, to reducing oil imports. Putting a price on carbon has been a salient aspect of climate policy until recently; however, that ambition is fading fast and climate policy has increasingly become, like what remains of energy policy, one among a number of justifications for promoting particular forms of energy, usually renewable energy and energy efficiency. The success of latter-day energy policy in achieving the avowed objective, reduced oil import levels, should give pause to those who expect a similar effect on greenhouse gas emissions from the conflation of climate with energy policy.
Richard Schmalensee, Review of Environmental Economics and Policy, Vol. 6, Issue 1 (Winter 2012), pp. 45-64, 2011
Building on a review of experience in the United States and the European Union, this article advances four main propositions concerning policies aimed at increasing electricity generation from renewable energy. First, who bears the short-run costs of programs to subsidize the generation of electricity from renewable sources varies with the organization of the electric power industry, and this variation may be a significant contributor to such programs’ political attractiveness in U.S. states. Second, despite the greater popularity of feed-in tariff schemes worldwide, renewable portfolio standard (RPS) programs may involve less long-run social risk. Third, in contrast to the European Union’s approach to reducing carbon dioxide emissions, its renewables program is almost certain not to minimize the cost of achieving its goals. Fourth, state RPS programs in the United States are also almost certain to cost more than necessary, even though most use market mechanisms. To support this last proposition I provide a fairly detailed description of actual markets for renewable energy credits and their shortcomings.
Guillaume De Roo and John E. Parsons, Energy Economics, Vol. 33, No. 5, pp. 826–839, 2011
In this paper we show how the traditional definition of the levelized cost of electricity (LCOE) can be extended to alternative nuclear fuel cycles in which elements of the fuel are recycled. In particular, we define the LCOE for a cycle with full actinide recycling in fast reactors in which elements of the fuel are reused an indefinite number of times. To our knowledge, ours is the first LCOE formula for this cycle. Others have approached the task of evaluating this cycle using an 'equilibrium cost' concept that is different from a levelized cost. We also show how the LCOE implies a unique price for the recycled elements. This price reflects the ultimate cost of waste disposal postponed through the recycling, as well as other costs in the cycle. We demonstrate the methodology by estimating the LCOE for three classic nuclear fuel cycles: (i) the traditional Once-Through Cycle, (ii) a Twice-Through Cycle, and (iii) a Fast Reactor Recycle. Given our chosen input parameters, we show that the 'equilibrium cost' is typically larger than the levelized cost, and we explain why.
Esther Duflo, Michael Greenstone, Rohini Pande and Nicholas Ryan, Discussion Paper, Ministry of Environment and Forest, Government of India, 2010
Emissions trading schemes have great potential to lower pollution while minimizing compliance costs for firms in many areas now subject to traditional command-and-control regulation. This paper connects experience with emissions trading, from programs like the U.S. Acid Rain program, to lessons for implementation of a Trading Pilot Scheme in India. This experience suggests that four areas are especially important for successful implementation of an emissions trading scheme: setting the cap, allocating permits, monitoring and compliance. The introduction of emissions trading would position India as a clear leader in environmental regulation amongst emerging economies.
John E. Parsons, Economia, Vol. 10, No. 2, pp. 81-116, 2010
This paper addresses the question of whether the oil price spike of 2003-2008 was a bubble. We document and discuss what is known about the level of speculation in the paper oil market. We then analyze the dynamics of the term structure of futures prices, both during the earlier period of 1985-2002 and during the spike. The dynamics of the term structure changed in important ways during this latter period, and we explain how this may have contributed to generating a bubble. We also explain how this answers the puzzle of the lack of accumulating above-ground inventories. Finally, we discuss the implications for regulatory reform of the paper oil markets.
Michael Greenstone and Ted Gayer, Journal of Environmental Economics and Management, Vol. 57, No. 1, pp. 21-44, 2008
This paper argues that an increased application of quasi-experimental and experimental techniques will improve understanding about core environmental economics questions. This argument is supported by a review of the limitations of associational evidence in assessing causal hypotheses. The paper also discusses the benefits of experiments and quasi-experiments, outlines some quasi-experimental methods, and highlights threats to their validity. It then illustrates the quasi-experimental method by assessing the validity of a quasi-experiment that aims to estimate the impact of the Endangered Species Act on property markets in North Carolina. The paper's larger argument is that greater application of experimental and quasi-experimental techniques can identify efficient policies that increase social welfare.
Michael R. Hamilton, Howard J. Herzog and John E. Parsons, Energy Procedia, Vol. 1, No. 1, pp. 4487-4494, 2009
This paper provides a financial analysis for new supercritical pulverized coal plants with carbon capture and sequestration (CCS) that compares the effects of two relevant climate policies. First, an updated cost estimate is presented for new supercritical pulverized coal plants, both with and without CCS. The capital cost escalation of recent years can be attributed to rising materials, plant supply, and plant contractor constraints. This estimate is then compared with recent estimates from public sources. Second, several current and proposed public policies relevant to CCS are presented. Finally, a financial analysis is performed to evaluate the effectiveness of two likely US carbon regulations on deploying Nth-plant CCS technology. The major conclusion is that the leading US carbon cap-and-trade bills will likely not be sufficient to deploy CCS technology in a manner consistent with a 550ppm CO2 stabilization scenario. A more aggressive carbon policy including CCS research, development, and demonstration must be considered to achieve this goal with significant CCS deployment.
Frank Convery, Denny Ellerman and Christian de Perthuis, Journal for European Environmental & Planning Law, Vol. 5, No. 2, pp. 215–233, 2008
Through its Emissions Trading Scheme (EU ETS), the European Union is leading the world's first effort to mobilize market forces to tackle global climate change. This article, examines how the EU ETS has performed thus far, at the conclusion of the scheme's first trading phase (2005–2007). Insights drawn from this analysis may inform not only the scheme's future operation, but also the establishment of greenhouse gas trading programs outside Europe. This interim analysis finds that Phase I of the EU ETS (2005–2007) has successfully established a carbon price for significant segments of economic activity in Europe, as well as the necessary trading infrastructure and experience; that the price on carbon has so far had limited impact on the industrial competitiveness of European industry; that it has provided an important stimulus to greenhouse gas emission reductions outside of Europe, primarily through the Clean DevelopmentMechanism; and that the EU ETS provides useful lessons for other countries seeking to limit GHG emissions and for future global climate negotiations.
A.D. Ellerman and B.K. Buchner, Environmental and Resource Economics, Vol. 41, No. 2, pp. 267-287, 2008
This paper provides an initial analysis of the EU ETS based on the installation-level data for verified emissions and allowance allocations in the first 2 years of the first trading period. These data reveal that CO2 emissions were about 3% lower than the allocated allowances. The main objective of the paper is to shed light on the extent to which overallocation and abatement have taken place in 2005 and 2006, when a significant CO2 price was observed. We propose a measure by which over-allocation can be judged and provide estimates of abatement based on emissions data and indicators of economic activity as well as trends in energy and carbon intensity. Finally, we discuss the insights and implications that emerge from this tentative assessment.
A.D. Ellerman and B.K. Buchner, Review of Environmental Economics and Policy, Vol. 1, No. 1, pp. 66-87, 2007
The European Union Emissions Trading Scheme (EU ETS) is the world's first large experiment with an emissions trading system for carbon dioxide (CO2) and it is likely to be copied by others if there is to be a global regime for limiting greenhouse gas emissions. After providing a brief discussion of the origins of the EU ETS, its relation to the Kyoto Protocol, and its precedents in Europe and the U.S., this paper focuses on allowance allocation—the process of deciding who will receive the newly limited rights to emit CO2. We describe how allowances were allocated in the EU ETS, with particular emphasis on the issues and problems encountered, including the lack of readily available installation-level data, the participants in the process, the use of projections, the choices of Member States with respect to auctioning, benchmarking, and new entrant provisions, and the difficult issue of deciding to whom the expected shortage was to be allocated. Finally, we discuss the recently available data on 2005 emissions and what they indicate concerning over-allocation, trading patterns, and abatement. We conclude with some observations about the broader implications of the EU ETS, what seems to be unique about CO2, and the fact that non-economic considerations inform the allocation of allowances.
Juan-Pablo Montero, Energy Journal, Climate Change Policies After 2012, Vol. 30 (Special Issue 2), 2009
As with other commodity markets, markets for trading pollution permits have not been immune to market power concerns. In this paper, I survey the existing literature on market power in permit trading but also contribute with some new results and ideas. I start the survey with Hahns (1984) dominant-firm (static) model that I then extend to the case in which there are two or more strategic firms that may also strategically interact in the output market, to the case in which current permits can be stored for future use (as in most existing and proposed market designs), to the possibility of collusive behavior, and to the case in which permits are auctioned off instead of allocated for free to firms. I finish the paper with a review of empirical evidence on market power, if any, with particular attention to the U.S. sulfur market and the Southern California NOx market.
Mort Webster, Ian Sue Wing and Lisa Jakobovits, Journal of Environmental Economics and Management, Vol. 59, No. 3, pp. 250–259, 2010
Current proposals for greenhouse gas emissions regulations in the United States mainly take the form of emissions caps with tradable permits. Since Weitzman's (1974) study of prices vs. quantities, economic theory predicts that a price instrument is superior under uncertainty in the case of stock pollutants. Given the general belief in the political infeasibility of a carbon tax in the US, there has been recent interest in two other policy instrument designs: hybrid policies and intensity targets. We extend the Weitzman model to derive an analytical expression for the expected net benefits of a hybrid instrument under uncertainty. We compare this expression to one developed by Newell and Pizer (2006) for an intensity target, and show the theoretical minimum correlation between GDP and emissions required for an intensity target to be preferred over a hybrid. In general, we show that unrealistically high correlations are required for the intensity target to be preferred to a hybrid, making a hybrid a more practical instrument in practice. We test the predictions by performing Monte Carlo simulation on a computable general equilibrium model of the US economy. The results are similar, and we show with the numerical model that when marginal abatement costs are non-linear, an even higher correlation is required for an intensity target to be preferred over a safety valve.
Douglas Almond, Yuyu Chen, Michael Greenstone, and Hongbin Li, American Economic Review, Vol. 99, No. 2, pp. 184-190, 2009
This paper assesses the role of a procrustean Chinese policy in generating stark differences in air quality within China. During the 1950-1980 central planning period, the Chinese government established free winter heating of homes and offices as a basic right via the provision of free coal fuel for boilers. The combustion of coal in boilers is associated with the release of air pollutants, especially TSP. Due to budgetary limitations, however, this right was extended only to areas located in northern China. The line formed by the Huai River and Qinling Mountains denotes the border between northern and southern China. Matching air pollution and weather data for 76 Chinese cities, we find the heating policy led to dramatically higher TSP levels in the north. This result holds both in a cross-sectional regression discontinuity-style estimation approach and in a panel data setting that compares the marginal effect of winter temperature on TSP in northern and southern China, after controlling for all permanent city-level determinants of TSP concentrations and transitory ones common to all Chinese cities. In contrast, we fail to find evidence that the heating policy leads to increases in sulfur dioxide (SO2) and nitrogen oxide (NOx) concentrations.
Richard Schmalensee, in: Post-Kyoto International Climate Policy, Joseph Aldy and Robert Stavins (editors), pp. 889-899, Cambridge University Press, 2010
History's evaluation of this generation will surely depend to an important extent on its handling of the climate problem -- not just on what gases we leave in the atmosphere but also on what durable climate policy architecture we leave to our heirs. In this brief essay I offer some thoughts on what makes the international dimension of the climate problem so difficult and important, on the history of climate policy debates, and on some key elements of policy architecture that those debates have so far produced.
Denny Ellerman, in: Post-Kyoto International Climate Policy, Joseph Aldy and Robert Stavins (editors), pp. 88-118, Cambridge University Press, 2010
The European Union's Emission Trading Scheme (EU ETS) is the world's first multinational cap-and-trade system for greenhouse gases. As an agreement between sovereign nations with diverse historical, institutional, and economic circumstances, it can be seen as a potential prototype for an eventual global climate regime. Surprisingly, the problems that are often seen as dooming a global trading system — international financial flows and institutional readiness — haven't appeared in the EU ETS. The more serious problems that emerge from the brief experience of the EU ETS are those of (1) developing a central coordinating organization, (2) devising side benefits to encourage participation, and (3) dealing with the interrelated issues of harmonization, differentiation, and stringency. The pre-existing organizational structure and membership benefits of the European Union provided convenient and almost accidental solutions to the need for a central institution and side benefits, but these solutions will not work on a global scale and there are no obvious substitutes. Furthermore, the EU ETS is only beginning to test the practicality of harmonizing allocations within the trading system, differentiating responsibilities among participants, and increasing the stringency of emissions caps. From a global perspective, the answers that are being worked out in Europe will say a great deal about what will be feasible on a broader, global scale.
Paul L. Joskow and John E. Parsons, Daedalus, Vol. 138, No. 4, pp. 45–59, 2009
In the last several years we have seen what appears to be revived global interest in continuing operation of existing nuclear power plants and constructing a new generation of plants. A recent International Atomic Energy Agency report indicates that 24 countries with nuclear power plants are considering policies either to accommodate or encourage investments in new nuclear power plants, and that 20 countries without nuclear power today are considering supporting the use of nuclear power to meet future electricity needs. It projects as much as a 100 percent increase in nuclear generating capacity by 2030. This renewed interest appears to reflect a variety of considerations, including a shift toward sources of electricity that do not produce CO2; the search for lower-cost sources of electricity, stimulated by dramatic increases in fossil fuel prices prior to the current global economic contraction; and (often poorly defined) energy security concerns associated with fossil fuels, especially natural gas. The potential revival of nuclear power faces a number of risks and challenges that make the anticipated “renaissance” of nuclear power in the United States and other countries quite uncertain. The economics of maintaining the existing fleet of nuclear power plants, investment in new nuclear power plants, and the economic impacts of constraints on CO2 emissions, not to mention considerations of safety, waste disposal, proliferation, and spent-fuel reprocessing: all impact the feasibility of a nuclear power renaissance.
Edward S.Steinfeld, Richard K.Lester, Edward A.Cunningham, Energy Policy, Vol. 37, No. 5, pp. 1809–1824, 2009
This article presents findings from the MIT China Energy Group's first-of-its-kind, independent nationwide survey of Chinese coal-fired power plants. It is well understood that developments in China's energy sector now have global environmental implications. It is also well understood that this sector has in recent years experienced rapidly rising fuel costs. The MIT survey, by delving into technology choice, pricing, fuel sourcing, and environmental cleanup at the firm level, provides insights into how the Chinese power sector as a whole responds, and what the environmental implications are. The findings suggest rapid uptake of advanced combustion technologies across the system, largely in response to rising fuel costs. Environmental cleanup systems, particularly for sulfur dioxide, have also spread rapidly, in large part due to regulatory enforcement. Yet, operationally, plants pollute substantially. Price hikes encourage them to source low-grade fuel and idle cleanup systems. On the whole, the Chinese system infrastructurally has a proven capacity for rapid technological upgrading in the face of new market and regulatory pressures. Operationally, however, in part due to exposure to market forces, and in part due to limited state capacity for monitoring operations, even the most advanced power plants remain major polluters.
Joshua Linn, The Economic Journal, Vol. 118, No. 533, pp. 1986-2012, 2008
This article investigates the link between factor prices, technology and factor demands. Using plantlevel data from the Census of Manufactures, I compare the energy intensity of entrants and incumbents from 1967–97. A 10% increase in the price of energy reduces the relative energy intensity of entrants by 1%. The estimate implies that technology adoption by incumbents explains a statistically significant but relatively small fraction of changes in aggregate energy demand in the 1970s and 1980s. Furthermore, entrants_ technology adoption can reduce the long run effect of energy prices on growth, but by less than previous research has found.
(Also published as CEEPR WP 2006-012)
A. Denny Ellerman, The Energy Journal, Vol. 29, Special Edition, pp. 63-76, 2008 (Article from the Campbell Watkins Special Edition)
Provisions to endow new entrants with free allowances and to require closed facilities to forfeit allowance endowments are ubiquitous in the EU Emissions Trading Scheme, but a new design feature in cap-and-trade systems. This essay seeks to explore, within a comparative statics framework, the effect of these provisions on agent behavior in output and emissions markets assuming profit maximization. The main conclusion is that the principal effect is on capacity. The effect of the resulting over-capacity on output markets is to reduce output price and to increase output. The effect on emissions markets is more ambiguous in that it depends on the emission characteristics of the new capacity, existing capacity, and the capacity not retired, and the distribution of the excess capacity among these categories.
(Also published as CEEPR WP 2006-013)
Michael Greenstone and Justin Gallagher, The Quarterly Journal of Economics, Vol. 123, No. 3, pp. 951-1003, August 2008
This paper uses the housing market to develop estimates of the local welfare impacts of Superfund-sponsored cleanups of hazardous waste sites. We show that if consumers value the cleanups, then the hedonic model predicts that they will lead to increases in local housing prices and new home construction, as well as the migration of individuals that place a high value on environmental quality to the areas near the improved sites. We compare housing market outcomes in the areas surrounding the first 400 hazardous waste sites chosen for Superfund cleanups to the areas surrounding the 290 sites that narrowly missed qualifying for these cleanups.We find that Superfund cleanups are associated with economically small and statistically insignificant changes in residential property values, property rental rates, housing supply, total population, and types of individuals living near the sites. These findings are robust to a series of specification checks, including the application of a regression discontinuity design based on knowledge of the selection rule. Overall, the preferred estimates suggest that the local benefits of Superfund cleanups are small and appear to be substantially lower than the $43 million mean cost of Superfund cleanups.
(Also published as CEEPR WP 2006-020)
Paul Twomey, Richard Green, Karsten Neuhoff and David Newbery, Journal of Energy Literature, Vol. 11, No. 2, pp. 3-54, August 2005
This article surveys the literature and publicly available information on market power monitoring in electricity wholesale markets. After briefly reviewing definitions, strategies and methods of mitigating market power we examine the various methods of detecting market power that have been employed by academics and market monitors/regulators. These techniques include structural and behavioural indices and analysis as well as various simulation approaches. The applications of these tools range from spot market mitigation and congestion management through to long-term market design assessment and merger decisions. Various market-power monitoring units already track market behaviour and produce indices. Our survey shows that these units collect a large amount of data from various market participants and we identify the crucial role of the transmission system operators with their access to dispatch and system information. Easily accessible and comprehensive data support effective market power monitoring and facilitate market design evaluation. The discretion required foreffective market monitoring is facilitated by institutional independence.
(Also published as CEEPR WP 2005-002)
Christian von Hirschhausen, Utilities Policy, Vol. 16, No. 1, pp. 1-10, March 2008
In this paper, we discuss the relationship between infrastructure regulation and investment in light of the emerging “security of supply” debate. We approach the subject by surveying the literature of the past two decades, especially examining the interactions among restructuring, regulation, and investment. The empirical section of this paper relies on case studies of the relationship between the regulatory framework for the US natural gas sector and the development of investment in LNG terminals, interstate pipelines, and storage facilities in the US. I find that there is little reason for concern about infrastructure investments, resource adequacy, and supply security.
(Also published as CEEPR WP 2006-018)
Vincent Rious, Jean-Michel Glachant, Yannick Perez and Philippe Dessante, Energy Policy, Vol. 36, No. 9, pp. 3323– 3332, 2008
It is puzzling today to explain diversity and imperfection of actual transmission monopoly designs in competitive electricity markets. We argue that transmission monopoly in competitive electricity markets has to be analyzed within a [Wilson, R, 2002. Architecture of the power markets. Econometrica 70(4), 1299–1344] modular framework. Applied to the management of electricity flows, at least three modules make the core of transmission design: (1) the short run management of network externalities; (2) the long run management of network investment; and (3) the coordination of neighboring transmission system operators (TSOs) for cross-border trade. In order to tackle this diversity of designs of TSOs, we show that for each of these modules, three different basic ways of managing them are possible. Among the identified 27 options of organization, we define an ideal TSO. Second, we demonstrate that (1) monopoly design differs from this ideal TSO and cannot handle these three modules irrespective of the ‘‘institutional’’ definition and allocation of property rights on transmission, while (2) definition and allocation of property rights on transmission cannot ignore the existing electrical industry and transmission network structure: they have to complement each other to be efficient. Some conclusions for regulatory issues of TSOs are derived from this analysis of network monopoly organization.
(Also published as CEEPR WP 2008-005)
Esther Duflo, Michael Greenstone, Rema Hanna, Economic & Political Weekly, Vol. 43, No. 32, pp. 71-76, Special Issue, August 09 - August 15, 2008
Indoor air pollution emitted from traditional fuels and cooking stoves is a potentially large health threat in rural regions. This paper reports the results of a survey of traditional stove ownership and health among 2,400 households in rural Orissa. We find a very high incidence of respiratory illness. About one-third of the adults and half of the children in the survey had experienced symptoms of respiratory illness in the 30 days preceding the survey, with 10 per cent of adults and 20 per cent of children experiencing a serious cough. We find a high correlation between using a traditional stove and having symptoms of respiratory illness. We cannot, however, rule out the possibility that the high level of observed respiratory illness is due to other factors that also contribute to a household’s decision to use a traditional stove, such as poverty, health preferences and the bargaining power of women in the household.
John Deutch, CHEMICAL TECHNOLOGY, Feb 2007
Government support of innovation – both technology creation and technology demonstration – is desirable to encourage private investors to adopt new technology. In this paper, I review the government role in encouraging technology innovation and the success of the Department of Energy (DOE) and its predecessor agencies in advancing technology in the energy sector. The DOE has had better success in the first stage of innovation (sponsoring R&D to create new technology options) than in the second stage (demonstrating technologies with the objective of encouraging adoption by the private sector). I argue that the DOE does not have the expertise, policy instruments, or contracting flexibility to manage successfully technology demonstration, and that consideration should be given to establishing a new mechanism for this purpose. The ill-fated 1980 Synthetic Fuels Corporation offers an interesting model for such a mechanism.
(CEEPR Working Paper 2005-009 is an earlier version of this article)
Tooraj Jamasb and Michael Pollitt, The Energy Journal, Vol. 26, Special Edition, pp. 11-41, (2005)
The energy market liberalisation process in Europe is increasingly focused on electricity market integration and related cross border issues. This signals that the liberalisation of national electricity markets is now closer to the long-term objective of a single European energy market. The interface between the national electricity markets requires physical interconnections and technical arrangements. However, further progress towards this objective also raises important issues regarding the framework within which the integrated market is implemented. This paper reviews the progress towards a single European electricity market. We then discuss the emerging issues of market concentration, investments, and security of supply as well as some aspects of market design and regulation that are crucial for dynamic performance of a single European market.
(CEEPR Working Paper 2005-003 is an earlier version of this article)
Xavier Labanderia, José M. Labeaga and Miguel Rodriguez, The Energy Journal, Vol. 27, Issue 2, pp. 87-111, (2006)
Sharp price fluctuations and increasing environmental and distributional concerns, among other issues, have led to a renewed academic interest in energy demand. In this paper we estimate, for the first time in Spain, an energy demand system with household microdata. In doing so, we tackle several econometric and data problems that are generally recognized to bias parameter estimates. This is obviously relevant, as obtaining correct price and income responses is essential if they may be used for assessing the economic consequences of hypothetical or real changes. With this objective, we combine data sources for a long time period and choose a demand system with flexible income and price responses. We also estimate the model in different sub-samples to capture varying responses to energy price changes by households living in rural, intermediate and urban areas. This constitutes a first attempt in the literature and it proved to be a very successful choice.
(CEEPR Working Paper 2005-001 is an earlier version of this article)
Paul Joskow, The Energy Journal, David Newbery Special Edition, 2008
This paper discusses the lessons learned from electricity sector liberalization over the last 20 years. The attributes of reform models that have exhibited good performance attributes are identified, drawing on empirical analysis of market structure, behavior and performance in many countries. Wholesale and retail market competition and network regulation performance evidence are discussed. Technical, economic, and political challenges to improving the efficiency of what continue to be partial liberalization programs in many countries are considered.
Matti Liski, Environmental & Resource Economics, Vol.31, No.2, pp.159-173, (2005)
In this paper, we investigate the effect of market power on equilibrium path of an emission permits market in which firms can bank current permits for use in later periods. In particular, we study the market equilibrium for a large (potentially dominant) firm and competitive fringe with rational expectations. We characterize the equilibrium solution for different permits allocations and discuss the large firm’s stock-holding constraints needed for credible market manipulation.
(CEEPR Working Paper 2004-005 is an earlier version of this article)
Denny Ellerman and Florence Dubroeucq, in: Emissions Trading and Business, Part D, pp. 327-352, Ralf Antes, Bernd Hansjurgens, Peter Letmathe (eds.) (2006)
An enduring issue in environmental regulation is whether to clean up existing “old” plants or in some manner to bring in new “clean” plants to replace the old. In this paper, a unit-level data base of emissions by nearly 2000 electric generating units from 1985 through 2002 is used to analyze the contribution of these two factors in accomplishing the significant reduction of sulphur dioxide emissions from these sources in the United States. The effect on SO2 emissions of the new naturalgas-fired, combined-cycle capacity that has been introduced since 1998 is also examined. The results indicate that cleaning up the old plants has made by far the greatest contribution to reducing SO2 emissions, and that this contribution has been especially large since the introduction of the SO2 cap-and-trade program in 1995. The new natural-gas-fired, combined cycle units have displaced conventional generation that would have emitted about 800.000 tons of SO2; however, the effect has not been to reduce total SO2 emissions since the 9.0 million ton cap is unchanged, but to reduce the quantity of abatement required of other units in meeting the cap and thereby the cost of doing so.
(CEEPR Working Paper 2004-001 is an earlier version of this article)
Michael Greenstone, Journal of Environmental Economics and Management, Vol. 47, No. 3, pp. 585-611, (2004)
Over the last three decades, ambient concentrations of sulfur dioxide (SO2) air pollution have declined by approximately 80%. This paper tests whether the 1970 Clean Air Act and its subsequent amendments caused this decline. The centerpiece of this legislation is the annual assignment of all counties to SO2 nonattainment or attainment categories. Polluters face stricter regulations in nonattainment counties. There are two primary findings. First, regulators pay little attention to the statutory selection rule in their assignment of the SO2 nonattainment designations. Second, SO2 nonattainment status is associated with modest reductions in SO2 air pollution, but a null hypothesis of zero effect generally cannot be rejected. This finding holds whether the estimated effect is obtained with linear adjustment or propensity score matching. Overall, the evidence suggests that the nonattainment designation played a minor role in the dramatic reduction of SO2concentrations over the last 30 years.
(CEEPR Working Paper 2004-007 is an earlier version of this article)
James L. Smith and Rex Thompson, Energy Journal, Vol. 29, Special Issue, (2008)
We consider the impact of sequential investment and active management on the value of a portfolio of real options. The options are assumed to be interdependent, in that exercise of any one is assumed to produce, in addition to some intrinsic value based on an underlying asset, further information regarding the values of other options based on related assets. We couch the problem in terms of oil exploration, where a discrete number of related geological prospects are available for drilling, and managements objective is to maximize the expected value of the combined exploration campaign. Managements task is complex because the expected value of the investment sequence depends on the order in which options are exercised.
A basic conclusion is that, although dependence increases the variance of potential outcomes, it also increases the expected value of the embedded portfolio of options and magnifies the value of optimal management. Stochastic dynamic programming techniques may be used to establish the optimal sequence of investment. Given plausible restrictions on the information structure, however, we demonstrate that the optimal dynamic program can be identified and implemented by policies that are relatively simple to execute. In other words, we provide sufficient conditions for the optimality of intuitive decision rules, like biggest first, most likely first, or greatest intrinsic value first. We also develop exact analytic expressions for the implied value of the portfolio, which permits the value of active management to be assessed directly
(CEEPR Working Paper 2004-003 is an earlier version of this article)
Junsang Nam, Mort Webster, Yosuke Kimura, Harvey Jeffries, William Vizuete and David T. Allen, Atmospheric Environment, Vol 42, pp. 4198-4211 (2008)
High concentrations of ozone in the Houston/Galveston area are associated with industrial plumes of highly reactive hydrocarbons, mixed with NOx. The emissions leading to these plumes can have significant temporal variability, and photochemical modeling indicates that the emissions variability can lead to increases and decreases of 10-50 ppb, or more, in ozone concentrations. Therefore, in regions with extensive industrial emissions, accounting for emission variability can be important in accurately predicting peak ozone concentrations, and in assessing the effectiveness of emission control strategies. This work compares the changes in ozone concentrations associated with two strategies for reducing flare emissions in Houston, Texas. One strategy eliminates the highest emission flow rates, that occur relatively infrequently, and a second strategy reduces emissions that occur at a nearly constant level. If emission variability is accounted for in air quality modeling, these control scenarios are predicted to be much more effective in reducing the expected value of daily maximum ozone concentrations than if similar reductions in the mass of emissions are made and constant emissions are assumed. The change in the expected value of daily maximum ozone concentration per ton of emissions reduced, when emissions variability is accounted for, is 5-10 times the change predicted when constant (deterministic) inventories are used.
(CEEPR Working Paper 2007-009 is an earlier version of this article)
A. Denny Ellerman and Juan-Pablo Montero, The Energy Journal, Vol 28, No. 4, pp. 67-92 (2007)
This paper provides an empirical evaluation of the efficiency of allowance banking in the nationwide market for sulfur dioxide (SO2) emission allowances that was created by the U.S. Acid Rain Program. We develop a model of efficient banking, select appropriate parameter values, and evaluate the efficiency of observed temporal pattern of abatement based on aggregate data from the first eight years of the Acid Rain Program. Contrary to the general opinion that banking in this program has been excessive, we find that it has been reasonably efficient. We also identify the erroneous assumptions underlying the earlier view and the conditions required for efficient banking to exist independently of changes in the counterfactual, an attribute we call robustness. These results show that firms use banking provisions in a rational and predictable way and that, at least in the US Acid Rain Program, there is no support for the often expressed concern that banked permits will be used all at once to create emissions spikes.
(CEEPR Working Paper 2005-005 is an earlier version of this article)
Paul L. Joskow, Utilities Policy, Vol 16, No. 3, pp. 159-170 (September 2008)
This paper argues that a variety of imperfections in wholesale “energy-only” previous electricity markets lead to generators earning net revenues that are inadequate to support investment in a least cost portfolio of generating previous capacity and to satisfy consumer preferences for reliability. Theoretical and numerical examples are used to illustrate the sources of this “missing money” problem. Improvements in “energy-only” wholesale previous electricity markets, especially those that improve pricing when previous capacity is fully utilized, can reduce the magnitude of the missing money problem. However, these improvements are unlikely to fully ameliorate it. Forward previous capacity obligations and associated auction mechanisms to determine previous capacity prices are necessary to restore appropriate wholesale previous market prices and associated investment incentives to support the optimal portfolio of generating investments. The deficiencies of the original previous capacity payment mechanisms adopted in the US are discussed and the necessary improvements identified.
Juan-Pablo Montero, American Economic Review, Vol 98, No. 1, pp. 496-518 (March 2008)
Efficient regulation of the commons requires information about the regulated firms that is rarely available to regulators (e.g., cost of pollution abatement). This paper proposes a simple mechanism that implements the first-best for any number of firms: a uniform price, sealed-bid auction of an endogenous number of (transferable) licenses with a fraction of the auction revenues given back to firms. Paybacks, which rapidly decrease with the number of firms, are such that truth-telling is a dominant strategy regardless of whether firms behave non-cooperatively or collusively. The mechanism also provides firms with incentives to invest in socially optimal R&D.
(CEEPR Working Paper 2006-008 is an earlier version of this article)
Mort Webster, Junsang Nam, Yosuke Kimura, Harvey Jeffries, William Vizuete and David T. Allen, Atmospheric Environment, Vol 41, No. 40, pp. 9580-9593 (December 2007)
Ambient observations have indicated that high concentrations of ozone observed in the Houston/Galveston area are associated with plumes of highly reactive hydrocarbons, mixed with NOBxB, from industrial facilities. Ambient observations and industrial process data, such as mass flow rates for industrial flares, indicate that the VOCs associated with these industrial emissions can have significant temporal variability. To characterize the effect of this variability in emissions on ozone formation in Houston, data were collected on the temporal variability of industrial emissions or emission surrogates (e.g., mass flow rates to flares). The observed emissions variability was then used to construct region-wide emission inventories with variable industrial emissions, and the impacts of the variability on ozone formation were examined for two types of meteorological conditions, both of which lead to high ozone concentrations in Houston. The air quality simulations indicate that variability in industrial emissions has the potential to cause increases and decreases of 10-52 ppb (13-316%), or more, in ozone concentration. The largest of these differences are restricted to regions of 10-20 kmP2P, but the variability also has the potential to increase region wide maxima in ozone concentrations by up to 12 ppb.
(CEEPR Working Paper 2007-008 is an earlier version of this article)
Paul Joskow and Jean Tirole, RAND Journal of Economics Vol 38, No. 1, pp. 60-84 (Spring 2007)
We derive the optimal prices and investment program for an electric power system when there are price-insensitive retail consumers served by load serving entities that can choose any level of rationing contingent on real-time prices. We then examine the assumptions required for competitive electricity markets to achieve this optimal price and investment program and the implications of relaxing several of these assumptions. We analyze the interrelationships between regulatorimposed wholesale market price caps and generating capacity obligations. The implications of potential network collapses for operating reserve requirements and whether market prices yield generation investments consistent with these reserve requirements are examined.
(CEEPR Working Paper 2004-008 is an earlier version of this article)
Kira R. Fabrizio, Nancy L. Rose and Catherine D. Wolfram, American Economic Review Vol 97, No. 4, pp. 1250-1277 ( 2007)
While neoclassical models assume static cost-minimization by firms, agency models suggest that firms may not minimize costs in less-competitive or regulated environments. We test this using a transition from cost-of-service regulation to marketoriented environments for many US electric generating plants. Our estimates of input demand suggest that publicly owned plants, whose owners were largely insulated from these reforms, experienced the smallest efficiency gains, while investor-owned plants in states that restructured their wholesale electricity markets improved the most. The results suggest modest medium-term efficiency benefits from replacing regulated monopoly with a market-based industry structure.
Matti Liski and Juan-Pablo Montero, Journal of Economic Theory 131 (2006) 212-230
We consider an infinitely repeated oligopoly in which at each period firms not only serve the spot market by either competing in prices or quantities but also have the opportunity to trade previous termforwardnext term contracts. Contrary to the pro-competitive results of finite-horizon models, we find that the possibility of previous termforward tradingnext term allows firms to sustain collusive profits that otherwise would not be possible to achieve. The result holds both for price and quantity competition and follows because (collusive) contracting of future sales is more effective in deterring deviations from the collusive plan than inducing the previously identified pro-competitive effects.
Juan-Pablo Montero, RAND Journal of Economics, Vol. 36, No. 3, Autumn (2005), pp. 645–660
I study the advantages of pollution permit markets over uniform emission (or technology) standards when the regulator has incomplete information on firms’ emissions and costs of production and abatement (e.g., air pollution in large cities). Because the regulator observes only each firm’s abatement technology but neither its emissions nor its output, there are cases in which standards can lead to lower emissions and, hence, welfare dominate permits. If permits are optimally combined with standards, in many cases this hybrid policy converges to the permits-alone policy but (almost) never to the standards-alone policy.
Paul L. Joskow, The Energy Journal, Vol. 27, No. 1, (2006)
The transition to competitive wholesale and retail markets for electricity in the U.S. has been a difficult and contentious process. This paper examines the progress that has been made in the evolution of wholesale and retail electricity market institutions. Various indicia of the performance of these market institutions are presented and discussed. Significant progress has been made on the wholesale competition front but major challenges must still be confronted. The framework for supporting retail competition has been less successful, especially for small customers. Empirical evidence suggests that well-designed competitive market reforms have led to performance improvements in a number of dimensions and benefited customers through lower retail prices.
James L. Smith, The Energy Journal, Vol. 26, No. 4, pp. 53-68, (2005)
The transition to competitive wholesale and retail markets for electricity in the U.S. has been a difficult and contentious process. This paper examines the progress that has been made in the evolution of wholesale and retail electricity market institutions. Various indicia of the performance of these market institutions are presented and discussed. Significant progress has been made on the wholesale competition front but major challenges must still be confronted. The framework for supporting retail competition has been less successful, especially for small customers. Empirical evidence suggests that well-designed competitive market reforms have led to performance improvements in a number of dimensions and benefited customers through lower retail prices.
G.C. Watkins, The Quarterly Review of Economics and Finance, Vol. 42, pp. 335-372, (2002)
In many petroleum basins, and especially in more mature areas, most reserve additions consist of the growth over time of prior discoveries, a phenomenon termed reserve appreciation. This paper concerns crude oil reserve appreciation in both the UK and Norwegian sectors of the North Sea. It examines the change in reserves attributed to North Sea fields over time, seeking to reveal atterns of reserve appreciation both for individual fields and for groups of fields classified by potentially relevant common elements. These include field size, year of production start-up, geological age, gravity, depth and depletion rate. The paper emphasizes the statistical analysis of reserve appreciation. It contrasts the Norwegian and UK experience. An important distinction is drawn between appreciation of oil-in-place and changes in recovery factors. North Sea oil reserve appreciation between production start-up and the last observation year (usually 1996) is found to be substantial, but generally lacks a consistent profile. Appreciation recorded for the Norwegian fields on average is considerably greater than for the UK. Most UK appreciation is seemingly accounted for by oil-in-place; in Norway, from increases in recovery factors. However, UK recovery factors commence at much higher levels than those for Norway.
Thomas M. Stoker, Ernst R. Berndt, A. Denny Ellerman, and Susanne M. Schennach, Journal of Econometrics, Vol. 127, pp. 131–164, (2005)
We analyze labor productivity in coal mining in the United States using indices of productivity change associated with the concepts of panel data modeling. This approach is valuable when there is extensive heterogeneity in production units, as with coal mines. We find substantial returns to scale for coal mining in all geographical regions, and find that smooth technical progress is exhibited by estimates of the fixed effects for coal mining. We carry out a variety of diagnostic analyses of our basic model and primary modeling assumptions, using recently proposed methods for addressing ‘errors-in-variables’ and ‘weak instrument bias’ problems in linear and nonlinear models.
M.A. Adelman and G.C. Watkins, Energy Economics, Vol. 27, pp 553-571; (2005)
A time series is estimated of in-ground prices of U.S. oil and natural gas reserve prices for the period 1982–2003, usingmarket transaction data.Reserves sold are considered as proved; errors in this respect may affect estimates, in either direction. The data are also used to examine the impact of reserve status, production rate, and well head prices, on reserve prices.Both oil and gas current values rose after 2000. In real terms, the reserve value of oil rose sharply in 2003, but stayed below the 1985 peak; that of gas remained below the mid-1980s. Oil reserve values hold for the worldwide industry; gas values only for North America.
James L. Smith, The Energy Journal, Vol. 21, No. 1; (2005)
Although OPEC is commonly viewed as a syndicate of producers engaged in cooperative efforts to restrict production and raise price, to date there is a surprising dearth of supporting statistical evidence to that effect. I show that standard statistical tests of OPEC behavior have very low power across a wide range of alternative hypotheses regarding market structure. Consequently, it is difficult, given the current availability and precision of data on demand and costs, to distinguish collusive from competitive behavior in the world oil market. I apply a new, production-based approach for examining alternative hypotheses and find strong evidence of cooperative behavior among OPEC members. My results also suggest that OPEC’s formal quota mechanism, introduced in 1982 to replace a system based on posted prices, increased transactions costs within the organization. Statistical evidence is mixed on the question of whether Saudi Arabia and other core producers have played a special role within the cartel.
A. Denny Ellerman, Environmental & Resource Economics, 31: pp. 123-131, (2005)
This note offers a perspective on whether tradeable permits are a passing fad or an enduring trend. It does so in noting how various types of tradeable permit systems relate to conventional environmental permits, what are the unique requirements of tradeable permit systems, and why they might be preferred to alternative instruments. A final observation concerns the analogy between tradeable permits for environmental goods and private property in land.
Paul L. Joskow, Utilities Policy, Vol. 13, pp. 95-115, (2005).
This paper provides an overview of the development of electric power transmission access, pricing and investment policies in the US over the last 15 years and evaluates the current state of those policies. Pre-liberalization transmission access and pricing policies are reviewed first since more recent policies have evolved from them. FERC’s efforts to ensure that transmission owning utilities provide non-discriminatory access and pricing to wholesale transmission customers, culminating in Order 888 and 889 are discussed. These rules did not respond to problems created by a highly balkanized transmission system and only partially responded to problems caused by common ownership and operation of transmission networks with generating and marketing businesses in the same regions. These problems motivated FERC to seek to create Regional Transmission Organizations (RTO) meeting a long list of criteria related to governance, network operations, transmission pricing and investment as reflected in Order 2000. The slow pace of ‘‘voluntary’’ reform following Order 2000 led FERC to issue a proposed Standard Market Design Rule (SMD) which provided more detailed prescriptions for wholesale market design, network operations, regional planning, resource adequacy, and transmission investment. The SMD rule confronted enormous resistance from groups of utilities and states that had not embraced an electricity sector liberalization agenda. However, many of the provisions of the SMD are being implemented by the RTOs and ISOs in the Northeast and Midwest. PJM’s market rules and transmission pricing, planning and investment policies are reviewed as an articulation of FERC’s RTO and SMD visions.
M.A. Adelman and G. Campbell Watkins, The Energy Journal, Vol. 25, No. 3, (2004).
'Oil Equivalence' is widely used to measure total hydrocarbon activity. Natural gas is converted to oil using a fixed factor, usually based on thermal measurement. In turn, expenditures on oil and gas are divided by such 'oil equivalence' volumes to define unit costs, especially of reserve additions. This approach lacks economic content. We show its implicit assumptions and constraints, and develop an alternative aggregation method using index numbers, with an example.
Robert S. Pindyck, The Journal of Energy and Development Vol. 30, No. 1, (2004).
This paper examines the behavior of natural-gas and crude-oil price volatility in the United States since 1990. Prices of crude oil and especially natural gas rose sharply (but temporarily) during late 2000, and natural gas trading was buffeted by the collapse of Enron in late 2001, suggesting to some that volatility in these markets has increased. Whether or not this is true, volatility has been high and (like prices themselves) fluctuates dramatically.
Morry Adelman, Regulation Vol. 27, No. 1, pp.16-21(2004).
According to “conventional wisdom,” humanity’s need for oil cannot be met and a gap will soon merge between demand and supply. That gap will broaden as the economies of Europe, Japan, and several emerging nations grow and increase their energy needs. The United States is at the mercy of Middle Eastern exporters who can use the “oil weapon” to cripple the U.S. economy. Unless we increase domestic oil production radically or cut consumption, or nations like Russia quickly exploit recently discovered oil fields, the United States will find itself in an oil crisis.
Paul L. Joskow, The Energy Journal 24, : 17-49 (2003).
Hans Landsberg and Sam Schurr each led research teams that produced two important energy futures policy studies that were published in 1979. The conclusions, policy recommendations, and energy demand, supply, and price forecasts contained in these studies are reviewed. Developments in U.S. energy policy over the last 25 years are discussed and compared with the recommendations contained in the two studies. The projections of energy demand, supply, and prices for 2000 contained in the studies are presented and compared to actual realizations. The nature, magnitudes, and reasons for the differences between the studies’ forecasts and what actually emerged 25 years later are discussed. All things considered, the Landsberg and Schurr studies have stood the test of time very well.
A. Denny Ellerman, Paul Joskow, and David Harrison, Jr., Pew Center for Climate Change (2003).
This report examines U.S. experience with emissions trading to provide lessons for future applications, including efforts to address climate change. It reviews six diverse U.S. emissions trading programs, drawing general lessons for future applications and discussing considerations for controlling greenhouse gas emissions. The authors derive five key lessons from this experience. First, emissions trading has been successful in its major objective of lowering the cost of meeting emission reduction goals. Second, the use of emissions trading has enhanced—not compromised—the achievement of environmental goals. Third, emissions trading has worked best when the allowances or credits being traded are clearly defined and tradable without case-by-case certification. Fourth, banking has played an important role in improving the economic and environmental performance of emissions trading programs. Finally, while the initial allocation of allowances in cap-and-trade programs is important from a distributional perspective, the method of allocation generally does not impair the program’s potential cost savings or environmental performance.
Juan Pablo Montero, Journal of Public Economics 85: 435-454 © 2002 with permission from Elsevier Science(USA). ScienceDirectTM
I study whether incomplete enforcement of a regulation has any impact on the choice between price (e.g., taxes) and quantity (e.g., tradeable quotas) instruments. Results indicate that a second-best design accounting for incomplete enforcement can be implemented equally well with either instrument as long as the benefit and cost curves are known with certainty. If these curves are uncertain to the regulator, however, the quantity instrument performs relatively better than the price instrument. The reason is the effective amount of control under the quantity instrument is no longer fixed, which makes this instrument come closer to a non-linear instrument.
Paul L. Joskow and Edward Kahn, The Energy Journal 23, : 1-35 (2002).
During the Summer of 2000, wholesale electricity prices in California were nearly 500% higher than they were during the same months in 1998 or 1999. This price explosion was unexpected and has called into question whether electricity restructuring will bring the benefits of competition promised to consumers. This paper examines the factors that explain this increase in wholesale electricity prices. Competitive benchmark prices for Summer of 2000 are simulated, taking account of all relevant supply and demand factors - gas prices, demand, imports from other states, and emission permit prices. The simulated competitive benchmark prices are then compared with the actual prices observed. A large gap between is found between the benchmark competitive prices and observed prices, suggesting that the prices observed during Summer 2000 reflect, in part, the exercise of market power by suppliers. Supplier behavior during high-price hours is then examined. Suppliers withheld supply from the market that would have been profitable for price-taking firms to sell at the market price.
Juan-Pablo Montero, Journal of Environmental Economics and Managment, Vol. 44, No. 1, pp. 23-44 © 2002 with permission from Elsevier Science(USA). JEEM
I compare environmental R&D incentives offered by four policy instruments--emission standards, performance standards, tradeable permits, and auctioned permits--in the presence of oligopoly permits and output markets. Because R&D incentives depend on direct and strategic effects, standards can offer greater incentives than do permits. If markets are perfectly competitive, however, tradeable and auctioned permits provide equal incentives that are similar to those offered by emission standards and greater than those offered by performance standards.
Robert S. Pindyck, Journal of Economic Dynamics & Control, Vol. 26, pp. 1677-1697. © 2002 with permission from Elsevier Science. ScienceDirect
Because of the uncertainties and irreversibilities that are often inherent in environmental degradation, its prevention, and its economic consequences, environmental policy design can involve important problems of timing. I use a simple two-period model to illustrate these optimal timing problems and their implications for environmental policy. I then lay out and solve a continuous-time model of policy adoption in which the policy itself entails sunk costs, and environmental damage is irreversible. The model generalizes earlier work in that it includes two stochastic state variables; one captures uncertainty over environmental change, and the other captures uncertainty over the social costs of environmental damage. Solutions of the model are used to show the implications of these two types of uncertainty for the timing of policy adoption.
Juan-Pablo Montero, J.M Sanchez, and R. Katz, Journal of Law and Economics, Vol. XLV, pp. 267-287 ( April 2002).
We evaluate the performance of an environmental market in a less developed country on the basis of the experiences of the particulate matter control program of Santiago, Chile. We find that grandfathering the permits has created economic incentives for incumbent sources to more readily declare their (historic) emissions in order to claim any permits. In addition, the market has not fully developed because of transaction costs, regulatory uncertainty, and incomplete enforcement. Nonetheless, it has provided sources with the flexibility to adapt to new market conditions. Our analysis of this particular experience indicates that market-based policies can provide important advantages over traditional command-and-control policies even under limited institutional capabilities.
Denny Ellerman, in The Energy Journal, Vol. 23, No. 2, pp. 1-26 (2002).
This paper discusses the problems of implementing a cap-and-trade system for controlling SO2 emissions in China. It describes the evolution of current air emissions policy for SO2 emissions and focuses on two critical aspects for establishing a tradable permits system in China: the transition from (non-tradeable) facility-specific permits to tradable (emissions) permits and the integration of tradable permits with pre-existing pollution levy system. A major theme throughout the paper is that the requirements for establishing an effective tradable permits system do not differ greatly from those for an equally effective tax or command-and-control regime. Although each instrument has distinctive features, the differences among them are mainly ones of form. All require that the same fundamental problems be solved: How to allocate the cost of burden of reducing emissions, what specific requirements to place on emitting sources, and how to ensure compliance.
Juan Pablo Montero, in The RAND Journal of Economics, Vol. 32, No. 4, pp. 762-774 (Winter 2001).
I study the optimal design of marketable permit systems to regulate various pollutants (e.g., air pollution in urban areas) when the regulator lives in a real world of imperfect information and incomplete enforcement. I show that the regulator should have pollution markets integrated through optimal exchange rates when the marginal-abatement cost curves in the different markets are steeper than the marginal-benefit curves; otherwise he should keep markets separated. I also find that incomplete enforcement reduces the advantage of market integration.
Paul L. Joskow, in the Oxford Review of Economic Policy, Vol. 17, No. 3, pp. 365-388 (2001).
The paper examines the economic and regulatory factors that led to an explosion in wholesale power prices, supply shortages, and utility insolvencies in California's electricity sector from May 2000 to June 2001. The structure of California's restructured electricity sector and its early performance are discussed. The effects on wholesale market prices of rising natural gas prices, increasing demand, reduced power imports, rising pollution credit prices, and market power, beginning in the summer of 2000, are analysed. The regulatory responses leading to utility credit problems and supply shortages are identified. The effects of falling natural gas prices, reduced demand, state power-procurement initiatives, and price-mitigation programmes on prices beginning in June 2001 are discussed. A set of lessons learned from the California experience concludes the paper.
Byron Swift, in Tulane Environmental Law Journal, Vol. 14, No. 2, pp. 309–425 (Summer 2001).© 2001 by Tulane Environmental Law Journal. All rights reserved. Posted with permission from Tulane Environmental Law Journal.
With this reprint, the Center for Energy and Environmental Policy Research (CEEPR) makes an exception to its normal practice of publishing only articles attributable to research in energy and environmental economics funded by the Center. We make an exception with this article because of the important contribution that it makes to the subject of improving environmental regulation and the article’s heavy reliance upon research sponsored by CEEPR.
This study is designed to examine the actual performance of environmental regulations and the compliance behavior of regulated business in a real-world setting. It focuses on business compliance with regulatory standards for nitrogen oxides and sulfur dioxide in the electric power industry from 1995 through 1999. The selected time period permits evaluation of Phase I of Title IV of the Federal Clean Air Act, enacted in 1990 to regulate utility emissions of sulfur dioxide and nitrogen oxides. This allows comparison of the two contrasting approaches Title IV imposed on electricity-generating facilities: an emissions cap and allowance trading program for sulfur dioxide, the most ambitious such program operating in the United States, and a more traditional technology-based emission rate standard to control nitrogen oxides emissions. The study also compares these standards to the new source standards for nitrogen oxides and sulfur dioxide in effect during the 1995-99 period, providing findings about business behavior in the face of varied regulatory standards.
Robert S. Pindyck, The Energy Journal 22  1-29 (2001).
I discuss the short-run dynamics of commodity prices, production, and inventories, as well as the sources and effects of market volatility. I explain how prices, rates of production, ana’ inventory levels are interrelated, and are determined via equilibrium in two interconnected markets: a cash market for spot purchases and sales of the commodity, and a market for storage. I show how equilibrium in these markets affects and is affected by changes in the level qf price volatility. I also explain the role and behavior of commodity futures markets, and the relationship between spot prices, futures prices, and inventoql behavior. I illustrate these ideas with data for the petroleum complex - crude oil, heating oil, and gasoline - over the past two decades.
A. Denny Ellerman, Paul L. Joskow, Richard Schmalensee, Juan-Pablo Montero, and Elizabeth M. Bailey, Peter Crampton, Journal of Economic Literature, Vol. 38, pp. 627-633 (September 2000)
Markets for Clean Air is the definitive text on the U.S. acid rain program. The authors analysis is careful and convincing. The reader is rewarded with significant insights about a major environmental program. One learns how Title IV came to be and what were the consequences of rent seeking in its formation. One learns that the program was successful in cutting the costs of SO2 emission reductions by about half, saving tens of billions of dollars over the life of the program. And one learns a sound methodology for evaluating the success of an innovative market-based program. Both scholars and policy-makers will have a better sense of the virtues and pitfalls of market-based regulation after reading this book.
Robert S. Pindyck, Resource and Energy Economics, Vol. 22, pp. 233-59 (2000).
The standard framework in which economists evaluate environmental policies is cost-benefit analysis, so policy debates usually focus on expected flows of costs and benefits, or on the choice of discount rate. But this can be misleading when there is uncertainty over future outcomes, when there are irreversibilities, and when policy adoption can be delayed. This paper shows how two kinds of uncertainty - over the future costs and benefits of reduced environmental degradation, and over the evolution of an ecosystem - interact with two kinds of irreversibilities - sunk costs associated with environmental regulation, and sunk benefits of avoided environmental degradation - to affect optimal policy timing and design.
Juan-Pablo Montero, Journal of Public Economics, Vol. 75, No. 2, pp. 273-91 (February 2000)
This paper studies a phase-in emissions trading program with voluntary opt-in possibilities for non-affected firms and derives optimal permits allocations to affected and opt-in firms when the environmental regulator has incomplete information on individual unrestricted emissions and control costs. The regulator faces a tradeoff between production efficiency (minimization of control costs) and information rent extraction (reduction of excess permits allocated to opt-in firms). The first-best equilibrium can be attained if the regulator can freely allocate permits to affected and opt-in firms; otherwise a second-best equilibrium is implemented. The latter is sensitive to uncertainty in control costs and benefits. Copyright 2000 Elsevier Science S.A. All rights reserved. Reprinted with permission from Elsevier Science.
Single copies of the article can be downloaded and printed fromhttp://www.elsevier.nl/cas/tree/store/pubec/sub/2000/75/2/1873.pdf for the reader's personal research and study."
Richard Schmalensee and Thomas M. Stoker, Econometrica, Vol. 67, No. 3, pp. 645-62 (May 1999)
Continued rapid growth in U.S. gasoline consumption is of particular interest because of various environmental consequences, from increased urban pollution and congestion to overall climate change. For projection trends in gasoline consumption, one can turn to an extensive econometric literature on gasoline demand, based largely on aggregate data. These studies tend to find a long-run income elasticity of around unity, which suggests substantial future growth in gasoline consumption in the U.S. and abroad.
In this paper, we give results from studying household-level data on gasoline consumption. Our analysis is motivated by several issues that arise from using existing studies to project secular trends in gasoline consumption. First is the question of whether high income households display the same income elasticity as other households. Will households with incomes of $60,000 really drive about twice as much on average as households with incomes of $30,000? If not, the aggregate income elasticity of demand may well fall over time, with consumption growth slowing relative to GDP growth. The most natural way to learn about the gasoline demand of future high-income consumers is to study the behavior of today's high-income consumers, which leads us to using household-level data.
Second, over periods of a decade or more, age structures and other demographic characteristics may change substantially, and it is reasonable to expect such changes will affect gasoline demand. The United States has seen a substantial aging of the population over the last several decades, as well as the emergence of two-earner (often two-commuter) households as a typical model. However, as Dahl (1993) notes, very little work has been done on gasoline demand at the household level, and even less has taken full account of differences in household composition and location. Moreover, secular trends are associated with longer-run determinants of demand, which are also consistent with the use of household-level data.
Avinash Dixit, Robert S. Pindyck, and Sigbørn Sødal, The Economic Journal, Vol. 109, No. 455, pp. 179-89 (April 1999)
We re-examine the basic investment problem of deciding when to incur a sunk cost to obtain a stochastically fluctuating benefit. The optimal investment rule satisfies a trade-off between a larger versus a later net benefit; we show that this trade-off is closely analogous to the standard trade-off for the pricing decision of a firm that faces a downward sloping demand curve. We reinterpret the optimal investment rule as a markup formula involving an elasticity that has exactly the same form as the formula for a firm's optimal markup of price over marginal cost. This is illustrated with several examples.
A. Denny Ellerman and Juan-Pablo Montero, The Journal of Environmental Economics and Management, Vol. 36, No. 1, pp. 26-45 (July 1998). Copyright © 1998 by Academic Press
In this paper, we find that sulfur dioxide (SO2) emissions by electric utilities declined from 1985 to 1993 for reasons largely unrelated to the emission reduction mandate of Title IV of the 1990 Clean Air Act Amendments. The principal reason appears to be the decline in rail rates for low-sulfur western coal delivered to higher-sulfur coal-fired plants in the Midwest. Consequently, there is less sulfur to be removed to meet the Title IV cap on aggregate SO2emissions, and the cost of compliance and price of allowances can be expected to be less than would otherwise have been the case.
Elizabeth M. Bailey, The Energy Journal, Vol. 11, No. 6, pp. 51-60
Econometric analysis shows that most of the western United States may be seen as a single market for wholesale electricity. However, conditions that create congestion in the transmission system - such as high hydroelectic flows in the Pacific Northwest, transmission outages and deratings, and high demand for power - can cause the scope of the market to narrow at times.
Thomas-Olivier Nasser, The Electricity Journal, Vol. 11, No. 4, pp. 32-39, Copyright 1998, with permission from Elsevier Science
Capacity constraints on the transmission network - the key to achieving most of the economics benefits promised by restructuring - affect competition in electricity generation. Despite early speculation to the contrary, economic models are unable to predict whether imperfect competition in generation increases or reduces transmission congestion payments.
Robert S. Pindyck, The Energy Journal, Vol. 20, No. 2, pp. 1-27, 1999
Abstract, as published:
In this paper I examine the long-run behavior of oil, coal, and natural gas prices, using up to 127 years of data, and address the following questions: What does over a century of data tell us about the stochastic dynamics of price evolution, and how it should be modelled? Can models of reversion to stochastically fluctuating trend lines help us forecast prices over horizons of 20 years or more? And what do the answers to these questions tell us about investment decisions that are dependent on prices and their stochastic evolution?
Posted with permission from the International Association for Energy Economics.