Energy Economics

Paper Session

Friday, Jan. 6, 2017 8:00 AM – 10:00 AM

Hyatt Regency Chicago, Dusable
Hosted By: Econometric Society
  • Chair: Mar Reguant, Northwestern University

Separate Markets for Externalities: Regional versus State-by-State Implementation of the Clean Power Plan

Jose Miguel Abito
,
University of Pennsylvania
Christopher Knittel
,
Massachusetts Institute of Technology
Konstantinos Metaxoglou
,
Carleton University
Andre Trindade
,
Getulio Vargas Foundation

Abstract

Are separate markets for an externality that inefficient compared to a single market? We study this question in the context of the Clean Power Plan (CPP) in the U.S. and examine the relative economic efficiency of regional versus state-by-state implementation in the Pennsylvania-New Jersey-Maryland (PJM) Interconnection. We show that the potential negative effects of having separate markets for CO2 are mitigated by the fact that firms participate in a single market for electricity, and will optimally make their investment decisions taking into account the distribution of production and CO2 prices across markets. Despite lacking the "invisible hand" of a single market for CO2, profit-maximizing firms implicitly coordinate separate markets via investment in new capacity.

Measuring Leakage Risk

Mar Reguant
,
Northwestern University
Meredith Fowlie
,
University of California-Berkeley

Abstract

The global nature of the climate change problem creates challenges for regional climate change policy. When a policy regulating greenhouse gas emissions applies to only a subset of emitting firms (i.e. the policy is ``incomplete"), regulated sources can find it difficult to compete with firms in less regulated jurisdictions. A policy-induced shift in economic activity to less regulated jurisdictions can substantially undermine policy effectiveness via emissions ``leakage". Concerns about leakage loom large in the debate about how to design and implement regional policy responses to the global climate change problem.
Economists generally agree that, in a world of incomplete carbon regulation, full auctioning of permits, together with some form of border tax adjustment, would be the preferred approach to mitigating emissions leakage. For a number of reasons, however, this approach has been difficult to implement in practice. Thus, economists have been exploring what amounts to the next-best option: output-based rebating (e.g. Fischer and Fox 2007, Fowlie et al 2015, Quirion 2009, Fischer and Fox 2012, Meunier et al 2012). The basic idea involves offsetting potentially adverse competitiveness impacts of climate policy with a production-based subsidy. In the case of a tax the subsidy comes out of tax revenues. In the case of an emissions trading program, the subsidy can be paid in terms of free emissions permits. Although output-based rebating can effectively mitigate leakage, these provisions come at a cost. First, the implicit production subsidy refunds a fraction of the compliance costs in industries receiving compensation. This dilutes the emissions price signal and undermine the extent to which consumption is efficiently allocated away from carbon-intensive goods. Second, an opportunity cost is incurred when permits are allocated for free versus auctioned. Permit auction revenues used to rebate costs could be put to an alternate productive use.

Prices, Quantities and Investment in Electricity Markets

Steve Cicala
,
University of Chicago
Thomas R. Covert
,
University of Chicago
Joseph Cullen
,
Washington University-St. Louis

Abstract

Cap-and-trade programs and emissions taxes both provide market-based incentives for existing “dirty” power plants to retire and for new “clean” power plants to enter a market. Though both policy instruments increase the price of pollution above zero, taxes result in a stable price, while cap-and-trade programs lead to potentially volatile prices. We use stylized models of investment allocation and timing to show that this volatility increases the total cost of the socially efficient power plant capital stock, delays the retirement of existing dirty plants and delays the arrival of newer, cleaner power plants. Our model introduces the notion that the abatement curve is endogenous to the policy instrument, rather than simply uncertain, but fixed. To measure the magnitudes of these effects in real world power plant investment, we estimate the impact of fuel price volatility on power plant construction and retirement decisions using comprehensive data on US power plant construction, retirement and hourly operations over the last 20 years.
JEL Classifications
  • Q0 - General