Market design

Europe is liberalising electricity in accordance with the European Commission’s Electricity Directives. Different countries have responded differently, notably in the extent of restructuring, treatment of mergers, market power, and vertical unbundling. While Britain and Norway have achieved effective competition, others like Germany, Spain and France are still struggling to deal with dominant and sometimes vertically integrated companies. The Netherlands offers an interesting intermediate case, where good economic analysis has sometimes been thwarted by legalistic interpretations. Investment under the new Emissions Trading system could further transform the electricity industry but may be hampered by slow progress in liberalising European gas markets

Constrained Regulatory Exit in Energy Law

In recent years, the federal government’s efforts to open up competitive electricity markets have transformed how we think about the regulation of energy. In many respects, the Federal Energy Regulatory Commission’s (FERC) broad “deregulatory” efforts, which commenced in the 1990s, might appear to be a case of paradigmatic regulatory exit as defined by J.B. Ruhl and Jim Salzman. But our case study of FERC’s restructuring of wholesale electricity markets reveals some important institutional features that make exit in federalism contexts, and under federal statutory duties, a rich and difficult problem. In the context of energy, exit from one regulatory sphere can create regulatory gaps. This has led FERC, which largely exited the regulation of wholesale electricity rates, to increase regulation in other spheres. It has also invited forms of intergovernmental exchange, as states have emulated or otherwise responded to FERC’s regulatory modifications in the areas in which states have jurisdiction. In this sense, the transition to competitive energy supply markets has involved constrained exit characterized by a hydraulic back-and-forth between regulators and institutions in an effort to ensure that statutory duties are fulfilled and other public needs are met. This assessment of regulatory exchange has a prescriptive implication: a federal regulator seeking to exit specific forms of conventional regulation needs to proactively develop strategies to facilitate regulatory exchange, while simultaneously preserving its authority over important substantive values related to its regulatory mission. Attention to “offsetting” regulations is often necessary to ensure that problematic regulatory gaps will not arise. In the energy context, these strategies might also include the use of mechanisms that give other institutions a voice in implementing exit strategies, as well as better ex ante regulatory planning for market enforcement that will continue after partial exit. We argue that it is not only a good strategy for federal regulators to recognize this hydraulic feature of exit, but that cooperative federalism statutes such as the Federal Power Act often require them to do so

The Complexity Dilemma in Policy Market Design

Regulators are increasingly pursuing their policy objectives by creating markets. To create a policy market, regulators require firms to procure a product that is socially useful but that confers little direct private benefit to the acquiring party. Examples of policy markets include pollutant emissions trading programs, renewable energy credit markets, and electricity capacity markets. Existing scholarship has tended to analyze policy markets simply as market-based regulation. Although not inaccurate, such inquiries are necessarily incomplete because they do not focus on the distinctive traits of policy markets. Policy markets are neither typical regulations nor typical markets. Concentrating on policy markets as a distinctive type of market brings to light common characteristics of such markets, which in turn generates insights into how they can be used more effectively to implement policy. In particular, this Article focuses on a recurring fundamental challenge in policy market design: managing complexity. Typical markets manage complexity through market forces. As a regulatory creation, however, policy markets require regulators to manage their complexity. This poses what we call the complexity dilemma, which requires regulators to balance strong pressures both toward and away from complexity. The central argument of this Article is that although policy markets are an important part of a regulator’s toolkit, they are also subject to complexity that limits their usefulness. Understanding the complexity dilemma and its crucial role in policy market design forms an essential step toward progress in improving the design and function of these markets

Doctor of Philosophy

dissertationThe problem of pollution is not going away. As global Gross Domestic Product (GDP) rises, so does pollution. Due to the existence of environmental externalities, polluting firms lack the incentive to abate their pollution, and without regulations, markets do not adequately control pollution. While regulators are responsible for enacting regulations, the firms ultimately determine the environmental outcomes through their production decisions. Furthermore, polluting industries are typically large and concentrated, raising the concern that market power may be present in these industries. In this dissertation, we study the interactions between powerful, strategic, firms operating under pollution regulations and the regulator when markets are imperfectly competitive. An important contribution of this work is our integrated pollution-production model, which incorporates the firms' emissions, abatement technologies, the damage from pollution, and three widely-used regulatory mechanisms-Cap, Cap-and-Trade, and Tax. The firms compete with each other and control prices by setting their production quantities. In our model, the firms have many options to comply with the pollution constraints enforced by the regulator, including abating pollution, reducing output, trading in emission allowances, paying emission taxes, investing in abatement innovations, colluding, and combining some of these options. Following the introduction in Chapter 1, we address three broad questions in three separate chapters. • Chapter 2: What is the e↵ect of the pollution control mechanisms on firms, consumers, and society as a whole? Which mechanisms and policies should regulators use to control pollution in a fair, e↵ective, and practical manner? • Chapter 3: Does Cap-and-Trade enable collusion? If it does, what are the e↵ects of collusion? • Chapter 4: Which mechanisms encourage more investments in abatement innovations? Our results apply to di↵erent types of pollutants and market structures. Our research provides guidelines for both policy-makers and regulated firms

Liberalisation of European energy markets: challenges and policy options

The European electricity and gas markets have been going through a process of liberalisation since the early 1990s. This process has changed the sector from a regulated structure of, predominantly, publicly owned monopolists controlling the entire supply chain, into a market where private and public generators and retailers compete on a regulated and unbundled system of transport infrastructure. This report assesses the evidence of the effects of liberalisation on efficiency, security of energy supply and environmental sustainability.

Australia's energy options: policy choice not economic inevitability

Executive summary A reliable and affordable supply of energy is a fundamental component to a vibrant economy. As a major source of commodities, including significant known reserves of low carbon emission energy sources, Australia is well positioned to supply the world’s future energy needs. In order for that to occur, Australia needs to examine all its energy options. The Government released a Draft Energy White paper in November 2011. CEDA considers this an opportunity that the Government should not miss in ensuring that Australia not only develops its energy resources for national economic gain but also to guarantee access to reasonably priced energy for Australian consumers. CEDA determined it would contribute to this significant debate by undertaking a year-long research project that examined Australia’s future energy options. As part of this research project CEDA published three policy perspectives that addressed Australia’s nuclear, renewables and efficiency and unconventional energy options. Recommendations in each of these perspectives were made with the specific aim of providing policy-makers with evidence-based research on the various energy sources either currently available or being actively explored and researched, often funded through the public purse. Fundamental governance decisions underpinned by strong economic policy arguments were at the centre of these recommendations. This final research report canvasses one of the more significant current debates associated with the availability of energy – the Australian electricity market. It puts forward a series of recommendations designed to enhance this element of the energy sector’s efficiency, security and effectiveness by placing consumers at the centre of the energy market and a reform agenda is proposed. Related identifier: ISBN 0 85801 284

Corporate Social Responsibility and the Environment: A Theoretical Perspective

We survey the growing theoretical literature on the motives for and welfare effects of corporate greening. We show how both market and political forces are making environmental CSR profitable, and we also discuss morally-motivated or altruistic CSR. Welfare effects of CSR are subtle and situation-contingent, and there is no guarantee that CSR enhances social welfare. We identify numerous areas in which additional theoretical work is needed.corporate social responsibility, environment, self-regulation, preemption, private politics

Identification of Options and Policy Instruments for the Internalisation of External Costs of Electricity Generation. Dissemination of External Costs of Electricity Supply Making Electricity External Costs Known to Policy-Makers MAXIMA

In the present paper, after reviewing the results of the ExternE project and its follow-up stages in the estimation of the external costs of electricity production, we look at the policy instruments for the internalisation of such costs. Emphasis is given to subsidies, such as feed-in tariffs, competitive bidding processes and tradable green certificates to stimulate the use of renewables in the production of electricity. When policy-makers are asked to choose the instrument(s) to internalise the externalities in the electricity production, they have to find a solution that gives the best outcome in terms of efficiency, cost minimisation, impact on the job market, security of energy supply, equity of the instrument, technological innovation, certainty of the level of the internalisation, and feasibility. The choice of the instrument will require some trade-offs among these criteria. Conjoint choice analysis can help in investigating how stakeholders and policy makers trade off the criteria when choosing a policy for the internalisation of the externalities. In this paper we present the first results of a questionnaire that employs conjoint choice questions to find out how policy makers and stakeholders of the electricity market trade off some socio-economic aspects in the selection of the policy instruments for the internalisation of the externalities. The results of this first set of interviews will be useful for further research.Policy instruments, ExternE, External costs, Electricity, Conjoint choice analysis

Better by design: Business preferences for environmental regulatory reform

We present the preferences for environmental regulatory reform expressed by 30 UK businesses and industry bodies from 5 sectors. While five strongly preferred voluntary regulation, seven expressed doubts about its effectiveness, and 18 expressed no general preference between instrument types. Voluntary approaches were valued for flexibility and lower burdens, but direct regulation offered stability and a level playing field. Respondents sought regulatory frameworks that: are coherent; balance clarity, prescription and flexibility; are enabled by positive regulatory relationships; administratively efficient; targeted according to risk magnitude and character; evidence-based and that deliver long-term market stability for regulatees. Anticipated differences in performance between types of instrument can be undermined by poor implementation. Results underline the need for policy makers and regulators to tailor an effective mix of instruments for a given sector, and to overcome analytical, institutional and political barriers to greater coherence, to better coordinate existing instruments and tackle new environmental challenges as they emerge

The New Australian Government's Primary Industries Policies: Some Implications and Opportunities

After more than a decade in opposition, the win by the Australian Labor Party (ALP) at the 2007 Federal Election focuses attention on their pre-election policies. The paper summarises ALP pre-election policies for primary industries, including the resources and seafood sectors; indicates program and policy funding where it is clearly indicated in the policy papers, and commences an interpretation of the implications and opportunities that may develop as the new government proceeds to discuss its policies and their implementation. A major shift in the context for all primary industries policies to 'climate change', irrespective of whether the component policies appear to be little changed is articulated. The detail of climate change policy awaits the Climate Change Review by Professor Ross Garnaut in mid-2008. The immediate implications and opportunities for all specific policies is that they need to be viewed through the new and overarching lens of 'adapting to climate change'.Environmental Economics and Policy, Political Economy,