Price volatility and risk exposure: on the interaction of quota and product markets

We consider an industry with firms that produce a final good emitting pollution to different degree as a side effect. Pollution is regulated by a tradable quota system where some quotas may have been allocated at the outset, i.e. before the quota market is opened. We study how volatility in quota price affects firm behaviour, taking into account the impact of quota price on final-good price. The impact on the individual firm differs depending on how polluting it is - whether it is `clean' or `dirty'- and whether it has been allocated quotas at the outset. In the absence of long-term or forward contracting, the optimal initial quota allocation turns out to resemble a grandfathering regime: clean firms are allocated no quotas - dirty firms are allocated quotas for a part of their emissions.With forward contracts and in the absence of wealth effects initial quota allocation has no effect on firm behaviour.regulation, effluent taxes, tradable quotas, uncertainty, risk aversion, environmental management

THE NORDIC MARKET: SIGNS OF STRESS?

The supply shock that hit the Nordic electricity market in 2002-2003 put the market to a severe test. A sharp reduction in inflow to hydro reservoirs during the normally wet months of late autumn pushed electricity prices to unprecedented levels. We take this event as the starting point for analysing some potential weaknesses of the Nordic market. We conclude that fears regarding supply security and adequacy are likely to be unfounded. Nevertheless, as inherited over-capacity is eroded, and new market-based environmental regulation takes effect, tighter market conditions are to be expected. It is then crucial that retail markets are fully developed so as to allow consumers to adequately protect themselves from occurrences of price spikes.Production; Pricing; and Market Structure; Size Distribution of Firms; Firm Performance: Size; Diversification; and Scope; Retail and Wholesale Trade; e-Commerce; Air Transportation; Organizational Behavior; Transaction Costs; Property Rights; Oligopoly and Other Forms of Market Imperfection.

Prices vs. quantities: the case of risk averse agents

We explore the efficacy of price and quantity controls as environmental policy instruments in a stochastic setting in which agents are risk averse. We demonstrate that the assumption of risk aversion may improve the performance of a tax relative to that of a system of tradable quotas, and that restricting quota trade may enhance e.ciency even though risk aversion in itself limits volumes of trade. The government may be able to improve the performance of a tradable quota system by judicious choice of distribution and amount of initial quotas and by trading pro-actively in the quota market

Investment incentives and auction design in electricity markets

Motivated by the regulatory debate in electricity markets, we seek to understand how market design affects market performance through its impact on investment incentives. For this purpose, we study a two-stage game in which firms choose their capacities under demand uncertainty prior to bidding into the spot market. We analyse a number of different market design elements, including (i) two commonly used auction formats, the uniform-price and discriminatory auctions, (ii) price-caps and (iii) bid duration. We find that, although the discriminatory auction tends to lower prices, this does not imply that investment incentives at the margin are poorer; indeed, under reasonable assumptions on the shape of the demand distribution, the discriminatory auction induces (weakly) stronger investment incentives than the uniform-price format

Decentralised Cross-Border Interconnection

Reaping the full benefits from cross-border interconnection typically requires reinforcement of national networks. When the relevant parts of the networks are complements, a lack of coordination between national transmission system operators typically results in investment below optimal levels in both interconnectors and national infrastructure. A subsidy to financially sustain interconnector building is not sufficient to restore optimality; indeed, even when possible, such subsidisation may have to be restrained so as not to encourage cross-border capacities that will not be fully utilised due to lack of investment in national systems

The Nordic Market: Signs of Stress?

The supply shock that hit the Nordic electricity market in 2002-2003 put the market to a severe test. A sharp reduction in inflow to hydro reservoirs during the normally wet months of late autumn pushed electricity prices to unprecedented levels. We take this event as the starting point for analysing some potential weaknesses of the Nordic market. We conclude that fears regarding supply security and adequacy are likely to be unfounded. Nevertheless, as inherited over-capacity is eroded, and new market-based environmental regulation takes effect, tighter market conditions are to be expected. It is then crucial that retail markets are fully developed so as to allow consumers to adequately protect themselves from occurrences of price spikes

Decentralised Cross-Border Interconnection

Reaping the full benefits from cross-border interconnection typically requires reinforcement of national networks. When the relevant parts of the networks are complements, a lack of coordination between national transmission system operators typically results in investment below optimal levels in both interconnectors and national infrastructure. A subsidy to financially sustain interconnector building is not sufficient to restore optimality; indeed, even when possible, such subsidisation may have to be restrained so as not to encourage cross-border capacities that will not be fully utilised due to lack of investment in national systems

On the Enforcement of Trade Embargoes by the Merchant Guilds

Compensation from rulers of trading centres to merchants whose property rights had been violated was a notable feature of early European international trade. We demonstrate in a repeated-game model that demands for compensation made threats by merchant guilds to impose trade boycotts self-enforcing for individual merchants, thus removing incentives for embargo breaking that could otherwise have rendered guilds powerless. Long-distance merchants were thus protected from predation by medieval city rulers, possibly providing a foundation for the trade expansion of the `Commercial Revolution'. We also address the frequently neglected issue of whether the guilds and cities would have agreed on the level of trade which they wished to support

On the Enforcement of Trade Embargoes by the Merchant Guilds

Compensation from rulers of trading centres to merchants whose property rights had been violated was a notable feature of early European international trade. We demonstrate in a repeated-game model that demands for compensation made threats by merchant guilds to impose trade boycotts self-enforcing for individual merchants, thus removing incentives for embargo breaking that could otherwise have rendered guilds powerless. Long-distance merchants were thus protected from predation by medieval city rulers, possibly providing a foundation for the trade expansion of the `Commercial Revolution'. We also address the frequently neglected issue of whether the guilds and cities would have agreed on the level of trade which they wished to support

Decentralised Cross-Border Interconnection

Reaping the full benefits from cross-border interconnection typically requires reinforcement of national networks. When the relevant parts of the networks are complements, a lack of coordination between national transmission system operators typically results in investment below optimal levels in both interconnectors and national infrastructure. A subsidy to financially sustain interconnector building is not sufficient to restore optimality; indeed, even when possible, such subsidisation may have to be restrained so as not to encourage cross-border capacities that will not be fully utilised due to lack of investment in national systems