Quebec's Green Future: The Lowest-Cost Route to Green Gas Reductions

The authors say Quebec’s efforts to reduce greenhouse gas (GHG) emissions must face some key facts. First, the possibilities of an effective reduction of GHG emissions through the substitution of one energy source for another are limited in Quebec. Second, Quebec’s era of low-cost hydroelectric production is finished. And third, low domestic electricity prices favour heavy usage and limit Quebec’s capacity to export clean hydroelectricity. This Backgrounder is also available in French.economic growth and innovation, greenhouse gas emissions (GHG), Quebec, carbon tax

The Measurement of the Energy Intensity of Manufacturing Industries: A Principal Components Analysis

Energy intensity is the ratio of energy use to output. Most industries deal with several energy sources and outputs. This leads to the usual difficulties of aggregating heterogeneous inputs and outputs. We apply principal components analysis to assess the information derived from six energy intensity indicators. We use two measures of total energy use (thermal and economic) and three measures of industry output (value added, value of production, and value of shipments). The data comes from manufacturing industries in Québec, Ontario, Alberta, and British Columbia from 1976 to 1996. We find that the variation of the six energy intensity indicators that is accounted for by the first principal component is quite large. However, depending on how variables are measured, there may be significant differences in the assessment of the evolution of energy intensity for some industries. There are no particular patterns in this respect. This makes identifying benchmarks that could be used to assess future performance difficult.Energy intensity; aggregation; principal components analysis

Nodal Pricing and Transmissions Losses. An Application to a Hydroelectric Power System

Since January 1st, 1997, the wholesale electricity market in the U.S. has been open to competition through FERC Order 888. In order to satisfy the reciprocity requirements which were imposed by FERC to foreign utilities, Hydro-Québec made her transmission grid accessible to third parties. A single flat rate is applied to account for transmission losses; location and time of use play no role. Hydro-Québec is a hydro based utility and it has very long linear high voltage power lines which link hydro power sites in the north to consumption centres in the south. In this paper, we compare three different methods of incorporating transmission losses into nodal prices for a simpplified model of Hydro-Québec electric network: flat rate, linear power loss rates, and quadratic power loss rates. The latter two vary by node and time of use. We estimate that nodal price differences between the flat rate and the quadratic power loss rates can be as large as 27.8% on the producer side and 32.7% on the consumer side. The implications of such price differences for the location of economic activity over the service area could be significant.Electricity, Transmission Pricing, Hydro Power

Seamless Electricity Trade between Canada and US Northeast

We analyse how the wholesale electricity market deregulation could modify exchanges between three Canadian regions (Ontario, Quebec and New Brunswick) and two U.S. regions (New York and New England), which were already trading electricity before the regulatory change took place in 1997. We find that the pre-1997 exchanges already made possible fuel cost savings of $397.2 million per year while deregulation adds annual savings of$358.7 million. Canadian regions are the main beneficiaries under the assumption that exports are priced at the marginal costs of the importing regions. Imports from the Canadian regions, although significant, are not large enough to lower the marginal costs of the U.S. regions. Hence electricity deregulation across the border should not significantly decrease prices in the U.S. regions although the latter are becoming more dependant upon imports from Canada. Greenhouse gas emissions increase by 4.3 Mt CO2 eq. in the wake of the open wholesale electricity market because of the low cost of coal, particularly in Ontario. Environmental concerns and the limited availability of additional hydroelectric power in Canada could change the trade patterns as electricity demand continue to grow.Minimum Electricity, deregulation, trade

Environmental Impact Assessment and Investment under Uncertainty. An Application to Power Grid Interconnection

We consider a firm that must undergo a costly and time-consuming regulatory process before making an irreversible, lagged investment whose value varies randomly. We analyze two cases: regulatory approval is valid forever or it expires after some time. We apply our model to Hydro-Québec's project of building a 1250 megawatts interconnection with Ontario. We find that the firm may start the regulatory process earlier if regulatory approval is valid long enough or if uncertainty is high enough; it postpones it otherwise. When to start the regulatory process and when to invest depend on the duration of the regulatory green light.Regulation, uncertainty, irreversibility, real options, interconnections

Environmental Impact Assessment and Investment under Uncertainty. An Application to Power Grid Interconnection.

We consider a firm that must undergo a costly and time-consuming regulatory process before making an irreversible, lagged investment whose value varies randomly. We analyze two cases: regulatory approval is valid forever or it expires after some time. We apply our model to Hydro-Québec's project of building a 1250 megawatts interconnection with Ontario. We find that the firm may start the regulatory process earlier if regulatory approval is valid long enough or if uncertainty is high enough; it postpones it otherwise. When to start the reglulatory process and when to invest depend on the duration of the regulatory green light.Regulation, uncertainty, irreversibility, real options; interconnections

Multinational Corporations, Transfer Prices, and Taxes: Evidence from the U.S. Petroleum Industry

Economic research on transfer-pricing behavior by multinational corporadons has emphasized theoretical modeling and institutional description. This paper presents the fiit systematic empirical analysis of transfer prices, using data from the petroleum industry. On the basis of oil imported into the United States over the period 1973 - 1984, we test two propositions: i) Are prices set by integrated companies for their internal transfers different from those prevailing in arm 's-length (i.e., inter-company) trade, when other variables, such as oil quality, are controlled for? ii) Do average effective corporate income tar rates explain observed patterns of transfer pricing? Regression analysis leads to the following conclusions: i) Transfer and arm's-length prices differ significantly for oil origznating in some countries but not all. When multiplied by the relevant import volumes, these differences are relatively smalL The revenue transferred through deviations from arm's-length prices represents two percent or less of the value of the crude oil imported by multinational companies each year. ii) The observed differences between arm's-length and transfer prices are not easily explained by average effective tax rates in exporting countries. Our results provide little support for the claim that multinational petroleum companies set their transfer prices to evade taxes. We offer several hypotheses to explain our findings.

Seamless Electricity Trade between Canada and US Northeast

We analyse how the wholesale electricity market deregulation could modify exchanges between three Canadian regions (Ontario, Quebec and New Brunswick) and two U.S. regions (New York and New England), which were already trading electricity before the regulatory change took place in 1997. We find that the pre-1997 exchanges already made possible fuel cost savings of $397.2 million per year while deregulation adds annual savings of$358.7 million. Canadian regions are the main beneficiaries under the assumption that exports are priced at the marginal costs of the importing regions. Imports from the Canadian regions, although significant, are not large enough to lower the marginal costs of the U.S. regions. Hence electricity deregulation across the border should not significantly decrease prices in the U.S. regions although the latter are becoming more dependant upon imports from Canada. Greenhouse gas emissions increase by 4.3 Mt CO2 eq. in the wake of the open wholesale electricity market because of the low cost of coal, particularly in Ontario. Environmental concerns and the limited availability of additional hydroelectric power in Canada could change the trade patterns as electricity demand continue to grow.Electricity, deregulation, trade