Three essays on regulation in Energy and Environmental Economics
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- Department of Economics 
There are four chapters in this thesis. The first is an introductory chapter, and the remaining three are composed of the research papers. The first part of the introductory chapter presents the problem of negative externalities, and a discussion of regulation in economics. The common theme for the papers is the importance of economic principles for effective regulation. While each paper considers different problems and sectors, they all focus on the regulation of negative externalities using economic instruments. In the second part of the introductory chapter, a summary of the papers is provided. The discussion addresses how the papers contribute to the literature, their research focus, the methods used, and the results obtained. The first paper co-authored with Eirik S. Amundsen, examines the problem facing a regulator wanting to achieve a specific target path of CO2-emission reductions in the electricity sector. The goal of the paper is to analyze the suitability of a tradable green certificate (TGC) scheme in achieving the target set by the regulator. In addition, we examine the incentives for construction of new renewable generation capacity. The previous literature on TGC schemes, consists mainly of theoretical contributions. They have focused on the interaction of a TGC scheme with other instruments, and the effect of using a TGC scheme as an instrument for promoting renewable energy or reducing emissions from energy production. Static models have been used in the analyses in these contributions. Our paper is a novel contribution to the TGC literature by using a dynamic model. Contrary to static models, a dynamic model allows us to analyze time-related issues. We examine price profiles for electricity and investment profiles for new green generation capacity, resulting from technological progress in green generation technology. We also have a specific focus on the calibration of the time-path of percentage requirements, the key component in a TGC scheme. Previous contributions in the TGC literature have treated the percentage requirement as given. Finally, we compare the results from using a TGC scheme with results derived from using an emission fee and a green subsidy, and conduct a welfare ranking of the instruments. Our results show that the use of a TGC scheme will reduce emissions from fossil-based electricity generation. Further, we find that with a properly calibrated time path of percentage requirements, a TGC scheme can achieve the specific target path announced by the regulator. However, regardless of the time path chosen, the use of a TGC scheme leads to overinvestment in green generation capacity compared with the optimal social solution. Moreover, the price path for electricity will fall below the socially optimal level, resulting in overconsumption of electricity. While a TGC scheme is not as cost-effective as the emission fee, it is less wasteful than the subsidy. The second paper examines whether a refunded emission payments (REP) scheme can be used as a cost-effective instrument achieving a dynamic emission target for NOx emissions. With a REP scheme, a charge is put on the regulated firms' emissions, and the revenues are recycled back to the firms. I look at the problem where a regulator wants to reduce emissions in accordance with an exogenously given target path, and first-best emission pricing is assumed unavailable due to political constraints. The emitting firms are heterogenous and emit NOx through energy production. Emissions can be reduced by cutting output or by investing in new abatement technology. I analyze two REP schemes and examine their incentives for emission mitigation at the firm level. In the first version, refunds are given based on the emission cuts of the firms, and the second version gives refunds in proportion to energy produced. In the REP literature, the focus has been mainly on output-based refunding, and its incentives for emission reductions. These analyses have been conducted with static models. There have also been papers examining the incentives provided by a REP scheme for adoption of abatement technologies. The paper contributes to the REP literature in several regards. First, to the best of my knowledge, this is the first paper to analyze REP schemes using a dynamic model. This allows me to investigate time-variant issues such as the time path of instruments and the evolution of mitigation incentives for firms. Second, I derive analytical expressions and conditions for a REP scheme able to achieve cost-effective regulation of NOx-emissions. Third, by assuming heterogenous firms, I can compare mitigation incentives for different firm types across the two REP schemes and look at the distributional outcomes for different firm types with the two instruments. Both REP schemes can achieve the specific target path of emission reductions. However, it is only cost-effective when all emission cuts are eligible for refunds. The choice of refund affects the costs of regulation and distributional outcome for different firm types. My results suggest that if a Pigouvian tax is unavailable, then a REP scheme is not necessarily an inferior second-best alternative. The third and final paper of the thesis is concerned with the regulation of negative externalities from road transport. Using a partial equilibrium model, I analyze the problem of transport choice for a fixed number of commuters who make an essential work trip in a congested urban area. The commuters use either fossil car, electric car, or public transport. Each alternative is responsible for a different composition of negative externalities. The long-term equilibrium outcomes for transport choice in the private and socially optimal outcomes are analyzed, and I discuss the importance of economic principles for optimal regulation of the externalities. There is a rich strand of literature on negative externalities from road transport. While congestion has received much attention, the literature has expanded to include externalities such as global and local emissions, accidents, and noise. There have been many contributions focusing on policy instruments to internalize negative externalities from road transport. These include both theoretical and empirical papers, studying both command-and-control, and market-based instruments. The paper is a contribution to the literature on the regulation of negative externalities from road transport. I focus on the difference in the long-run private and socially optimal outcomes on the transport choice of commuters and consider the effect from four categories of externalities. My approach allows me to study the effect of the different externalities on the equilibrium outcomes. This is examined thoroughly, using comparative statics. Further, I discuss important economic principles for achieving a socially optimal outcome. The inclusion of electric cars enables me to highlight the trade-off in the regulation of local and global negative externalities. To the best of my knowledge, there are no other papers using a similar setup. The results from the paper show the importance of the different externality cost on transport choice, where congestion costs prove to be particularly important. An optimal internalization of the externalities can be achieved with a “sandwich” of economic instruments that are differentiated to account for different damage intensities from the various vehicle types. This key result is underscored with comparisons of long-run outcomes from partial instrument use. Such strategies will be insufficient and can also be costly and even counterproductive.
Består avPaper I: Heimvik, A., & Amundsen, E. S. (2021). Prices vs. percentages: use of tradable green certificates as an instrument of greenhouse gas mitigation. Energy Economics, 99, 105316. The article is available in the thesis file. The article is also available at: https://doi.org/10.1016/j.eneco.2021.105316
Paper II: Heimvik, A. (2020). Refunded emission payments scheme–a cost-efficient and politically acceptable instrument for reduction of NOx-emissions?.
Paper III: Heimvik, A. (2021). Transport choice and negative externalities in a congested urban area.