assessing the effects of co2 price caps on electricity investments a real options analysis abstract this paper uses real options modeling to assess the impact of different climate change policy instruments on investment profits and cumulative emissions in the electricity sector even though co 2 price caps or safety valves have been suggested as methods to limit uncertainty emanating from fluctuating prices of co 2 permits that would hurt the industry s profit and thereby also energy security our analysis shows that price caps set at a too low level are detrimental to the adoption of e g modern biomass fired capacity as a replacement for existing coal fired power plants we therefore conduct a series of experiments with different policy scenarios to analyze under which regime emissions are most effectively reduced with respect to co 2 price uncertainty it turns out that even for moderately rising co 2 prices fluctuations frequently lead to investment into carbon capture and storage ccs while investment is often not triggered in the face of deterministic co 2 prices

pricing to market of italian exporting firms this article investigates the pricing to market ptm behaviour of italian exporting firms using quarterly survey data by sector and by region over the period 1999q1 to 2005q2 a partial equilibrium imperfect competition model provides the structure according to which the orthogonality of structural shocks is derived impulse response analysis shows non negligible reactions of export domestic price margins to unanticipated changes in cost competitiveness and in foreign and domestic demand levels even though these effects appear to be of a transitory nature for the period 1999 to 2001 a typical ptm behaviour emerges while during the most recent years favourable foreign demand conditions allowed firms to increase their export domestic price margins in face of a strong deterioration of their cost competitiveness macroeconomic implications of the observed ptm behaviour are also discussed

liml estimation of import demand and export supply elasticities i apply limited information maximum likelihood liml to estimate import demand and export supply elasticities for a range of eurozone countries the results highlight inconsistencies in the parame

estimating import supply and demand elasticities analysis and implications i feenstra 1994 developed and broda and weinstein 2006 refined a structural estimator to estimate import demand and supply elasticities working through the first principles of the methodology from leamer 1981 this paper analyzes and improves the technique to provide a unified estimator of import supply and demand elasticities the proposed liml routine corrects small sample biases and constrained search inefficiencies standard estimates are shown to overestimate the median elasticity of substitution by over 35 applied to us import data from 1993 2007 the biases of the standard estimates translate into an understatement of consumer gains from product variety by a factor of 6 lastly i investigate the implications of violations to the underlying assumptions of the model

emissions trading and technology deployment in an energy systems bottom up model with technology learning abstract an important criterion in the analysis of climate policy instruments is their ability to stimulate the technological change necessary to enable the long term shift towards a low carbon global energy system in this paper some effects of emissions trading on technology deployment when technology learning is endogenized are examined with a multi regional bottom up energy systems optimization markal model of the global energy system in this framework due to the action of spillovers of learning imposing emission constraints on a given region may affect the technology choice and emissions profiles of other unconstrained regions the effects depend on the geographical scale of the learning process but also on the presence of emissions trading the regions that join the trade system and their timing for doing so incorporating endogenous technology learning and allowing for spillovers across regions appears as an important mechanism for capturing the possibility of induced technological change due to environmental constraints in bottom up models

a small linear model of wage and price inflation in the norwegian economy summary this paper presents a model of inflation in a small open economy which features both wage wage linkages and a wage price spiral hence we have a simultaneous structure which contains the conventional scandinavian model of inflation as a special case full system estimation results are reported great emphasis is placed on data coherency and on parameter stability one interesting finding is that both wage growth and the wage level in the exposed e sector are strongly influenced by the outside wage this contradicts the predictions of the scandinavian model which defines the wage leading role of the e sector by the absence of outside wage effects in e sector wage formation another result is that the speed of adjustment to exogenous shocks is greater for prices than for wages this finding may be important in explaining real wage flexibility which is often seen as the hallmark of low unemployment economies such as the norwegian

simple monetary policy rules and exchange rate uncertainty abstract we analyze the performance and robustness of some common simple rules for monetary policy in a new keynesian open economy model under different assumptions about the exchange rate model adding the exchange rate to an optimized taylor rule that responds to cpi inflation gives only small improvements in terms of economic stability in most model configurations the taylor rule is also slightly more robust to uncertainty about the exchange rate model than are rules that respond to the rate of exchange rate depreciation our results thus indicate that the taylor rule is sufficient to stabilize a small open economy also under exchange rate model uncertainty

pricing to market in swedish exports fluctuations in prices of swedish exports to five countries are investigated in this paper we test whether there are systematic differences between prices to different markets and whether relative export prices are affected by macroeconomic conditions in destination countries the test results indicate that deviations from no pricing to market and neutrality of money are quite common and persistent over a sample of 15 years long run monetary neutrality is rejected in almost half of the cases in most cases the degree of pricing to market is also affected by aggregate demand in export markets

investigating the asymptotic properties of import elasticity estimates abstract feenstra 1994 is widely implemented in international trade to estimate elasticities of substitution through a monte carlo experiment simulated estimates suggest substantial biases due to weak instruments however the derivation of the elasticity of substitution drastically mitigates these biases

time varying correlations in oil gas and co2 prices an application using bekk ccc and dcc mgarch models previous literature has identified oil and gas prices as being the main drivers of co2 prices in a univariate generalized autoregressive conditional heteroscedasticity garch econometric framework alberola et al 2008 oberndorfer 2009 by contrast we argue in this article that the interrelationships between energy and emissions markets shall be modelled in a vector autoregressive var and multivariate garch mgarch framework so as to reflect the dynamics of the correlations between the oil gas and co2 variables overtime using the baba engle kraft kroner bekk constant conditional correlation ccc and dynamic conditional correlation mgarch dcc mgarch models on daily data from april 2005 to december 2008 we highlight significant own volatility cross volatility spillovers and own persistent volatility effects for nearly all markets indicating the presence of strong autoregressive conditional heteroscedasticity arch and garch effects besides we provide strong empirical evidence of tim

testing the purchasing power parity through i 2 cointegration techniques this paper contributes to the empirical literature on the purchasing power parity ppp over the post bretton woods period by providing a time series based interpretation of the controversial evidence characterizing the dynamics of real exchange rates it is shown that the persistence of deviations from the ppp between a set of european countries and the united states may be empirically attributed to the presence of i 2 stochastic trends in prices using consumer price indices interestingly the slow adjustment towards the equilibrium can be modelled through integral proportional equilibrium correction models and this evidence can be partly reconciled with theories where the inflation rate reduces the markup of profit maximizing firms acting on imperfectly competitive markets copyright 2005 john wiley sons ltd

timing and eco nomic efficiency of climate friendly investments in supply chains abstract emission trading schemes such as the european union emissions trading system euets attempt to reconcile economic efficiency with ecological efficiency by creating financial incentives for companies to invest in climate friendly innovations using real options methodology we demonstrate that under uncertainty economic and ecological efficiency continue to be mutually exclusive this problem is even worse if a climate friendly project depends on investing in of a whole supply chain we model a sequential bargaining game in a supply chain where the parties negotiate over implementation of a carbon dioxide co2 saving investment project we show that the outcome of their bargaining is not economically efficient and even less ecologically efficient furthermore we show that a supply chain becomes less economically efficient and less ecologically efficient with every additional chain link finally we make recommendations for how managers or politicians can improve the situation and thereby increase economic as well as ecological efficiency and thus also the eco efficiency of supply chains

real wage growth technical change and competition in the labor market the paper measures the rate of growth of average labor cost and the real wage for the twenty u s two digit manufacturing industries 1948 76 it is argued that these rates of growth give interesting information which other studies on the real wage ignore the results suggest that the gains from technical advance are shared equally across all labor markets consistent with the competitive paradigm a simple and appealing rationale for the observation that high growth industries show the slowest relative rate of growth of prices is also given t he general theory keynes 1936 unleashed many controversies one of the earliest and still topical controversy is the cyclical behavior of the real wage essentially the real wage employment debate has focussed on whether or not the demand schedule slopes downwards and there have been many studies on this topic producing a variety of conflicting findings a common feature of the real wage employment studies is to abstract away from the growth in the real wage that is bound to occur in a growing economy these studies are primarily concerned with deviations from trend or innovations in the real wage and the theme of this paper is that to ignore the growth in the real wage is to throw away valuable and interesting information this information on real wage growth tells us a great deal about competition in the labor market this study should be seen as being complementary rather than conflicting with the real wage employment studies the existence of a downward sloping demand curve for labor is after all not sufficient and probably not necessary for the functioning of competitive labor markets over the span of years 1948 76 i find that individual u s manufacturing industries record widely varying rates of productivity growth however these same industries tend to show a common rate of growth of the real wage this feature of productivity growth was emphasized by the late salter 1960 in his pathbreaking analysis of technical change he writes there is no tendency for above average increases in labour productivity to be accompanied by above average increases in earnings

measuring the benefits of foreign product variety with an accurate variety set abstract recent studies have used import data to assess the impact of foreign varieties on domestic prices and welfare we employ a market based data set on the u s automobile market that allows us to define goods varieties at a more precise level as well as discern location of production and ownership of varieties our estimates of price and welfare changes from new varieties in the u s automobile sector are twice as large as standard estimates when using our detailed market based data we also show that new varieties introduced by foreign owned affiliates provided an additional 70 welfare gain during our sample

carbon markets and technological innovation this paper examines the effects of firm level innovation in carbon abatement technologies on optimal cap and trade schemes with and without price controls we characterize optimal cap and trade regulation with a price cap and a price floor and compare it to the special cases of pure taxation and a simple emissions cap innovation shifts the tradeoff between price and quantity based instruments towards quantitybased emissions trading schemes more specifically an increase in innovation effectiveness lowers the optimal emissions cap and leads to relaxed price controls unless the slope of the marginal environmental damage curve is small because of the decrease in the emissions cap innovation in abatement technologies can lead to a higher expected carbon price so as to provide sufficient incentives for private r d investments the expected carbon price decreases once innovative technologies are widely used

simulating the new british electricity market reform abstract the british government is implementing fully its novel electricity market reform gb emr its objective in line with european directives aims at replacing existing nuclear and coal plant with low carbon systems to deliver reliable and affordable power though the gb emr has proposed several policy instruments for meeting its objectives and the academic literature has discussed the main issues no known report includes a comprehensive and dynamic simulation exercise that assesses the extent of this profound and important initiative this paper presents a system dynamics model that supports analysis of long term effects of the various policy instruments that have been proposed in the gb emr focusing on environmental quality security of supply and economic sustainability using lessons learned from simulation the paper concludes that effectively achieving the gb emr objectives requires this comprehensive intervention or a similar one that includes the promotion of low carbon electricity generation through the simultaneous implementation of various direct and indirect incentives such as a carbon price floor a feed in tariff fit and a capacity mechanism

pricing to market in a small open economy the determinants of norwegian import prices of manufactures are investigated over the period 1970 1 1991 4 multivariate cointegration analysis establishes a long run relationship between import prices foreign prices the exchange rate and domestic unit labour costs normalized on import prices the long run elasticities are 0 63 foreign prices and the exchange rate and 0 37 domestic costs deviations from this relationship are highly significant in a structural import price equation which also contains positive effects of growth in domestic demand and inflation as well as a negative effect from the norwegian unemployment rate the estimated parameters appear reasonably stable within the sample

calculating the real return on a sovereign wealth fund we present a new methodology for calculating the real return on sovereign wealth funds swf that share the investment objective of maximizing international purchasing power in terms of goods and services specifically we modify the traditional approach for deflating the nominal return along three dimensions the aggregator formula the measure of international prices and the weighting scheme we argue that a geometric average of price levels is an appropriate aggregator formula for capturing the deflationary effects of imports increasingly originating from low cost countries and that import prices paid by the swf owner and weights reflecting the owner s import pattern are consistent with the investment objective our proposed approach using the norwegian government pension fund global as an illustration raises the estimated average annual real rate of return over the sample period of 1998 2012 from 3 1 to 4 9

incomplete exchange rate pass through and simple monetary policy rules abstract this paper investigates the performance of various monetary policy rules in an open economy with incomplete exchange rate pass through implementing monetary policy through an exchange rate augmented policy rule does not improve social welfare compared to using an optimized taylor rule irrespective of the degree of pass through a direct exchange rate response improves welfare only if the other reaction coefficients on inflation and output are sub optimal however an indirect exchange rate response through a policy reaction to consumer price index cpi inflation rather than to domestic inflation is welfare enhancing this result is independent of whether society values domestic or cpi inflation stabilization

exchange rates and import prices for a small open economy the exchange rate pass through for a small open economy in the case of australian manufactured imports in estimated by applying an econometrics procedure which avoids the pit falls in previous studies to a carefully assembled data set for the first time in the literature estimate of pass through based on the johansen 1988 maximum likelihood ml procedure are provided it is found that incomplete pass through has important implications for policy and the macroeconomy

long run price effects of exchange rate changes in finnish pulp and paper exports this paper presents long run exchange rate elasticities of finnish newsprint and pulp export prices in the united kingdom uk and germany over the period 1980 94 the elasticities were estimated for a markup pricing model using johansen s cointegration method the magnitudes of the elasticity estimates obtained by imposing price homogeneity indicate that pass through of exchange rate changes to export prices has been incomplete in both markets for newsprint the pass through elasticity was 0 60 in the uk and 0 46 in germany which means that about one half of the changes in the exchange rates is reflected in prices as expressed in the destination countries currencies and about a half in prices measured in finnish markka instead in pulp exports the pass through elasticities differed from each other between the two destination countries more clearly than in newsprint exports indicating a different pricing behaviour of finnish pulp exporters in the uk and germany when exchange rate changes pass throug

exchange rate pass through abstract the resilience of trade balances of the major industrialized economies to changes in their exchange rates has evoked interest in the exchange rate pass through relationship so far there has not been a comprehensive survey of this literature the paper aims to fill this gap in two ways first it pieces together the theoretical literature on exchange rate pass through second it provides a critical survey of the empirical literature on exchange rate pass through emphasis is placed on the data and methodology employed in previous work this is done in order to guide future work in this growing area of research

off shore enhanced oil recovery in the north sea the impact of price uncertainty on the investment decisions although co2 capture and storage ccs is considered a key solution for co2 emission mitigation it is currently not economically feasible co2 enhanced oil recovery can play a significant role in stimulating ccs deployment because co2 is used to extract additional quantities of oil this study analyzes the investment decision of both a carbon emitting source and an oil company separately by adopting a real options approach it is shown that when uncertainty is integrated in the economic analysis co2 and oil price threshold levels at which investments in co2 capture and enhanced oil recovery will take place are higher than when a net present value approach is adopted we also demonstrate that a tax on co2 instead of an emission trading system results in a lower investment threshold level for the investment in the co2 capture unit furthermore we determine a minimum co2 selling price between the two firms and show that co2 eor has the potential to pull ccs into the market by providing an additional revenue on the capture plant however when co2 permit prices are above an identifiable level the eu ets does not necessarily result in the adoption of ccs and stimulates oil production

tariffs and the risk of invasive pest introductions in commodity imports theory and empirical evidence abstract we investigate using tariffs as corrective taxes to reduce risks from biological invasions due to expanded world trade a theoretical analysis indicates that higher tariffs have ambiguous effects on invasive pest introductions an econometric analysis using data from us department of agriculture surveillance screening indicates that tariff rates exert a negligible influence on expected invasive pest introductions from commodities currently facing positive tariffs removal of duty free status would decrease expected pest intercepts but undermine other goals of us trade policy and lower consumer welfare consumer welfare loss is on the order of 38 million per expected intercept avoided

evaluating the power investment options with uncertainty in climate policy abstract this paper uses a real options approach roa for analysing the effects of government climate policy uncertainty on private investors decision making in the power sector it presents an analysis undertaken by the international energy agency iea that implements roa within a dynamic programming approach for technology investment choice case studies for gas coal and nuclear power investment are undertaken with the model illustrative results from the model indicate four broad conclusions i climate change policy risks can become large if there is only a short time between a future climate policy event such as post 2012 and the time when the investment decision is being made ii the way in which co 2 and fuel price variations feed through to electricity price variations is an important determinant of the overall investment risk that companies will face iii investment risks vary according to the technology being considered with nuclear power appearing to be particularly exposed to fuel and co 2 price risks under various assumptions and iv the government will be able to reduce investors risks by implementing long term say 10 years rather than short term say 5 years climate change policy frameworks contributions of this study include 1 having created a step function with stochastic volume of jump at a particular time to simulate carbon price shock under a particular climate policy event 2 quantifying the implicit risk premium of carbon price uncertainty to investors in new capacity 3 evaluating carbon price risk alongside energy price risk in investment decision making and 4 demonstrating roa to be a useful tool to quantify the impacts of climate change policy uncertainty on power investment

econometrics and business cycle empirics business cycle empirics have long been a central arena for the debate about the roles of economic theory and econometrics in modelling economic time series data some famous historical examples are moore i9i4 keynes i939 and koopmans i947 sources for potential disagreements include that the entire economic system is involved and unobservable stochastic forces seem more than usually prominent in determining the outcome not only do these constitute two aspects about which it is hard to theorise they are equally difficult to model empirically there are both positive arguments for and negative arguments against according a dominant role to either theory or evidence not least because it is unclear what constitutes admissible instances of either in the absence of the other we first review what precludes a purely theoretical approach what prevents a purely empirical approach and hence why an interactive approach is imperative even so both the relative importance of the two ingredients and their substantive contents are likely to remain at issue first concerning the economy considerable empirical evidence suggests that it is a dynamic non linear high dimensional and evolving entity so studying it is difficult society and social systems alter over time laws change and technological innovations occur so establishing any invariants of an economic system is not easy such difficulties adversely afflict both theory and empirical modelling secondly concerning the observations time series data in economics are heterogeneous non stationary time dependent and interdependent so it is difficult to acquire knowledge from the available empirical information again such factors also make it hard to theorise about the properties of the underlying system a more direct critique of the empirical enterprise is that samples are short and highly aggregated economic magnitudes are inaccurately measured are subject to considerable revision and important variables are not measured or are unobservable so inferences are both imprecise and tentative combined with the simultaneity non constancy and high dimensionality of economic data a purely empirical approach seems to many to be precluded other criticisms of econometric approaches include worries about data mining pretest biases a lack of genuine identifiability and collinearity sometimes combined with a belief that theory can compensate an overemphasis on a

emissions trading and investment decisions in the power sector a case study in finland abstract organizations which consider investment in or divestment of power production licences capacity within the european community are exposed to the impacts of the european union emission allowance trading scheme eu ets in this paper the consequences of the eu ets on investment decisions are explored in a country specific setting in finland first we review the general mechanisms through which the eu ets influences size timing and cashflows of an investment next we discuss the projected changes in finnish power producers investment environment and examine the financial impacts due to the eu ets on a case investment decision a hypothetical condensing power plant 250 mwe the standard discounted cash flow dcf analysis is extended to take into account the value of two real options the option to wait and the option to alter operating scale in a quantitative investment appraisal the impact of emissions trading not only depends on the expected level of allowance prices but also on their volatility and correlation with electricity and fuel prices the case study shows that the uncertainty regarding the allocation of emission allowances is critical in a quantitative investment appraisal of fossil fuel fired power plants

exchange rates and prices the adjustment of relative prices to exchange rate movements is explained in an industrial organization approach given labor costs in the respective currencies exchange rate movements change costs for firms selling in the home market and thus disturb the industry equilibrium the extent of absolute and relative price adjustment is shown to depend on market integration product substitutability the relative number of domestic and foreign firms and the market structure the impact of exchange rates on prices is illustrated in a variety of approaches including the cournot a dixit and j stiglitz 1977 and s salop 1979 models some empirical evidence is offered in support of the theory copyright 1987 by american economic association

price dynamics in the european union emissions trading system and evaluation of its ability to boost emission related investment decisions abstract the price of permits in the european union emissions trading system eu ets has historically been highly sensitive and prone to jumps we consider different stochastic processes to model the price of permits and show that the variance gamma vg model provides the best fit for the price distribution among a selection of infinite activity processes using this result as a starting point we assess the effects of the eu ets in delivering low carbon investments at the firm level by modeling a price taker electricity producer subject to the eu ets jurisdiction we compute via least squares monte carlo the value of the real option the greenhouse gas emitter has consisting in the opportunity to switch from its current high carbon technology to a cleaner one we use a vg specification for carbon prices and a mean reverting brennan schwartz process for the price of fuel moreover we further analyze the investment decision problem in case of a co 2 price stabilization mechanism in the form of a price floor by explicitly computing the expected value of the investment project by means of fourier methods our results show that the introduction of the price stabilization mechanism significantly affects the timing of the investment decision and supports emission related investments

the zero emission certificates a novel co2 pollution reduction instrument applied to the electricity market abstract today several instruments exist to decrease air pollution the paper discusses pollution taxes emission trading permits and green certificates applied to reduce the co 2 emissions in the electricity sector it then investigates how the different mechanisms behind these three instruments can possibly be combined the proposed approach is to introduce the concept of zero emission certificates zec zec are confirming actual emission reductions achieved by electricity producers as compared to a well defined baseline producers can trade zec on a market to achieve least cost efficiency in their reduction efforts distributors can themselves produce an additional contribution to emission reductions by decreasing the final demand i e by producing zero emission mwh in this way the electricity market is approached from both the supply and the demand sides the paper uses system dynamics to validate the approach it shows why it is in the interest of all operators to make the largest possible reduction efforts as long as they are compatible with economic efficiency