A key challenge for unilateral policy initiatives, even for a big coalition like the EU, is carbon leakage and competitiveness concerns. A problem with international climate agreements is also that few countries will sign an abatement agreement due to the free rider problem: all countries benefit whereas cost of abatement is born entirely by the country itself. We analyze economic and emission effects of introducing carbon taxes combined with output-based rebating. We also analyze how a border tax improves the attractiveness of international climate agreements and increases the number of signatories. The design of subsidy policies for abatement technology will also influence the competitiveness of firms and carbon leakage, and the effects may differ between large versus small regions/countries. We use both theoretical and numerical methods, the last one exemplified by the global CGE model SNOW.
Allocation rules for carbon permits
Unilateral carbon pricing tends to induce carbon leakage to other countries. Hence, output-based allocation (OBA) of quotas to leakage exposed firms has been implemented e.g. in the EU ETS. We consider the effects of combining carbon pricing and OBA with a consumption tax that corresponds to the implicit subsidy rate of OBA. In the first paper we use a combination of analytical methods and a stylized numerical model of the global economy. We also compare this policy with border tax adjustments (carbon tariffs + export rebates). We find that adding such a consumption tax is likely to be welfare-improving.
“WILL” - Governing EU-Norwegian willingness to extract, combust and consume less carbon
A main strategy in Norwegian climate policy is embracing and encouraging the climate and energy policy initiatives of the EU by coordinating Norwegian policies with the EU. The purpose of this project is to explore and identify how to best mind the ambitions for coordinated policies in the EU and Norway, in terms of maximising the overall effectiveness of their combined initiatives. A key challenge for unilateral policy in a global market place is carbon leakage and competitiveness concerns. To reduce such concerns, we focus on how the EU and- Norway should target policies towards different points of the fossil fuel and emissions supply chain, from the point of extraction, to the point of combustion, and finally consumption. We will use both theoretical and detailed numerical models to analyse the different approaches to carbon pricing targets, and measure their efficiency in terms of global emission effects and economic welfare.
Residential energy efficiency and European carbon policies
While the introduction and reformation of climate policy instruments take place rapidly in Europe, the knowledge on how the instruments interact lags behind. In this paper we analyse different interpretations of the 2030 climate policy goals for residential energy efficiency and how they interact with targets for restricting CO2 emissions. We focus on Norway, whose climate and energy policies are integrated with those of the EU. As we account for investment costs of improving energy efficiency we find substantial welfare costs of energy efficiency policies, particularly when interacting with carbon pricing. Rebound effects within households are small, but economy-wide indirect rebound is significant because energy-intensive, trade-exposed (EITE) industries expand. As residential energy use consists mainly of carbon-free electricity, this expansion of EITE-industries leads to increased total CO2 emissions.
Energy efficiency, energy systems and the economy
Ambitious energy efficiency goals constitute an important part of the EU’s road to a low carbon economy. The traditional approach in the literature analysing residential energy efficiency policies has been to increase energy efficiency exogenously, implying that energy efficiency policies make energy more productive in providing comfort and other services to the households. In this project we will combine knowledge from both technological science and economics to analyse effects of energy efficiency policies. The aim is to add knowledge from both kinds of sciences represented by economic model analyses at Statistics Norway and detailed information of technological energy investment possibilities derived from the bottom-up model TIMES-Norway at IFE, into the complex topic of energy efficiency.
International oil market analyses
The project has developed a dynamic simulation model for the international oil market (PETRO2) that is used for analyses of how market conditions and/or climate-/energy-policies affect the oil market. The project has especially analysed effects of fuel efficiency improvements.
Prospects: Global and national transformation from a fossil-fuel-dependent economy
The project addresses the transformation from a petroleum-dependent Norwegian economy. It analyses the effects of a declining Norwegian petroleum extraction sector for the domestic economy as a whole. We will examine the flow of workers, competence and knowledge spillovers from the petroleum sector and its surrounding innovation activities to other, greener parts of the economy.
The first part of the project examines how the Norwegian economy can achieve a less oil-dependent productivity growth. The second part of the project studies how future climate policies in large countries/regions can change the extraction of fossil fuels. The main analytical tools are numerical models of the global markets.
Abatement of greenhouse gas emissions in Norway and the EU towards 2030
Norway’s climate targets for 2030 correspond to those of the EU. The Norwegian government intends to fulfil the ambitions jointly with the EU, but it is still unsettled how flexible the mechanism for joint implementation will be and the conditions Norway will face. The EU has decided that some trading of emissions will be possible within the non-ETS sector and that some of the commitments within non-ETS can be fulfilled by cancelling quotas in the emission trading system (ETS). The aim of the project is twofold: First, we will analyse costs and emissions for Norway and the EU under alternative designs of these flexibility mechanisms, taking into account the EU actions and consequences for energy prices and carbon prices. We do this by means of simulations of the energy market model LIBEMOD and SSB’s CGE models. The second aim is to develop the CGE model SNoW-No (for Norway) to account for potentials for changes in climate technologies towards 2030. The latter is based on close collaboration between SSB, University of Oldenburg and NEA, who provides engineering and emissions expertise.
Regionalizing Norway in LIBEMOD
The EU has large ambitions for its climate policy in 2030 and beyond. This also includes specific targets for the share of renewable energy which demands substantial changes to the energy system, both when it comes to production and transportation of renewable energy. In this project we study how European climate and energy policy may affect the renewable energy production in Norway and the corresponding necessary investments in the grids (domestic grids and interconnectors). In this project we will further develop the energy market model LIBEMOD.
LIBEMOD is an energy multi-market equilibrium model, developed by researcher at Statistics Norway and the Frisch Centre. Its main focus is on the electricity and natural gas markets of Europe, but it also covers global markets for coal and oil. The model distinguishes between model countries – each of 30 European countries – and exogenous countries/regions, the latter group containing all countries in the world outside Europe. In order to focus on the production and transmission of renewable energy in Norway, we will regionalize LIBEMOD for Norway. The regionalization will follow (or can be aggregated to follow) the current spot price areas in Norway.
Implications of Paris
This project will study the implications of the Paris agreement on climate change. It is initiated by JGCRI at the University of Maryland, USA, and will consist of a workshop series that started in North America in 2016 (University of Maryland), and will continue in Norway in the spring 2017 (NTNU and UiO) and in Japan in the fall 2017.
The idea is to inform key stakeholders on the environmental, economic and energy implications of the new agreement based on integrated scientific and technical analysis and to stimulate dialogue on next steps in the process. The key questions are: What do the NDCs means in the context of a 2 degree C long-term limit? What does it mean for key countries and regions? What does it mean for the energy system and for different sectors?
The workshop in Norway actually consists of one workshop organized by CenSES at NTNU on 5-6 March and an outreach workshop organized by CREE at the University of Oslo on 8 March. The outreach workshop is mainly intended to foster a dialogue among Norwegian policy makers, research funding agencies/organizations, private sector entities, NGOs, and researchers (both national and international) towards their contributions to Norway’s national commitment to implementation of Paris Agreement. Hopefully, the discussion can give inputs to a research agenda to support the implementation of the Paris Agreement.
Systems for refunding emissions payments
We analyze two mechanism designs for refunding emission payments to polluting firms: output-based refunding (OB) and expenditure-based refunding (EB). In both instruments, emission fees are returned to the polluting industry, typically making the policy more politically acceptable than a standard tax. The crucial difference between OB and EB is that the fees are refunded in proportion to output in the former but in proportion to the firms’ expenditure on abatement equipment in the latter. To achieve a given abatement target, the fee level in the OB design exceeds the standard tax rate, whereas the fee level in the EB design is lower. The paper “Refunding Emissions Payments” has been submitted to an international journal and has been invited to a resubmission.
Pareto-improving climate policies
Future generations will be richer than us, but may have a more inferior environment. While mitigation today will increase the quality of the future environment, it implies costs to the current generation. However, by transferring resources from the future to the present generation there may be possibilities for improving the welfare of all generations. This can be done by compensating mitigation today by fewer investments so that the present generation does not have to reduce consumption.
This is a numerical project where we do simulations with the RICE model. The project started in 2013 and was finalized by a working paper in 2015, which has been submitted to Journal of Environmental Economics and Management. It has been presented at several conferences, seminars and workshops.
In 2016, we extend this project by studying the implications for the energy systems by using the Global Change Assessment Model (GCAM). GCAM input assumptions are population, economic activity (GDP), technology characterization, and policy. We begin by tuning the GCAM reference scenario to match the RICE-derived reference scenario. That means using RICE population and economic growth in GCAM. Since the RICE model does not prescribe technology assumptions, we begin with the default assumptions in GCAM. We use the rate of exogenous end-use energy intensity improvement to tune GCAM emissions to match the emissions pathway produced by the reference scenario by RICE.
Climate treaties with reciprocal preferences
The project develops a simplified theoretical analysis of participation in international environmental agreements if countries behave as if they have reciprocal preferences, i.e., a preference to repay mean intentions by mean actions and kind intentions by kind actions. It is shown that when few others are expected to abate, reciprocal countries are even less willing to abate than countries with standard preferences. However, if all countries have strong preferences for reciprocity, the grand coalition of all countries can be stable as well. The reason is that others' abatement increases the individual country's motivation to contribute. Moreover, if not all countries are reciprocal, a large (but less than full) coalition can be stable if the share of reciprocal countries is strictly more than half, and if these countries are sufficiently strongly reciprocal. In addition, there can exist a stable minority coalition which is larger than the maximum coalition size with standard preferences. In this situation, each coalition member is disappointed with others' behavior and is willing to sacrifice own material welfare to punish them. In spite of this, the minority coalition is stable, for the following reason: Each coalition member knows that if it leaves, the coalition will dissolve. It will then choose to stay, because this is the only way it can keep a small island of kindness in a world of meanness; if it leaves, the world becomes universally mean.
The project also uses laboratory experiments to explore the conditions for parties’ willingness to cooperate in contributing to public goods. Two ongoing sub-projects explore this.
Sufficiently strong reciprocity can lead to conditional cooperation, i.e., parties’ willingness to cooperate is increasing in others’ cooperation. Lab experiment I shows that self-selection into different group types, combined with the dynamic interplay between conditional cooperators, unconditional contributors, and free-riders, result in significant and increasing contribution differences between groups.
Lab experiment II explores the role of strategic ignorance. Previous international studies have established an apparently robust result that when given the opportunity, a large share of subjects choose to avoid getting information about potentially troublesome consequences of their actions for others. Such strategic ignorance typically reduce actual contributions. We study whether strategic ignorance reduces subjects’ contributions to climate projects; if so, whether an impartial observer is willing to provide the unwanted information; and finally, whether fear of social sanctions prevent the observer from providing subjects with the unwanted information.
Decision making in environmental-related dilemmas
This project covers the lab experiments that were performed in Alice Ciccone’s PhD thesis, and consists of three papers.
The first is about the widespread skepticism towards tradable emission quotas that is apparent in surveys and political debates. One potential explanation is that opponents see markets as rigged and favoring "rich countries." Our experiment tests whether people willingly "leave money on the table" rather than trade at inequality increasing terms. We conclude that fairness concerns may affect outcomes in a fixed price trade setting, even when there are no strategic or retaliation motives present for restricting trade.
Bargaining is central to many economic applications and certainly a key to an international climate agreement. Experiments are designed to test the effect of earning either an outside option or earning a share of the pie, prior to alternating offer bargaining. The model prediction is that earning an outside option should not matter, unless the option is binding, while subjects who earned a larger share of the pie should also end up with a larger share. This latter prediction is contrary to most other models of bargaining, but supported by the experimental result.
Obstacles to permit trade
This project was earlier named "The role of decency in emissions permit trade", but as the work has evolved, we have changed focus a bit and renamed the project.
While the initial focus was to study if permit trade is less acceptable when the distribution of initial permits is perceived as unfair, we know would like to make this more general by studying willingness to accept trade for different background conditions. We know from several ultimatum games that people may reject efficient outcomes that are considered unfair, i.e. with very unequal outcomes. But would the background conditions, e.g., the bargaining power, affect this result? More explicitly, will very different background conditions make people accept trade institutions considered unfair? Examples of trade with possibly unfair background conditions could be kidney trade between poor and rich; prostitution; surrogate mothers; and permit trading.
Several papers have studied the impact of ambiguity aversion on optimal climate policy. The idea of ambiguity aversion was introduced by Ellsberg (1961), and a mathematical representation, suggested by Gilboa and Schmeidler (1989) is that under ambiguity, subject assign subjective probability to single events in a manner that does not add to 100% when adding over all possible events. By contrast, Riege and Teigen (2013) find that when subjects are asked to state probabilities in ambiguous lotteries, they typically state probabilities that add to much more than 100%, indicating a strong ambiguity seeking. The idea of this project is to make a design as close as possible to Riege and Teigen, but add incentivized lottery choices.
We have now more than 500 observations from three cases, the Norwegian Policy rate, the Iowa Republican caucuses with Trump as a candidate and the Academy awards (Oscar). All studies show some degree of aversion to 50% lotteries, and the effect is significant at 1% level when we use data from all studies. Subject also show a strong tendency to bet on their favorite (most probable outcome of the event), which may be due to consistency. Finally we also find a general strong preference for lotteries over ambiguous gambles.
The aversion to 50% lotteries is very puzzling: lotteries with well-defined 50% winning probabilities seem to be considered as if they were ambiguous. In a choice between an ambiguous gamble and a lottery with well-defined winning probability, the lottery appears to be less attractive with 50% winning chance than with 30% or 40% winning chance. As the 50%-50% lotteries are much used in empirical studies, this may have significant methodological implications. Bu as we only collect data on choices between risky lotteries and gambles on natural events, we do not know if the same aversion can be extended beyond such choices. We plan to collect even more data to see if the same aversion can be observed in choices between only risky lotteries.
Effects of the EU ETS on manufacturing plants
This project investigates how the EU ETS regulation has affected Norwegian plants. We are particularly interested in whether plants regulated by the ETS have reduced their emissions or emissions intensities because of the regulation. A positive price on emission allowances should give plants incentives to cut back on their emissions, both total emissions and emissions per unit of output. The price of allowances has periodically been rather low, however, moderating these incentives. Moreover, manufacturing industry plants have received most of the allowances they need for free, and the question is if this has also reduced the incentives to abate. Our rich data for Norwegian plants allow us to identify effects on several important aspects of plant behavior, such as emissions, emission intensities and economic performance. We use propensity score matching to identify a comparison group of plants. As the regulator’s decision on which plants should be regulated is based on the plant’s type of emission, the industry affiliation, the capacity limit and the plant size, we match on these variables. The panel data set contains information on emissions, ETS regulation, other types of environmental regulations, number of employees, capital intensity, economic performance, and more. As greenhouse gases are energy use related emissions, these plants are likely to be energy price responsive. Hence, we control for relative energy prices.
Investments in green technology
This project consists of two papers that study investments in green technology in dynamic games.
In the first paper, we study a model where countries over time invest in technologies as well as pollute. While Folk theorems point out that the first-best is possible when countries are sufficiently patient, we characterize the second-best subgame-perfect equilibrium when the first-best is out of reach. In particular, when countries are tempted to pollute rather than comply, then it is necessary to require over-investments in "green technologies" that are strategic substitutes to polluting, and under-investments in "brown technologies" (complements to polluting) and adaptation technologies. It is in particular small or reluctant participants who will be required to strategically invest in this way. With imperfect monitoring, such strategic investments reduce the need for a costly and long punishment phase. This project is currently under revision and we will continue to revise it in 2018 (for a journal).
The second paper studies a dynamic game where countries can noncooperatively invest in green technology as well as pollute. We study agreements on carbon taxes and compare them to international agreements on emission quotas. The two instruments are different because they motivate different amounts of investments, and this means that quotas may be better than agreements on carbon taxes, even though the reverse would hold in a standard model without many periods or without such investments.
This project consists of two papers on resource extraction in dynamic games.
The first paper, develops a model of resource extraction where the owner is strategic and takes into account that extraction today will influence (i) how much the competitors will extract tomorrow, (ii) other countries' willingness to pay for conservation, and (thus) (iii) the owner's bargaining power when conservation is negotiated. The strategic concerns imply that third countries, paying for conservation, may benefit from asymmetric contracts where all extraction takes place in one country while the resource in the other countries is conserved. The strategic concerns also imply that negotiating a treaty specifying extraction levels (of fossil fuels) will be more efficient than a treaty specifying consumption levels. This project will be further developed in 2018.
This second paper, develops a dynamic game in which countries can both extract fossil fuels and decide on how much to consume. The difference between consumption and extraction must be imported (or exported, if negative) and the sum of imports must equal zero for the world market to clear. In a dynamic game, where the resource is exhaustible, I study how negotiations and agreements on extraction levels differ from negotiations and agreements on consumption levels.
The climate system and irreversible catastrophes
The first part of this project builds on a previous project by Eric Nævdal and Anne-Sophie Crépin at Beijer Institute in Stockholm. We want to address weaknesses in how risk of irreversible catastrophes is modelled in economics. In one subproject we suggest to model climate induced risk as a process with inertia. In another we examine the how shadow prices after a catastrophe affects policy before a catastrophe and come to the surprising, but quite general result, that they do not.
In the last part of the project we study learning about crucial parameter values in the climate system and how the potential for learning affects optimal climate policy, by using an integrated assessment model (ILICC) developed at the Frisch Centre jointly with Larry Karp at University of California, Berkeley and Michael Oppenheimer at Princeton University. Preliminary results indicate that the existence of positive feedbacks in the climate system together with uncertainty about the economic impact of climate change prescribes a precautionary approach to climate change.
Discounting the future has been described as one of the most critical problems in all of economics, not least because small changes in the discount rate can substantially alter the recommended stringency of climate policy. The following questions will therefore be addressed in the project:
1. What is the extent of disagreement on the appropriate discount rate for long-term public policy-making between experts? How should the uncertainty (of forecasts) and disagreement (on value judgments) between experts be treated when aggregating responses into a single long-term discount rate?
2. Are the probable future negative effects of climate change an argument for decreasing the discount rate to promote the interests of future generations? Under which conditions can decreasing the discount rate be a means for achieving accumulation of consumption, potentially without increasing the climate threat.
3. What is the normatively desired discount rate when current decision-makers have coinciding concerns for the future? The answer may have implications for the modeling of regional integrated models of climate and the economy.
4. How should government agencies or companies set their discount rates when assessing long-lived projects?
Strategic technology policy as supplement to renewable energy standards
Renewable energy standards have been introduced in several countries as a supplement to climate policy. Some countries have also subsidized the use of renewable energy or the producers of renewable energy capital. In this subproject we examine the rational for such policies.
Our point of departure is that a renewable energy standard creates new profit opportunities for firms that supply renewable energy capital. With imperfect competition among technology suppliers, technology policy could be used strategically. We consider both downstream subsidies to renewable energy suppliers and upstream subsidies to renewable energy capital producers. To the extent that there is imperfect competition upstream, subsidies may improve welfare both globally and nationally. Moreover, upstream subsidies are preferred over downstream subsidies from a national perspective. Finally, we show that strategically chosen subsidies by individual countries could in fact be optimal from a global perspective, given that the shadow price of emissions is correct from a global perspective.
How should CCS technologies be supported?
Carbon capture and storage (CCS) technologies have the potential to bridge the gap between the current carbon-based society and a future low-carbon society. Using CCS electricity technologies, either with coal or natural gas as the fuel, may reduce emissions by as much as 90 percent relative to standard fossil-fuel based technologies.
One main disadvantage of CCS is high cost. These may, however, be lower through continued R&D. An important question is then whether CCS should be prompted through subsidizing the producers of CCS technology (upstream subsidy) or through subsidizing the use of CCS technology (downstream subsidy). In a combined theoretical-empirical subproject we first study optimal design of CCS subsidizes within a simple model of imperfect competition where CCS technology producers are divided into two groups according to whether they are owned by EU citizens/member countries. We then use the numerical equilibrium model of the European energy market LIBEMOD, combined with a new model block with non-competitive supply of CCS technologies, to study how the CCS subsidy should be designed.
Environmental innovation prizes
There are at least two reasons to support private R&D: First, the R&D process generates knowledge spillovers from which all future innovators will benefit. Second, even if the innovator succeeds to patent her new idea, she will not be able to appropriate the full social benefit of her innovation. This project focuses on the appropriability problem for supporting R&D and how two technology push policies -Innovation prizes and Subsidies to R&D projects - should be designed in order to overcome the appropriability problem. A key question is to what degree there are systematic differences between market goods R&D and environmental R&D, and if so, how that transforms into optimal design of the two policy instruments.
Innovation in clean energy as a commitment device
The starting point of this project is how the present generation can make future generations reduce their GHG emissions. The basic idea is that by developing and installing environmentally friendly capital and technologies, for example, cheap solar power or insolation of buildings, costs of obtaining low GHG emissions will be reduced for future generations, thereby fulfilling the aim of the present generation to lower future GHG emissions.
In 2014 and 2015, a recursive Integrated Assessment Model has been built, that can be used to simulate scenarios and study innovations as commitment device for climate policy. The research topic has also been addressed through a novel dynamic coordination game. The game captures features of a transition between externality networks. Coordination is required to implement the transition while minimizing costs. We have set up an experiment, in which the game is repeated five times, which enables groups to learn to coordinate over time. We compare a neutral language treatment with a ‘green framing’ treatment, in which meaningful context is added to the instructions. We find the green framing to significantly increase the number of profitable transitions, but also to inhibit the learning from past experiences, and thus it reduces coherence of strategies. Consequently, payoffs in both treatments are similar even though the green framing results in twice as many transitions.
Effective climate policies with trade and international technology spillovers
Inge van den Bijgaart has determined the conditions under which unilateral policies can implement global sustainable growth in a dynamic two-country directed technical change framework. Domestic climate policies alter the structure of domestic and foreign production and thereby innovation incentives across countries. Implementing sustainable growth requires redirecting global innovation to the nonpolluting sector. If most innovation takes place in the foreign country, policies must redirect foreign innovation by relocating clean production to this country. A calibration exercise suggests that the US or EU alone are too small to implement sustainable growth. A coalition of Annex I countries that ratified the Kyoto protocol can implement sustainable growth, yet required tax rates are very high.
Triggering environmentally friendly technology development
This paper examine the magnitude of the effect of the Norwegian R&D tax credit program, known as SkatteFUNN, on firm patenting as well as on patent quality measured using patent citations. We are also interested in investigating whether the R&D tax credit is sufficient in order to reduce the externalities and create incentives for patenting of environmental technologies.
We investigate whether the R&D tax credit scheme – which is generic in the sense that it offers the same R&D support for any type of technology (clean, dirty or other) – thus has the same effect on environmental and non-environmental technology patenting. We will also investigate the effects of R&D support specifically targeted towards environmental technology development. Through this study we seek to contribute to the policy discussion on the effectiveness of the various R&D support alternatives. We have access to a detailed Norwegian firm level patent data set including both domestic and foreign patent citations where we identify the patenting firms through official organizational numbers, allowing a better match with other important firm level data. We are thus able to control for firm size, the education level of each firm's employees, capital intensity, economic performance, industry affiliation, and more.
Policy instruments that can promote the development and use of environmental technology
In 2015 we had a project for the Green Tax Commission where we wrote a summary in Norwegian of the latest literature on policy measures to promote the development and use of environmental technology. This is published in the CREE working paper series, and may be published as an Appendix to the report from the commission.
Technology and Time Inconsistency
Standard analyses of economic policy assume exponential discounting, even though empirical and experimental evidence shows that preferences are time-inconsistent and discounting is hyperbolic. When policy makers-or the voters they must satisfy-apply smaller discount rates for long-term than for short-term decisions, they benefit from investing in infrastructure and technologies that will influence future decisions. This paper analyzes the equilibrium investment strategy and policy as a function of the technology's type and position in the production chain. The strategic concern can be measured by the subsidy a sophisticated decision maker would impose on a naive agent, or on a perfect market. Two main results are pro- vided. First, I derive a formula for how the optimal investment subsidy depends on the investment lags and the technology's complementarity with future investments. When applied to climate change, it implies that investments in "green" technology should be subsidized while adaptation and "brown" technology should be taxed, even when laissez faire is first best under exponential discounting. Second, I show that fundamental technologies (i.e., those further upstream in the production chain) should be invested in and subsidized to a larger extent. This result also reveals that quasi-hyperbolic discounting is a poor approximation for strictly decreasing discount rates.
Avoiding Nature-Sensitive Oil Extraction
Oil activity in the arctic region entails many global risks: avoiding exploration and extraction of oil resource in the arctic is advocated as in key fighting climate change; oil extraction entails large risks for the vulnerable arctic eco-systems; and the extraction of these resources is a key driver of geopolitical tension in the arctic. This project studies the strategies a country bordering the arctic (e.g., Norway) can employ to avoid that other arctic countries (e.g., Russia) explore and extract arctic resources. The project focuses on the role of technology spillovers.
Arctic oil activity requires specific technology which is largely undeveloped to date. Naturally, the size of the market for these technologies determines how much will be invested in their development and hence how affordable arctic oil activity will be. By staying out of the arctic a country that cares for the environment and geopolitical calm can make it less affordable and hence tip another country to not entering the arctic. This can make it less tempting for another country to enter and so on. Hence, if one country stays out of the arctic this may create a chain reaction where all stay out. We study the circumstances under which such a chain-reaction can be started and what further communication strategies an environmentally-conscious country can employ.
The model is calibrated using real-world data on oil prices, extraction costs and Arctic oil resources and it is shown that a country such as Norway may be pivotal in preventing others from entering – should it want to.
Green Certificates and Competition in Electricity Markets
A number of studies have analysed how green certificates affect the functioning of electricity markets, both with respect to short-term price formation and long-term investment. One result is that green certificates may undermine the efficiency of energy markets by increasing price volatility. In addition, green certificates may provide market participants with the possibility of exploiting market power by imposing so-called "margin squeezes". In this project we study the importance of green certificates for electricity markets, and analyse how potentially negative effects may be counteracted by suitable regulation.
Effects of Reduced Nuclear Capacity in Europe
Following the Fukushima accident in 2011, some EU member states decided to phase out nuclear power. We explore the impact of an EU-wide nuclear phase out provided the proposal of the EU Commission to reduce GHG emissions by 40 percent in 2030 relative to 1990 is implemented. Using a numerical simulation model of the European energy industry (LIBEMOD), we find that a complete nuclear phase out in Europe by 2030 has a moderate impact on total production of electricity and only a tiny impact on total consumption of energy. Lower nuclear production is to a large extent replaced by more renewable electricity production, in particular wind power and bio power.
Natural Resources and Sovereign Expropriation
Note that the earlier project III.12 is merged into this project. An important question for governments of countries endowed with large natural resources is how to govern these resources, including choice of ownership structure and rights to exploitation. Questions of ownership and governance are inherently political and policies may change abruptly, following changes in government, changes in the value of the resources or other events. At the same time, the type and quality of governance is crucial for the efficient exploitation of natural resources. In this project we study such issues, including how the regime governing natural resources depends on political and economic factors, as well as how such factors, through their influence on the regime, affect the efficiency of resource exploitation.
One part of this subproject ("Nationalization of natural resources") concerns how resource owners will behave under risk of losing their resource due to nationalization, and how this risk in turn affects the incentives for governments to nationalize such resources and how world prices for resources may be affected by such interaction.
A part of this subproject is the analysis of resource taxation. This is performed in the project "Finders Keepers?". The project aims at understanding to what extent resource exploration firms will get to keep their findings.
Should Foresters Forecast?
Growth dynamics of forests will likely be altered by climate change. As these shifts are hard to predict, this paper asks whether forecasting them is necessary for profitable management. While unpredictability of climate change makes it hard to calculate expected profit losses of not forecasting, by using Monte Carlo simulations we can obtain an upper bound of these losses. We show that an owner following a rule of thumb, which completely ignores future changes and only observes changes as they come, will closely approximate optimal management. If changes are observed without too much delay, profit losses and errors in harvesting are negligible. This has implications for the effort foresters should devote to long run forecasting. It also implies the argument that boundedly rational agents may behave as if being fully rational has traction in forestry.
The Hveding Conjecture: Optimal Operation of Hydro Power
The thinking about how to operate hydro generation facilities in an integrated system has developed considerably over time, with ideas from economics gradually becoming more influential. In this project this history will be revisited, with particular emphasis on the relevance and success of the so-called Hveding Conjecture.
Integration of, and Competition between, Electricity Market Places
A new phase in the integration of the European electricity industry has been initiated with the coupling of physical trade on different regional market places. Some developments have already taken place, mostly based on bilateral agreements between regional players, but a more comprehensive approach is currently being taken by regulators in North-Western Europe, with the aim of subsequently extending the process to the rest of Europe. The coupling of trade not only raises question about how to harmonize market places and efficiently utilize physical interconnectors, but also how to handle competition between different market places. Such competition is already present in the UK, as well as in certain regions of Germany, but further integration may increase the extent of rivalry between market places. In this project, we study challenges raised by market coupling.
Flexibility in Electricity Markets
The project consists of two parts. Part I: Consumption and demand of electricity must be balanced at all times. Achieving this balance requires a high degree of flexibility, either on the supply side, on the demand side or both. Achieving the warranted flexibility has become more challenging with the increased share of intermittent and distributed generation. A fundamental question is whether this requires new ways of organizing and governing the electricity market, including the availability of contracts and market places to allow market participants, as well as system operators and other decision makers, to operate efficiently. In this project we aim to study such questions.
Part II: This project starts from the observation that, in Norway and Sweden, the pricing of electricity may vary between geographical areas of the countries reflecting the capacity of transmission capacities, i.e. areas with pressure on transmission capacities will have a higher price than areas with a lower or no pressure on capacities. Economists have advocated much smaller geographical areas, namely production and consumption nodes. Theoretical models of production- and consumption nodes have indicated a welfare gain of having node-specific prices The purpose of the study is to establish the theoretical framework for analyzing optimal electricity pricing and to explore ideas how to implement such a system.
Security of supply in a green power market – The challenges and opportunities of intermittent power
Security of electricity supply in the long run is both a question of having sufficient energy (TWh) and power (GW) capacity, and equally whether the system can deliver electricity efficiently where and when it is needed. This project concerns how to organize the power market in order to avoid short-run system breakdown and at the same time give socially optimal long-run incentives for investments in production and transmission capacities. We will study these topics by work packages that characterize theoretically the optimal electricity system (WP1), explore different technical, judicial and economic mechanisms (WP2-WP5), and study the interaction of these mechanisms in model-based policy analyses (WP6).
Although we have no industry financing of the project, we have two possible joint ventures with electricity supply companies, which will form the empirical basis for WP4 on Demand management. Ringerikskraft has been given a grant from ENOVA to explore the effects of smart meters and the pricing of end user maximum power usage, and has an agreement with the Frisch Centre whereby we will cooperate on design of an experiment and analyse t
Rebound and adverse effects of energy efficiency measures
Economists at Statistics Norway have conducted an analysis of the main drivers for the sharp increase in the proportion of households that have acquired heat pumps in Norway, and how this affects household energy consumption. On average, households with and without a heat pump use approximately the same amount of electricity, implying that the changes in behavior completely offsets the savings potential of the heat pump. However, total energy consumption is lowered and energy efficiency is increased since the consumption of firewood and fuel oils are reduced.
In an interdisciplinary paper, economists and anthropologists study the perplexing case of the Norwegian heat pump ownership, a technology that theoretically should reduce household heat consumption by up to 25%, but when taken into use results in little or no change in electricity consumption. Our two coordinated studies find a major change in how households heat their residences after acquiring a heat pump. The anthropological study shows that many households increase the heated living area and no longer turn down the heat at night and when away. The economic study quantifies large effects of heat pump ownership on the consumption of all energy sources.
The households’ response to soft policy measures
The project is collaboration between SUM/CREE, CICERO and SINTEF. Based on a collection of empirical data in 2014 (including a trial where 26 in-home displays were installed and used in people's homes in Røverkollen the families interviewed after 1-3 months of usage, and their electricity monitored in the subsequent year), the work resulted in a journal article, which compares the findings from Røverkollen with a different socio-cultural setting (Askøy and Follo) for using in-home displays.
Environmentally friendly transportation
Reyer Gerlagh and Inge van den Bijgaart (jointly with Hans Nijland and Thomas Michielsen,) at Tilburg Sustainability Center construct a simple model that generates predictions regarding the effect of fiscal policies on average CO2 emissions of new cars, and then test the model empirically. The empirical strategy combines a diverse series of data. First, they use a large database of vehicle‐specific taxes in 15 EU countries over 2001‐2010 to construct a measure for the vehicle registration and annual road tax levels, and separately, for the CO2 sensitivity of these taxes.
They find that for many countries the fiscal policies have become more sensitive to CO2 emissions of new cars. They then use these constructed measures to estimate the effect of fiscal policies on the CO2 emissions of the new car fleet. The increased CO2‐sensitivity of registration taxes have reduced the CO2 emission intensity of the average new car by 1.3 percent, partly through an induced increase of the share of diesel‐fuelled cars by 6.5 percentage points. Higher fuel taxes lead to the purchase of more fuel-efficient cars, but higher annual road taxes have no or an adverse effect.
Environmental performance in firms
We study the effects of various environmental regulations on environmental performance measured as emission intensity. Moreover, we aim to test whether any such effects are persistent or only temporary. Conventional theory predicts that indirect regulations as opposed to direct regulations provide continuous dynamic incentives for emission reductions. Our unique Norwegian firm level panel data set allow us to identify effects from different types of regulations such as environmental taxes, non-tradable emission quotas and technology standards. The data includes information of different environmental regulations, all kinds of polluting emissions, and a large number of control variables for all polluting incorporated firms. Empirically we identify positive and significant effects from both direct and indirect policy instruments. We also investigate whether the regulations provide continuous dynamic incentives that lead to persistent effects. In contrast to what the literature suggests, we find evidence that direct regulations promote persistent effects. Indirect regulations will, on the other hand, only have potential persistent effects if environmental taxes are increasing over time.
Evaluation of energy efficiency measures
This project is a study of existing literature on partial microeconomic analyses of energy efficiency measures. We plan to write a section on this in a report in 2015 (a wider report also containing a literature study on macroeconomic analyses).
Investments and utilization of energy efficient household appliances
The project is part of Dalen’s PhD-thesis and will analyse two aspects of policy use too reduce household energy consumption. In one article a difference-in-difference estimation based on cross-sectional samples of Norwegian households is performed to evaluate the effect on household electricity consumption of implementation of mandatory energy labelling of household appliances. By comparing different implementation stages of the labelling policy we are able to discuss potential effects on both producers and consumers.
A second article analyses Norwegian and Swedish household’s consumption of environmentally friendly products, such as high efficient appliances. We model how households are affected by different aspects, such as norms, attitudes, polices and socio-demographic variables, in their choice of adopting environmentally friendly items related to energy saving. The model is further estimated using data from a web-based OECD study performed in 2008 designed to shed light on household’s environmental behaviour and the effect of governmental policies.
Household energy practices in low energy buildings
Low energy buildings are designed to reduce energy demand but assume household energy users who are motivated, knowledgeable and capable of managing complex thermostatic systems in order to regulate comfort. This aim of this project has been to explore how residents in a low-energy building cooperative in Oslo adjust comfort levels and regulate thermostats. The results will form a basis for further exploration of household-technology interactions in ‘smart’ buildings.
Electrification of transport: Challenges, mechanisms and solutions (ELECTRANS)
Electrification of the transport sector makes the transportation system and the electricity market increasingly entwined, highlighting a need for improved coordination and collaboration between different policy fields and institutions. We assess different policy packages and explore the effects on the electricity market and the transportation sector. The output of the project is expected to provide knowledge which is essential for making the right investment decisions in electricity production capacities, in charging technologies, in the grids, and in the market for EVs, as well as for efficient transportation planning.
Legal challenges and opportunities for Norway under a re-designed European electricity market
A core objective of this project is to anticipate the legal consequences of the further introduction of generation adequacy mechanisms, capacity markets as well as new requirements for support schemes for renewable energy generation on the Norwegian power system. In particular, there is a need to identify the legal barriers and opportunities created by those new mechanisms, domestically and inerntionally. At the domestic level, the research will first assess the need for a national generation adequacy mechanism in Norway. Second, the research will investigate the legal basis for introducing new national mechanisms aimed to increase the resilience of the Norwegian energy power market to price fluctuations and changes in investment structure for interconnectors. The main objective is to find the manner to limit the negative consequences on electricity prices when neighbouring countries operate capacity mechanisms. At the cross-border level, the research will identify to which extent Norwegian actors can take part in foreign capacity mechanisms and national support schemes for renewables under a new legislative framework. Finally, a comparative joint research project will be conducted between University of Oslo and Paris Dauphine University on the interaction between the development of decentralised electricity generation and local grids regulation.
Cooperation and regulation for building electric interconnectors
The gains from investing in electric interconnection depend on the reinforcement of national transmission infrastructure. Because most of the pieces of interconnected grids are complementary, a lack of coordination in the investment decisions made by transmission operators within their limited jurisdiction results in investment below first best levels in both the interconnector and national infrastructure. A subsidy to financially sustain the interconnector building is not sufficient to restore first best. To reach optimal investment without merging the two TSOs into an international operator that would internalize all the effects from its investment, we need a compensation to be paid to each TSO for the positive externality its internal investment creates abroad. This is feasible only if a regulatory agency is empowered with a say in the design and financing not only of the interconnector but also of the domestic lines.
The European electricity market towards 2050
2050 climate and energy policy will have impact on the European energy markets, and thus affect the Norwegian energy system. Some factors that will be considered are i) alternative climate targets, in particular, the official aim of the EU of a 80 percent emissions reduction by 2050, ii) the degree of flexibility between emissions reductions in ETS and non-ETS sectors (one corner case is full flexibility), iii) the degree of flexibility between non-ETS emissions reductions across countries, and iv) the impact of alternative targets for the share of renewables in final energy demand. The importance of cost reductions for renewables will also be considered. We will use the numerical energy market model LIBEMOD.
The second part of this project examines the impact of batteries as a storage technology for wind power and solar, using, for example an extended version of a numerical energy market model. In particular, we will study:
• At what cost level will it be profitable to use batteries as a storage technology for wind power and solar?
• What are the impacts of a radical reduction in costs of batteries for intermittent power on the European electricity markets and the Norwegian energy system?
• Should batteries be installed at the production site for intermittent power or among end users?
WINDLAND: Spatial assessment of environment-economy trade-offs to reduce wind power conflicts
Our primary objective is to evaluate the loss of ecosystem services associated with wind energy installations, and to construct methods to use these data as input in designing policy instruments and regulations in order to reduce the conflicts of interest across stakeholders.
Our secondary objectives are to answer the following research questions: What are the welfare losses from reduced flow of ecosystem services caused by construction of wind farms and associated grid? How can we build a framework for transferring the assessed values of ecosystem services to decision making contexts? What is the economic and environmentally friendly priority plan for the geographical distribution of wind installations in Norway? How do the assessed values of ecosystem services affect the priority plan and energy system cost? How can application of the polluter pay principle and improved legal protection of the environment increase the support of wind power?
The role of CCS in reaching a low-carbon society
CCS – Carbon Capture and Storage - may be important whether policies aim for the two-degree target or the 1.5 degree target. However, the technology has been implemented only to a very limited extent. There is consequently a need for research to understand why the technology has not been implemented and how policy instruments can be optimally designed to target this technology. How do we value the benefits of CCS such as learning effects, CO2 reductions and the option of storage? What are the market imperfections in the three markets (capture, transport, storage) and how can policies be designed to target these imperfections? Can CCS be economically profitable without government support? What will the consequences for Norwegian industry (including oil and gas) be with and without CCS, given that we aim for the two-degree target?
Driving towards the low-emission society
This project’s aim is to obtain accurate and reliable knowledge on the effects of existing and potential future policies to support the transition to zero- and low-emission automobiles in Norway. Effects will be assessed in terms of how many cars households choose to own, by type of car (electric vs. petrol or diesel driven), and on how much the cars are used, in addition to assessing environmental outcomes, such as global and local emissions, energy demand, and distributional effects across society. The analysis will be based on a novel database assembled from administrative registers encompassing the entire Norwegian population, combining disaggregate information on passenger cars with detailed information about their owners.
The research project aims at answering research questions related to how policy can help transforming the passenger transport sector from relying primarily on vehicles with internal combustion engines to an energy technology system for passenger transport based largely on battery and fuel cell electric vehicles, possibly supplemented by plug-in hybrid electric vehicles or other ultra-low emission propulsion technologies.
The project will benefit from an active stakeholder group consisting of private sector organisations, non-profit interest organisations and public institutions.
CREE Master Theses in environmentally friendly energy
Every year CREE offers scholarships of NOK 20,000 each to master students writing a thesis on subjects within the research interests of CREE. (CREE project plan) Priority is given to students of economics at the University of Oslo. Those who receive the scholarship will be offered an office and a supervisor at one of the Norwegian CREE institutions.
We expect to have around three master students each year.
Technical building standards and energy use in non- residential buildings
Building standards have changed over time. As a result, the current stock of buildings is built under different TEK standards. Statistics of current energy consumption in commercial buildings, see Rapporter 62/2013, Statistisk sentralbyrå, shows that non-residential buildings built in the 90s have clearly higher energy consumption per m2 than buildings built before and later. This applies both for office buildings, schools and also partly commercial buildings. The question is what factors cause this pattern, do we see any effects of changes in building codes or other energy policies for development in energy use, and what are the major drivers of changes in energy consumption?
In this project we aim to understand the main drivers for energy consumption in non-residential buildings, and how technical standards affect the buildings’ energy performance.
Increased energy efficiency in non-residential buildings?
To increase the energy efficiency in current non-residential buildings, governmental energy efficiency grants are introduced through the governmental agency Enova. One of the few evaluations of this grant was conducted by the Auditor General of Norway in their report on evaluating the government’s efforts to increase energy efficiency in buildings (Riksrevisjonen, 2015-2016: «Riksrevisjonens undersøkelse av myndighetenes arbeid med energieffektivitet i bygg».) In their summery of the report, they state that "Enovas tilskudd til yrkesbygg har begrenset effekt". This conclusion was drawn from the observation that the energy consumption per m2 was not significantly lower after renovations compared to before based on ex post evaluation of energy consumption in buildings receiving grants from Enova. The report does, however, not aim to explain why these results occur.
In collaboration with Riksrevisjonen we aim to do further analysis on the data they collected to shed light on the main drivers for this lack of reduction in energy consumption per m2. This will help us better understand how energy efficiency measures affect firm behaviour, and may help authorities adjust rules and conditions for energy efficiency grant to better secure the desired outcome.
Energy security and option value in residences
The choice of heating, lighting and cooking technology in households has implications not only for the welfare in the form of current energy consumption, but also for the option value of being able to use alternative energy sources in household production in cases where prices on energy sources are rising rapidly, or the delivery of one energy source becomes insecure. In Norway today, these alternative energy sources are to a large degree connected to old technology; wood and fuel oils for heating, candles, paraffin or solar panels for lighting, and gas, coal and wood for cooking.
Currently, we know very little about to what extent households are concerned with energy security when choosing among available technologies and how this affects the diffusion and utilization of new and smart technologies. This option to use alternative energy sources are important for how households are affected by, and value the loss of electricity supply, in the case of power grid failures. Thus it is interesting to analyse how technology choices are affected by this option value and how the option to use alternative energy sources affects the households’ welfare losses in a long-term black out situation lasting for more than 24 hours.
The first part of this project will map the likely future external impulses that are particularly decisive for the performance of the Norwegian national climate strategy. We will analyse technological, demographical and international economic and political drivers, with particular attention to the consequences of EU’s climate and energy policy. The aim is to define and simulate a limited set of distinct scenarios where we vary the developments of external factors to form consistent storylines. Scenario experiments will be performed in collaboration with a wider set of researcher and users from public, private and political organisations. We will use two global models in team to construct consistent developments based on these storylines; one energy system model and one CGE model.
The second part of this project will both analytically and numerically investigate the severity of lock-in mechanisms caused by behavioural sluggishness. Examples of possible consumer response inertia can be habit formation, psychological mechanisms or network externalities that call for coordinated action in order to avoid lock-in. We will model alternative preferential structures that account for realistic social and psychological behavioural drivers.
Mitigation under the Paris agreement
This research project tries to make sense of "unconditional" and "conditional" (intended) nationally determined contributions ((I)NDCs) under the Paris Agreement (PA) on climate action, initiated in December 2015. We consider possible relationships between quantity targets for greenhouse gas (GHG) mitigation ambition as defined by participating countries under the PA, and price targets required to implement them.
Main objectives of the analysis are:
• Study the overall global structure of carbon pricing likely to result from the PA, and discuss the scope for unified global carbon pricing under the PA;
• Analyze main types of GHG mitigation, both overall reductions in energy consumption and switches from fossil to renewable energy sources, in terms of their efficiency, financing structure, and overall viability; and
• Analyze the suitability of different financing mechanisms for low-income countries, necessary to incentivize additional mitigation in such countries under the PA, to fulfill the countries’ conditional (I)NDCs.
Under the project we will construct, and analyze, a series of simple analytical models where both low-income and high-income countries are viewed as rational actors; and with empirical examples, mainly from Latin America, of how the (I)NDCs are likely to be implemented.
Sustainable transition to sustainability
This project examines some of the key factors necessary to transform Norway to a low-emission society: First, which of the available climate policy options will be chosen and implemented in a democratic society? Second, green policies may fail to work as expected if actors respond differently to the policy than anticipated. How may social, psychological and other motivations influence the effects of common policy instruments in the climate field? Third, most investments in green R&D take place abroad. This suggests that Norway should have a two-sided strategy: push for international agreements that spur green R&D, and also implement domestic instruments to trigger more, and efficient, green R&D. How can an international green R&D agreement be designed, and how should Norway design its green R&D policy? Finally, Extraction of Norwegian oil and gas tend to increase emissions of CO2, thereby undermining the goal of a reaching a low-emission society. However, extraction of natural gas may reduce the use of coal and thus contribute to lower global emissions in the short run. On the other hand, extraction of oil and natural gas reduce energy prices, which reduces incentives for investments in green R&D. How should Norway, with its stated goal of becoming a low-emissions society, balance these concerns?