132 research outputs found
Price Is a Better Climate Commitment
No full textAt the international level, a global carbon price is a better form of commitment to reduce carbon emissions than a system of national caps. Peter Cramton and Steven Stoft outline a price-based approach that is simple, effective, and remarkably affordable.
Flexible Global Carbon Pricing: A Backward-Compatible Upgrade for the Kyoto Protocol
No full textThe Kyoto Protocol’s approach of assigning emission targets, or “caps,” promises certainty that it cannot deliver, because it exacerbates problems with international cooperation and commitment. Global carbon pricing addresses these problems and, with less risk and more reward, can generate and sustain stronger policies. This paper proposes a system, “flexible global carbon pricing,” designed to replace the Kyoto Protocol. It provides backward-compatibility with the Kyoto Protocol by allowing un-modified cap and trade as one form of national carbon pricing. Instead of many national “caps,” the proposal sets a global target price for carbon and specifies a pair of incentives. A Pricing Incentive rewards nations that set their carbon price higher than the global target and penalizes nations that underachieve. These rewards and penalties sum to zero by design. The strength of the Pricing Incentive is adjusted automatically so that the global average carbon price converges to the global target price. A Clean Development Incentive (CDI), free from the gaming problems that plague the U.N.’s Clean Development Mechanism, encourages full participation by low-emission countries. An example, based on a $20 price target, causes transfers from the United States of only seven cents per capita per day. Nevertheless, India’s CDI receipts cover its compliance costs. The example shows that low costs can be guaranteed.Kyoto protocol,cap and trade,flexible global carbon pricing,international cooperation
The Convergence of Market Designs for Adequate Generating Capacity
No full textThis paper compares market designs intended to solve the resource adequacy (RA) problem, and finds that, in spite of rivalrous claims, the most advanced designs have nearly converged. The original dichotomy between approaches based on long-term energy contracts and those based on short-term capacity markets spawned two design tracks. Long-term contracts led to call-option obligations which provide market-power control and the ability to strengthen performance incentives, but this approach fails to replace the missing money at the root of the adequacy problem. Hogan’s energy-only market fills this gap. On the other track, the short-term capacity markets (ICAP) spawned long-term capacity market designs. In 2004, ISO New England proposed a short-term market with hedged performance incentives essentially based on high spot prices. In 2005 we developed for New England a forward capacity market with load obligated to purchase a target level of capacity covered by an energy call option. The two tracks have now converged on two conclusions: (1) High real-time energy prices should provide performance incentives. (2) High energy prices should be hedged with call options. We argue that two more conclusions are needed: (3) Capacity targets rather than high and volatile spot prices should guide investment, and (4) long-term physically based options should be purchased in a forward market for capacity. The result will be that adequacy is maintained, performance incentives are restored, market power and risks are reduced from present levels, and prices are hedged down to a level below the present price cap.Auctions, electricity auctions, uniform-price auctions
A Capacity Market that Makes Sense
No full textWe argue that a capacity market is needed in most restructured electricity markets, and present a design that avoids the many problems found in the early capacity markets. The proposed locational capacity market pays suppliers based on their demonstrated ability to supply energy or reserves in shortage hours—hours in which there is a shortage of operating reserves. Thus, only supply that contributes to reliability is rewarded. The capacity price responds to market conditions. When capacity is scarce the capacity price is high; when capacity is plentiful the capacity price is low or zero. Market power in the capacity market is addressed by setting the capacity price based on actual capacity, rather than bid capacity, so generators cannot increase the capacity price by withholding supply. Ex post peak energy rents (the short-run energy profits of a benchmark peaking unit) are subtracted from the capacity price. Thus, a supplier does not have an incentive to create real-time shortages—the high shortage price resulting from a shortage is subtracted from the capacity price, so there is no net gain from the high price. By defining a capacity product closely tied to reliability and directly addressing market power both in the capacity market and in the spot energy market, the proposed design results in a market participants can trust to encourage efficient behavior both in the short run and long run.Auctions, Electricity Auctions, Capacity Auctions, Market Design
Global Carbon Pricing
No full textWhy the traditional “pledge and review” climate agreements have failed, and how carbon pricing, based on trust and reciprocity, could succeed. After twenty-five years of failure, climate negotiations continue to use a “pledge and review” approach: countries pledge (almost anything), subject to (unenforced) review. This approach ignores everything we know about human cooperation. In this book, leading economists describe an alternate model for climate agreements, drawing on the work of the late Nobel laureate Elinor Ostrom and others. They show that a “common commitment” scheme is more effective than an “individual commitment” scheme; the latter depends on altruism while the former involves reciprocity (“we will if you will”). The contributors propose that global carbon pricing is the best candidate for a reciprocal common commitment in climate negotiations. Each country would commit to placing charges on carbon emissions sufficient to match an agreed global price formula. The contributors show that carbon pricing would facilitate negotiations and enforcement, improve efficiency and flexibility, and make other climate policies more effective. Additionally, they analyze the failings of the 2015 Paris climate conference. Contributors Richard N. Cooper, Peter Cramton, Ottmar Edenhofer, Christian Gollier, Éloi Laurent, David JC MacKay, William Nordhaus, Axel Ockenfels, Joseph E. Stiglitz, Steven Stoft, Jean Tirole, Martin L. Weitzma
Global Carbon Pricing
No full textWhy the traditional “pledge and review” climate agreements have failed, and how carbon pricing, based on trust and reciprocity, could succeed.After twenty-five years of failure, climate negotiations continue to use a “pledge and review” approach: countries pledge (almost anything), subject to (unenforced) review. This approach ignores everything we know about human cooperation. In this book, leading economists describe an alternate model for climate agreements, drawing on the work of the late Nobel laureate Elinor Ostrom and others. They show that a “common commitment” scheme is more effective than an “individual commitment” scheme; the latter depends on altruism while the former involves reciprocity (“we will if you will”).The contributors propose that global carbon pricing is the best candidate for a reciprocal common commitment in climate negotiations. Each country would commit to placing charges on carbon emissions sufficient to match an agreed global price formula. The contributors show that carbon pricing would facilitate negotiations and enforcement, improve efficiency and flexibility, and make other climate policies more effective. Additionally, they analyze the failings of the 2015 Paris climate conference.ContributorsRichard N. Cooper, Peter Cramton, Ottmar Edenhofer, Christian Gollier, Éloi Laurent, David JC MacKay, William Nordhaus, Axel Ockenfels, Joseph E. Stiglitz, Steven Stoft, Jean Tirole, Martin L. Weitzma
Colombia Firm Energy Market
No full textA firm energy market for Colombia is presented. Firm energy—the ability to provide energy in a dry period—is the product needed for reliability in Colombia’s hydro-dominated electricity market. The firm energy market coordinates investment in new resources to assure that sufficient firm energy is available in dry periods. Load procures in an annual auction enough firm energy to cover its needs. The firm energy product includes both a financial call option and the physical capability to supply firm energy. The call option protects load from high spot prices and improves the performance of the spot market during scarcity. The market provides strong performance incentives through the spot energy price. Market power is addressed directly: existing resources cannot impact the firm energy price. Since load is hedged from high spot prices, the market can rely on high prices to balance supply and demand during dry periods, rather than rationing.Auctions
A Capacity Market that Makes Sense
No full text"A Capacity Market that Makes Sense," (with Steven Stoft) Electricity Journal, 18, 43-54, August/September 2005.We argue that a capacity market is needed in most restructured electricity
markets, and present a design that avoids problems found in the early capacity
markets. The proposed market only rewards capacity that contributes to
reliability as demonstrated by its performance during hours in which there is a
shortage of operating reserves. The capacity price responds to market
conditions, increasing when and where capacity is scarce and decreasing to zero
when and where it is plentiful. Market power in the capacity market is addressed
by basing the capacity price on actual capacity, rather than bid capacity, so
generators cannot increase the capacity price by withholding supply. Actual
peak energy rents (the short-run energy and reserve profits of a benchmark
peaking unit) are subtracted from the capacity price. This allows the capacity
market to more accurately control short-run profits and suppresses market power
in the energy market. This design both avoids and hedges energy market risk,
and by suppressing market power avoids regulatory risk. Risk reduction saves
consumers money as do the performance and investment incentives inherent in
the pay-for-performance mechanism
Forward Reliability Markets: Less Risk, Less Market Power, More Efficiency
No full textA forward reliability market is presented. The market coordinates new entry through the forward procurement of reliability options—physical capacity bundled with a financial option to supply energy above a strike price. The market assures adequate generating resources and prices capacity from the bids of competitive new entry in an annual auction. Efficient performance incentives are maintained from a load-following obligation to supply energy above the strike price. The capacity payment fully hedges load from high spot prices, and reduces supplier risk as well. Market power is reduced in the spot market, since suppliers enter the spot market with a nearly balanced position in times of scarcity. Market power in the reliability market is addressed by not allowing existing supply to impact the capacity price. The approach, which has been adopted in New England and Colombia, is readily adapted to either a thermal or a hydro system.Auctions, electricity auctions, capacity auctions, reliability auctions
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