Natalia Fabra will be presenting her research on renewables and local jobs at the 5th Joint Research Conference on Firm organization, firm financing and firm dynamics entitled “Bracing for the ecological transition: challenges, opportunities, solutions”, and organized by Banque de France, Banca d’Italia and Sciences Po, in cooperation with the CEPR.
9.40 – 10.00. Registration
10.00 – 10.45. Managerial and Financial Barriers during the Green Transition. Ralph De Haas (EBRD), Ralf
Martin (Imperial College), Mirabelle Muûls (Imperial College), Helena Schweiger (EBRD).
10.45 – 11.05. Coffee break
11.05 – 11.50. The Impact of Corporate Climate Action on Financial Markets: Evidence from Climate-Related
Patents. Ulrich Hege (TSE), Sébastien Pouget (TSE), Yifei Zhang (Peking University).
11.50 – 12.35. Are Carbon Prices Priced in Stock Returns? Patrick Bolton (Imperial College), Adrian Lam
(Amsterdam University), Mirabelle Muuls (Imperial College).
12.35 – 13.45. Buffet lunch.
13.45 – 14.30. Do Renewables Create Local Jobs? Natalia Fabra (CarlosIII and CEPR), Eduardo Gutiérrez
(Banco de Espana), Aitor Lacuesta (Banco de Espana), Roberto Ramos (Banco de Espana).
14.30 – 15.15. The Effects of Climate Change on Labor and Capital Reallocation. Christoph Albert (Collegio
Carlo Alberto), Paula Bustos (CEMFI), Jacopo Ponticelli (Northwestern University).
15.15 – 15.35. Coffee break
15.35 – 16.20. Climate Variability and International Trade. Walter Steingress (Syracuse University).
19.30 Dinner (on invitation)
9.30 – 9.45. Registration
9.45 – 10.30. Emission caps and investment in green technologies. Bruno Biais (HEC), Augustin Landier
10.30 – 10.50. Coffee break
10.50 – 11.35. Induced Innovation, Inventors, and the Energy Transition. Eugenie Dugoua (LSE), Todd
Gerarden (Cornell University).
11.35 – 12.20. The Effect of ESG Disclosure on Corporate Investment Efficiency. Elsa Allman (Banque de
France), Joonsung Won (Baruch College).
12.20 – 13.30. Buffet lunch.
13.30 – 14.15. Dance for the rain or pay for insurance? An empirical analysis of the Italian crop insurance
market. Luca Citino (Bank of Italy), Alessandro Palma (GSSI), Matteo Paradisi (EIEF).
14.15 – 15.00. Saving for a Dry Day: Coal, Dams and the Energy Transition. Michele Fioretti (Sciences Po),
Jorge Tamayo (Harvard).
Federico Cingano (Banca d’Italia), Stéphane Guibaud (Sciences Po), Andrea Linarello (Banca d’Italia),
Noémie Lisack (Banque de France), Thierry Mayer (Sciences Po and CEPR), Jean-Stéphane Mésonnier
(Banque de France and Sciences Po).
Federico Cingano, Jean-Stéphane Mésonnier, Maria Ohlund (Sciences Po), Pilar Calvo (Sciences Po)
See more information here.
The measures adopted so far by the EU have been insufficient to contain the impact of the gas crisis on firms and households. This column proposes an emergency gas policy package to deal with the crisis that threatens European economies and the security of supply. The proposal combines an EU-wide gas price cap with binding gas-saving targets and a continued strong price incentive for users to cut gas consumption. The authors explain how these three policy measures would work together, enhance credibility, address concerns about implementing a price cap, and could accommodate the needs of different EU member states.
Europe is unique in many ways – rather unfortunately so, in one way to do with energy. No other part of the world imports most of its pipeline and liquefied natural gas (LNG) with contracts that are based on short-term market prices. This has allowed Russia to announce and implement gas supply interruptions to drive up prices and thus revenues on all its gas sales. Russia’s strategy has inflicted even higher costs on EU economies as it has led to higher costs on gas imported from other countries and knock-on price increases in power markets, where electricity prices are often set by the cost of gas-fired generation.
As a result, European consumers are exposed to high and hugely volatile gas and electricity costs, raising affordability concerns for poorer households and survival concerns for energy-intensive companies competing in global markets. Since the Russian invasion of Ukraine, the gas market is being used as part of the overall warfare. Hence, the EU needs to implement a joint robust response to protect gas users from excessive risks while maintaining security of supply for households and industry.
So far, the focus of policymakers has been on national programmes compensating households and industry for cost increases – thereby imposing costs of hundreds of billions of euros for public budgets and leading to tensions between member states with differing funding capacities. Governments have also provided liquidity and guarantee programmes for firms and suppliers to ensure continued trading. This has, however, further escalated prices by incentivising firms to bet on even higher prices without the downside risk – which is born by governments.
Critical emergency measures for the gas sector
We believe that a combination of three elements is essential for a successful response to the gas crisis at the EU scale while also contributing to longer-run environmental objectives:
Binding gas saving targets: Lower gas demand in any EU member state reduces gas scarcity prices and the risk of supply interruptions for all other member states. Gas-saving targets help to internalise these tangible benefits in the decision-making process of member states to ensure the implementation of national information, engagement and advice programmes for gas-saving measures for households and industry. These targets need to be supported by a credible monitoring and governance process to build trust among EU partners, including penalties for countries that fail to comply with the gas-saving targets, especially during periods of Europe-wide gas shortages. Targets should be relaxed only for countries and during periods where the European Regulatory Agency (ACER) identifies that further savings will not benefit the other member states due to infrastructure constraints in pipeline and LNG shipping.
A price cap to avoid excessive gas prices: Demand and net supply of gas are highly inelastic once prices exceed the level at which the power sector and industry have shifted from gas to alternative fossil fuels (coal and oil) and have exhausted their energy efficiency opportunities. Hence, any potential scarcity can quickly escalate market prices. Uncertainty about potential supply remains high (see, for example, the explosion of Nordstream 1 pipelines), and has less to do with market fundamentals than with military conflict. An EU-wide price cap ensures that the effect of such uncertainties on forward markets no longer escalates prices, avoiding further damage to the European economies. Lower gas prices have the additional benefit of reducing the cost of electricity generation and the inframarginal rents for some technologies. Therefore, the gas price limit can also contribute to lowering Europe’s overall rate of inflation – by reducing both gas and electricity prices.
A commitment to retain strong incentives for gas saving: A regulatory gas price limit by itself reduces prices, avoiding the need for financial compensation to consumers, including all the distortions this can create for efficiency or across member states. However, the challenge is ensuring that strong gas-savings incentives are maintained despite the lower prices. One option is for member states to guarantee to all consumers a baseline consumption at the price limit while imposing a higher price for consumption above and below the baseline. This will preserve strong marginal incentives for gas savings. Furthermore, if all member states adopted such an incentive mechanism, then every company and household would be assured that other European actors face similar incentives.
The policy package: Why any one of these elements would not succeed on its own
Gas saving targets alone may not be sufficiently credible to retain gas prices within acceptable bounds in light of the extreme and continuing developments in gas markets. To discourage any supply disruptions and to moderate risk premia associated with such supply interruptions, it is therefore necessary to complement gas-saving targets with a price limit.
An EU-level price cap that binds will immediately reduce incentives for gas savings and also leave unspecified how scarce gas is to be allocated between different EU member states. Gas saving targets will (i) reduce gas consumption and enhance the incentive to save gas (before the cap becomes binding); and (ii) clarify the allocation of gas between member states in the case of a binding price cap.
Strong measures for gas saving are thus important to reinforce the credibility of the gas savings targets and to limit the role of the price cap. Achieving gas savings at the national level requires – if targets are tight – a variety of programmes and measures at the national level, all of which will be more effective if combined with incentives for short-term gas savings from higher marginal prices. Implementing such pricing structures will be supported at the national level if they are directly linked to the benefits from an EU-wide price limit – and therefore already agreed upon as part of a deal.
The policy package: How potential concerns can be addressed through policy design
Our proposed policy package can address legitimate concerns that are often voiced about price caps.
One concern about a price cap involves circumvention and credibility. Indeed, currently discussed proposals to impose a gas price limit only on exchange-based trading would trigger the unintended (and undesirable) consequence of shifting liquidity to bilateral trades – so-called over-the-counter (OTC) markets. To avoid this, governments would have to regulate all gas trading activities. If they are unwilling or unable to do so, they have to find other means to avoid circumvention.
One option to achieve this makes use of the Transmission System Operators’ (TSOs) imbalance mechanism. The TSOs are responsible for keeping the gas system in balance. So, if there are discrepancies between the gas inflows and deliveries nominated by market participants, TSOs have to buy or sell gas to make up the difference. They then impute the cost on the market participants responsible for the imbalance. The risk of potentially very high imbalance prices encourages all market participants to contract sufficient gas to be in balance. The proposal is for EU governments to mandate TSOs not to acquire imbalance gas above a price limit. This would limit the cost for imbalance gas and make market participants unwilling to sign new gas contracts at prices exceeding that limit. As a result, no supplier will be able to sell above the price limit; hence, they will all have to offer gas below the price limit. A small penalty would be imposed on imbalance prices to ensure that gas producers and utilities still find it attractive to contract bilaterally.
For the market to shift to the lower-price equilibrium, it is critical to ensure the credibility of the TSOs’ commitment not to buy above the price limit. To ensure this, the TSOs need access to additional instruments in case there is insufficient gas supply to meet demand at the price limit. These could involve reverse auctions to unlock additional gas savings from consumers at higher prices, storage options (for clearly constrained timeframes) and, if required, the curtailment of the demand of non-privileged consumers.
A second concern relates to the impact of a price limit on gas-saving incentives. This can nevertheless be avoided through a proper design of retail contracts, exposing consumption above a baseline to high prices (and, symmetrically, rebating any savings below the baseline at high prices). It is well-known to economists that ‘non-linear’ pricing can be used to moderate the overall cost of gas while simultaneously retaining strong gas-saving incentives at the margin. That a practical implementation of this principle is possible has already been recently demonstrated by several European countries with gas price limits that retain short-term gas-saving incentives.
A third concern is that a price limit will reduce gas available to the EU. While there is general agreement that gas production will continue at maximum capacity if the price limit is high enough (e.g. at €50/MWh, thus exceeding any historic price spikes), some actors are concerned that Europe will no longer be able to outcompete Asian countries so as to redirect gas towards the EU. Recent analysis of the IEA Gas Market Report (IEA 2022) shows that LNG was freed up thanks to fuel-shifting from gas to oil and coal in China, Korea, Japan, and India. For this fuel-shifting to be profitable in Asian economies without carbon pricing, gas prices in the range of €50/MWh would have been sufficient. Prices exceeding these levels were typically not passed to final consumers and could thus also not deliver demand reductions in Asia to free up the gas for EU demand. The IEA reports that the extremely high gas prices will likely have resulted in additional demand reductions, primarily in Thailand, Indonesia, and Bangladesh. However, these effects would not be large: LNG volumes redirected to the EU would represent an estimated 1% of EU demand.
Finally, there is a concern that a gas price limit would violate existing long-term import contracts. Yet, adjusting the TSO imbalance pricing structure as discussed above would retain wholesale price formation. Hence, indexation and contractual obligations would remain unaffected, avoiding any interference with existing or future long-term contracts.
The measures adopted so far by the EU have been insufficient to contain the impact of the gas crisis on firms and households. More decisive action is needed. Member states must try to find common ground beyond their recent opposing views on an EU gas price cap. We believe a three-step emergency plan combining (i) an effective regulatory gas price limit with (ii) binding gas-saving targets and (iii) measures that retain short-term gas-saving incentives could be up to this task and also address concerns raised by different member states.
There is much to gain for EU citizens and companies. They would obtain immediate relief and reassurance that everyone is acting together to solve this crisis. It would also save hundreds of billions of euros of public money used for national support programmes for households and industry. Furthermore, clarity that gas prices will remain within acceptable bounds will limit margin calls and counterparty risks, reducing the need for governments to provide guarantees that involve taxpayer risks at the scale of hundreds of billions of euros. While European unity is challenged, member states can choose to act resolutely and show that the EU really means to be stronger together.
Authors: Natalia Fabra, Karsten Neuhoff, and Nicolas Berghmans.
See the post here.
The ERC has highlighted “how ERC grantee Natalia Fabra and her team in Spain shuttles between the lab and policy makers’ cabinets to make future EU electricity market work both for the people and for the climate.”
We are pleased to share with you our 2022 newsletter, which describes some of our most recent research.
- The interview: Erich Muehlegger.
- Research on the Economics of Renewables Energy Policies (Natalia Fabra and Stefan Lamp)
- Air Pollution from Agricultural Fires Increases Hypertension Risk (Mateus Souza)
- Do Renewables Create Local Jobs? (Natalia Fabra)
- Climate Politics and the Dynamics of Green Preferences (David Andrés-Cerezo)
- Keynote Lectures: Efficiency and Distributional Impacts of Real-Time Pricing for Electricity (Natalia Fabra)
- The policy angle: The Case for an Electricity Market Reform
- Social outreach: Energy Workshop, OECD Expert Workshop on Environmental Policies, academic and social outreach, in the media
On September 19th, 2022, Mateus Souza presented some of his work at the LSE Environment Week. The conference gathered top researchers in the field of environmental and energy economics. The full programme can be found here.
Mateus presented his paper entitled “Energy Efficiency Can Deliver for Climate Policy: Evidence from Machine Learning-Based Targeting.” This is joint work with Peter Christensen, Paul Francisco, Erica Myers, and Hansen Shao. The authors show how a machine-learning based targeting design can help improve the cost-effectiveness of residential energy efficiency programs.
More details can be found in their NBER Working Paper.
The European University Institute, Universidad Carlos III, DIW Berlin, Technical University Berlin, Universidad Autónoma de Madrid, University College London and Université Libre de Bruxelles are organising the third edition of the PhD Summer School on “Economic Foundations for Energy and Climate Policies”.
The Summer School will be held on September 19-23, 2022 at the European University Institute, on the Tuscan hills surrounding Florence. The programme of the School will consist of four days (Monday afternoon to Friday morning) of teaching by prominent academics, supplemented by students’ presentations and a roundtable with policymakers.
More information can be found here.
Policy makers face the challenge of supporting both inclusive economic development and a healthy environment. To respond to this challenge, regulators need tools and insights to assess the consequences of policies on the environment, the economy and social outcomes. From a policy perspective, a desirable outcome is one that achieves the greatest environmental benefits while limiting the adverse economic and distributional impacts. This is all the more important as countries take different paths in addressing environment and climate challenges.
Empirical evidence shows that more stringent environmental policy has achieved significant environmental benefits with little aggregate effect on economic performance. However, localised effects may generate significant losses for certain sectors, firms or individuals while providing benefits to others. Policies must therefore be designed to mitigate the negative impacts while harnessing the benefits.
Research has further shown that by inducing innovation in clean technologies, environmental policies can actually increase the productivity of firms directly affected. Assessments of the impact on the broader supply chain, however, are less conclusive. This highlights the important role of empirical research in informing national policy processes and in shedding light on elements of policy processes that remain less well understood.
The employment impacts of environmental policies can be decisive in determining their political acceptability. While the objective of policies generally will be to limit the long-term employment effects, the adjustments costs might be significant and geographically concentrated. Empirical evidence on employment impacts at different levels – national, regional, sectoral or firm – can support policy design that takes into account this heterogeneity in impacts.
Environmental policies can also have substantial distributional effects when polluters do not bear the full cost of mitigating pollution. The benefits of environmental policies may also be unequally distributed e.g. when subsidies to clean technologies disproportionally benefit wealthier households. Empirical research provides important insights into policy mixes that minimise unfair distributional effects while achieving environmental objectives at the lowest economic cost.
With these issues in the background, the OECD has organized a workshop, “Environmental Policies: Social and Economic Outcomes”. This workshop aims to facilitate a discussion among policymakers, regulators, experts in empirical analysis, modelling and statistical analysis on the latest research on the impact
of environmental policies on social and economic outcomes. The discussion is guided by the following questions:
• What is the impact of environmental policies
on innovation in clean technologies, and in turn, economic performance of firms and sectors directly and indirectly impacted by those policies?
• What is the impact of environmental policy stringency on employment?
• What are the distributional effects of environmental policies and how can policy packages minimise the trade-off between efficiency, equity and cost-effectiveness?
Natalia Fabra has contributed to the panel analysing the impact of environmental policy on employment with her paper “Do Renewables create local jobs?” (EEL working paper)
We are delighted to share three forthcoming publications that deal with energy issues in the context of the pandemic. This research deepens our understanding of the mechanisms through which lockdowns and movement restrictions affect energy consumption and associated carbon emissions. It further investigates the links between energy demand and economic activity (as measured by GDP, for example). And it discusses the lessons that electricity markets can provide to cope with security of supply issues such as the ones that arise during major shocks such as the pandemic. Our papers have been accepted at the European Economic Review, The Energy Journal, and Energy Policy.
Natalia Fabra, Aitor Lacuesta and Mateus Souza investigate “The implicit cost of carbon abatement during the COVID-19 pandemic” in an article published this month at the European Economic Review. The first step of the analysis was to predict what the (counterfactual) electricity demand in Spain would have been in case the COVID-19 pandemic had not happened. We employ highly flexible machine learning algorithms for this task, in order to obtain accurate hourly-level predictions. These predictions then serve as inputs for a power sector model which allows us to understand which power plants would have been dispatched in the counterfactual scenario. By comparing plants dispatched under realized and counterfactual electricity demand, we calculate that the carbon abatement attributable to the pandemic ranged between 3.9 and 4.1 Million Tons of CO2.
For carbon reductions in other sectors of the economy, we use data from the Carbon Monitor. Summing all sectors, we estimate that total carbon abatement in Spain reached 23 Million Tons of CO2 during 2020. However, this came at a great cost, even if we do not consider the health damages and human loss due to the pandemic. Using projections from the Bank of Spain, we find that the Spanish GDP loss in 2020 was 169.37 Billion Euros. Comparing this figure to the emissions avoided results in an implicit cost of carbon of 7319 Euro/Ton. We conclude the paper with simulations showing that the abatement observed in the power sector could have been achieved at a much lower cost by investing in renewables. For that case, the implicit cost would range between 60-65 Euro/Ton of CO2.
Paper available here.
We provide more insight about the mechanisms through which Spanish electricity demand reduced during the pandemic in a paper forthcoming at The Energy Journal: “Firms and Households during the Pandemic: What do we learn from their electricity consumption?” This was a joint study by Natalia Fabra and a team of researchers from the Bank of Spain: Olympia Bover, Sandra García-Uribe, Aitor Lacuesta, and Roberto Ramos. The paper starts by laying out how Spanish grid-level electricity demand data can be decomposed into firms’ demand versus households’ demand. The first insight from this exercise is that households’ consumption increased due to lockdowns and movement restrictions, while firms’ consumption substantially decreased. Since firms represent a larger portion of the market, the net effect was of a strong decrease in demand. By plotting the demand figures against GDP growth rates, the authors arrive at another key insight: economic activity is better captured by firms’ electricity consumption, such that using total electricity consumption would under-estimate the severity of the economic impacts of the pandemic. Finally, the study provides evidence of substantial changes in the hourly patterns of electricity consumption, which differ across firms and households. For example, the pandemic was associated with large declines in electricity consumption by firms during working times, which are paralleled by simultaneous increases in households’ electricity consumption.
Paper available here.
In “Learning from Electricity Markets: How to Design a Resilience Strategy“, forthcoming at Energy Policy, Natalia Fabra, Massimo Motta and Martin Peitz argue that the economics of electricity capacity mechanisms provides valuable lessons for the provision of essential goods during crises, which need to be complemented with other elements aimed at mitigating their causes and impacts. The pandemic and post-pandemic times have demonstrated that preparing for global shocks requires the quick availability of some essential goods and services, including energy. Private incentives are typically insufficient for an economy to be prepared for rare events with large negative impacts. Instead, they argue that governments and preferably supranational institutions should implement mechanisms that make sure that prevention, detection and mitigation measures are taken.
Paper available here.
We are excited to announce three new accepted papers from our team’s work on renewable energies. These are forthcoming at The Economic Journal, the American Economic Journal: Economic Policy, and the Journal of the Association of Environmental and Resource Economists. These papers deal with a variety of issues regarding the expansion of renewable energies and accompanying support policies. First, the functioning of future wholesale electricity markets in cases where they are dominated by renewable energies. Second, the quantification of the effects of renewable energy subsidies regarding pricing incentives and market power. Third, the effect of uniform subsidies on the allocation of solar photovoltaic plants. These policies are widely used to support the deployment of renewable energies and thus our research directly contributes to the debate on optimal policy design.
In “Auctions with Privately Known Capacities”, forthcoming at The Economic Journal, Natalia Fabra and Gerard Llobet assess in a theoretical model bidding equilibria and market outcomes in renewables-dominated electricity markets. A key feature of the model is that the availability of renewable energy capacity is random and it is private information. The results show that private information on capacities changes the nature of the equilibrium as compared to the case when private information is on costs (or valuations), a typical assumption in the standard electricity market models. Additionally, the authors show that the uniform-price and discriminatory auctions are not revenue equivalent, in contrast to when costs are independently drawn.
Paper available here.
In “Market Power and Price Exposure: Learning from Changes in Renewables Regulation”, forthcoming at the American Economic Journal: Economic Policy, Natalia Fabra and Imelda, study how RE technologies affect firms’ pricing incentives in wholesale electricity markets. In particular, the authors analyze whether renewable energies depress electricity market prices, and how this effect depends on their degree of exposure to fluctuations in market prices. The paper develops a theoretical model to show that fixed market prices, such as feed-in tariffs, are relatively more effective at curbing market power of dominant firms that own large shares of renewable capacity. The authors test for the main theoretical predictions empirically using detailed data from the Spanish electricity market and confirm that a switch from full price exposure to fixed prices caused a 2-4% reduction in the average price-cost markup.
Paper available here.
In “(Mis)allocation of Renewable Energy Sources”, forthcoming at the Journal of the Association of Environmental and Resource Economists, Stefan Lamp and Mario Samano study feed-in tariffs as a form of uniform policy instrument in case of solar photovoltaic installations in Germany. The authors estimate the dispersion of marginal benefits from solar production and compute the social and private benefits from optimal reallocations of solar installations keeping total capacity fixed. They find that a reallocation of solar, in line with the marginal benefits, would lead to substantial gains compared to the status quo, especially if transmission capacity between regions was considered. Overall, the paper puts in perspective the social costs of nationwide policies that do not offer heterogeneous incentives.
Paper available here.