Download List for concepts 45003 feb 2011

Reference list for concepts and terms used in DTU course 45003
JHJA/SASC/LLPH/ERZV, November, 2010
1. Economics: The economics behind energy markets
Marginal cost: MC: cost of producing one additional unit of output
Short term marginal cost: costs directly associated with increasing output with one unit with the
existing capital (machinery)
Long term marginal cost: costs associated with permanently increasing output with one unit including
expanding equipment (capacity)
Average cost: AC: average production costs = total costs/output quantity
Variable cost: production costs that can be adjusted – inputs as materials, labour and energy
Fixed costs: capital costs, land – part of labour cost, capital maintenance costs (costs)
Fuel cost: The costs of fuels supplied at plant (factory)
Total cost: C(q)
Revenue: R(q) = Price * output (sales)
Marginal revenue: MR: the change in total revenue a firm experience by supplying (selling) an additional
unit of output
Utility maximization: Consumers maximise the utility they derive from consuming a bundle of goods and
services including leisure time given a budget constraint of income:
Max U(x,y) s.t. pxx+pyy=I
Profit maximisation: Producers maximise profits given their production costs and a market price
Max Π(q): Π(q) =R( q) – C(q)
Indifference curve: Consumers indifference between consuming different consumption bundles (the
utility level is the same)
Equilibrium price: price where total demand is equal to total supply
Price elasticity: the percentage quantity response to a percentage price change
Income elasticity: the percentage quantity change as a response to a percentage income change
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Production elasticity: the percentage quantity change as a response to a percentage change in
production (output)
Demand elasticity: fully phrased” price elasticity of demand” is similar to price elasticity but refers to
demand
Supply elasticity: fully phrased” price elasticity of supply” is similar to price elasticity but refers to
change in supply
Cross-price elasticity: the percentage change in demand for x as a response to the percentage change in
the price of y (change in relative price py/px)
GDP: Gross Domestic Product: most commonly used term for economic value creation by an economy
(economic growth is measured as increase in GDP) also called economic activity



current prices: measured in the actual prices for each year
constant, real prices or fixed prices: measured (aggregated) for each year with the price level of
a specific fixed year
in PPP (Purchasing Power Parity) adjusting GDP with the price level of the country = low price
level adjust GDP up and thereby reduce the energy intensity per GDP (see intensity)
GNP: Gross National Product: slightly different from GDP and measure the national product including
from activities abroad and reduced by foreigners’ activity within the country – GDP more generally used
compared to GNP
Perfect competition: Firms are price takers, maximising profits by adjusting output q; optimality criteria
MC=MR = p
Monopoly: One firm maximise profits given full information about demand curve, optimality MC = MR
Monopolistic competition: Firms compete but products are not fully homogenous (differentiated
products) and therefore not fully substitutable
Oligopoly: Limited number of producers (suppliers) and therefore market power
Cournot duopoly: Model with 2 firms competing in quantities reacting to the output of the other firm
and maximising profit given the residual demand curve
Monopsony: Market with just one buyer (market power on the demand side)
Allocative efficiency: The provision of the optimal output level distributed in an optimal allocation
between buyers depending on their marginal utility
Productive efficiency: The optimal input mix and mix of producers in supply
Consumer surplus CS: area (value) between demand curve and the market price
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Producer surplus PS: area (value) between the price and the marginal cost curve
Welfare: partial equilibrium measure is: Welfare = CS + PS
Deadweight loss: The loss in terms of welfare CS+PS from having market limited competition resulting in
quantities lower than optimal (welfare loss in monopoly market)
2. Energy balance and indicators
Energy commodities: goods that are exchanged in some kind of a market with a price in monetary terms
or a relative price against other goods (barter trade)
Primary production: extraction of energy resources (fossil+renewables)
Primary production renewable and nuclear: normally primary renewable = the electricity output, which
imply assuming 100% conversion efficiency – means using a low figure for renewables primary share
Primary supply: the total domestic energy supply available for domestic processing or consumption
TPES: Total Primary Energy Supply (often used when constructing energy intensity)
Bunkering, marine: the heavy fuel and diesel used by ocean transport is not included in domestic supply
Converted energy: electricity, heat, oil refinery outputs
Final consumption: The domestic consumption of energy products excluding the part used for
converting energy – energy by type (column) and sector (row)
End-use: end use is similar to final consumption but do sometimes refer to a specific technology/process
Final demand: = final consumption of energy – different from final demand in input-output
Self-sufficiency: Domestic production/extraction divided by domestic consumption
Energy balance entries: positive means supply or output, negative means input (in converting sectors) or
export, including marine bunkering
Energy balance rows: addition of rows (vertical) possible for final demand
Energy balance columns: addition of columns (horizontal) not meaningful (difficulties in interpretation)
Energy intensity indicators and the link to economic growth:
Energy/GDP: Measure how much energy a country is using to produce its value added ; how energy
intensive is the economy of a country (example: TJ/mill €), (BTU/mill $), (GWh/ mill $)
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Energy/Capita: Indicator that normally increase with income level – how much energy does a country
consume per capita (include both energy used for production and used by the households)
Sectorwise intensity indicators: example: electricity input/output in steel manufacturing, electricity in
households/total private consumption
Determinants for long term economic growth: technological progress (productivity) + population growth
(effective labour supply)
Growth and energy demand causality: Energy demand is normally driven by economic growth but the
causality can be the opposite also with energy input increasing productivity providing a positive
contribution to economic growth (example: steam driven industrial revolution, electrification).
Limits to growth: Physical limits to economic growth exists but are practically beyond the time scale of
economic planning horizons >200 years
Scarcity, growth and prices: Scarcity of certain resource inputs, including energy can harm the economic
growth rates (slower growth) and that would result in sharply rising prices for these inputs. High price
will induce substitution and increased R&D effort.
Price links
Cost pass through: cost of raw materials and inputs passed on to the output price: crude oil has a very
high cost share in diesel output and if costs are passed fully this imply diesel price will increase with
nearly the same percentage as crude oil prices
Substitution: Ability to replace one type of energy input with another energy input. Products that are
close substitutes affect the price of each other a lot
Price linkage short term: If arbitrage or short term substitution is high and markets are free price links
will be high (price links between electricity markets with interconnection), different crude oil markets
Price linkages long term: If markets are more regulated (contract or bilateral markets) the price linkages
only show up gradually: gas market, coal markets linkage to oil
Energy and fuel prices
Crude oil: ‘Raw’ oil as it is extracted. The main world market qualities are Brent (North Sea), Western
Texas Intermediate (WTI), and Arabian/Persian Gulf products (Arabian Light/Heavy).
IEA: International Energy Agency, Paris. Known for its annual World Energy Outlook, which is widely
used as a reference for price forecasts.
OPEC: Organisation of the Petroleum Exporting Countries. Supply-side cartel, adjusting oil extraction
with the aim that the resulting price should be within a certain corridor, higher than the competitive
price level
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API°: American Petroleum Institute degrees, a quality (heating value) indicator for crude oil
Hedging: Risk management method by trading with forwards/futures and their derived financial
instruments (such as options). In order to offset risk, opposite positions to one’s own are taken as well.
Liquidity: a main feature of all markets – a certain number of sellers and buyers need to be present and
to be trading to ensure market liquidity. If only few units are traded, it is doubtful whether the price
index gives a reliable representation
Natural gas: different qualities regarding heating value per m³, depending on extraction site (e.g. Russia
vs. North Sea). In markets, this can be compensated for by norming per heating value (kWh).
LNG (Liquified Natural Gas): Cooling and compressing natural gas allows transporting it onboard special
LNG tankers, but requires special capital-intensive facilities in the ports. Traditionally, natural gas is
mainly transported in pipelines and therefore, regional prices can be different. This is expected to
decrease with the spreading of LNG technology.
Input-output analyses
Direct energy content: The energy input used directly in the sector a to supply the final demand good
Indirect energy content: The energy used in other sectors to make the first sector a able to produce and
supply their output good and in the a sector to supply the other sectors so that they can produce the
inputs to the a sector (including the energy used in a to supply inputs to itself)
Global energy content: Domestic direct energy+domestic indirect energy+energy content in imports of
all goods
Fixed coefficients: The input structure (composition) of each producing sector is fixed = no substitution
Limitational production function: Production is increased by increasing all inputs proportionally = same
as fixed input coefficients
Input coefficients matrix: Ag : column sum of all inputs always sum to 1.
Leontief inverse matrix: (I-Ag)-1: Used to calculate production necessary to supply final demand
components
Diagonal elements of Leontief inverse: Will always be larger than 1 and the broader and larger the
sector the more it adds to the diagonal element. Non diagonal elements represent the indirect
production effects (the production necessary for inputs in the sector directly supplying the final demand
good)
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3. Power economics
Following abbreviation/terms are from Stoft; more details provided below for some of them.
AC: alternating current
DA: day ahead market
GT: gas turbine generator
HHI Herfindahl-Hirschman index: Index that measure concentration of suppliers in a market and thereby
market power
ICap: Total installed capacity
IPP: independent power producer
ISO: independent system operator
LHMC: left-hand marginal cost
RHMC: right-hand marginal cost
LRMC: long-run marginal cost
MC: marginal cost
RT: real time (market)
TR: transmission right
VOLL: value of lost load
Efficiency:
conversion efficiency: energy out / energy in: typically in range 0.30-0.55 for conventional power plants
combined efficiency CHP: (power output + heat output)/ total energy input: higher than the electric
conversion efficiency
Generation technology:
Condensing plant: Power plant that only produce electricity
Condensing extraction plant: combined heat and power generation with flexible output mix – can
operate 100% in condensing mode
CHP: Combined Heat and Power – heat normally for district heating networks
Back-pressure CHP: fixed output composition; Cm value = electricity output/heat output
District heating: heat distributed through a grid of pipes
Cogeneration: combined production of power and process heat (industrial activity)
Renewables: (Directive 2009/28/EC, Art. 2(a)): “ ‘energy from renewable sources’ means energy from
renewable non-fossil sources, namely wind, solar, aerothermal, geothermal, hydrothermal and ocean
energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases“
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Duration curve:
Load duration: ordering of load of system by time slices, usually hours of a year from highest to lowest
load
Daily load variation curve: chronological load of system over 24 hours – usually illustrate systematic load
variation winter, summer, working days, weekend
Peak load: the maximum load of the system (here hourly load) or the top part of the load duration curve
– constitute the smallest part of total load
Intermediate load: the middle part of the load duration curve
Base load: the lower part of the load duration curve – constitute the largest fraction of total load
Price duration curve: corresponding to load the prices for hours can be ordered – usually exhibits larger
variation than load duration curve
Cost composition of retail electricity price: generation+transmission+distribution+retail mark
up+electricity tax and public obligation contribution + VAT: generation costs constitute 15-60% of total
costs up to retail level, depending on country and type of customer.
Power Markets:
Power exchange: An organised marketplace (public or private) offering to trade certain amounts of
standardised products, and providing services to facilitate doing so. The main product is a day-ahead
spot market, an intraday market and possibly a real-time market. Typically, it also offers futures and
other derivatives. Trade can take place as an auction (day ahead market clearing) or as trades that take
place by matching individual bids, continuously during trading hours.
Power pool: compulsory participation by generators where the market mediator uses a more or less
complex algorithm to clear the market for collected bids up to clearing – not all supply bids will be
profitable, but compensation by mediator will take place.
Nordpool is the power exchange for the Nordic market, and operates a day ahead market, futures and
quota trading.
Bilateral market: the trading that take place outside the organised market mainly directly between a
generator and a large consumer (industry) or a retail supplier
Electricity spot market: In order to ensure system stability (supply=demand) at all times, trading
electricity needs to take place before actual delivery. In Europe, this is done day-ahead and this dayahead market is commonly called the spot market. Both supply and demand bids are aggregated
horizontally (this gives stepped curves) and their intersection determines the market price for all units
traded for a delivery period (an hour).
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Electricity regulating/balancing market: Whenever actual generation/consumption do not match with
day-ahead planning, the differences are compensated at regulating/balancing markets (NB: terminology
differs strongly between countries). Sometimes, this is also referred to as real-time markets.
Electricity prices:
Spot price: normally refers to the day ahead price which is the correct term
Day ahead price: the price per MWh supplied in a specific hour of the following day.
Wholesale price: the day ahead market constitute the electricity wholesale market and thus include only
generation costs
Retail price: the price that retail customers (industry, service, residential sectors) have to pay including
network tariffs, and most often also taxes and retail sales mark-ups.
Nodal pricing: pricing electricity separately in all nodes in a power grid, theoretically attractive but
difficult to implement practically
Base/intermediate/peak load power plants: Dispatchable power plants that traditionally run a certain
amount of hours per year (<2000h for peak, >6000h for base load) and thus, cover the respective parts
in the demand profile. Fluctuating renewable energy sources do not fit into this categorisation.
RES-E: Renewable Energy Sources generating Electricity
RES-E marginal cost and the supply curve: Some RES-E technologies (wind, PV etc.) have marginal costs
of approx. 0. Therefore, they enter the supply bid curve at this low level and shift the supply curve to the
right. This leads to a reduction in the spot market price.
Intermittent generation: uncontrollable generation sources as for example wind or PV
Thermal price profile (this is not a standard term, but be you should know the concept): In electricity
markets dominated by thermal generation units of different technologies, the market price depends on
the last activated unit. As different technologies have different marginal costs (coal=low, gas=high),
there are considerable fluctuations in daily prices, following the demand pattern.
Hydro price profile (this is not a standard term, but you should know the concept): In electricity markets
dominated by hydropower reservoirs, e.g. Norway, market prices are quite constant during the day.
Logic behind it: if there is sufficient generation capacity, all hydropower reservoir owners optimise when
to use a m³ of water, and this leads to a flat daily price profile. However, seasonal variations can be very
large, depending on the precipitation level.
Forward prices: bilateral forwards have flexible conditions, but involve credit risk on counterpart
Futures: a standardised contract for delivery of a fixed amount of power with a given profile during a
time in the future (trade in futures have most volume in contracts closer to present time: 3 month
ahead, and low volume in contract that expire years into the future)
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Options: a right but not a duty to sell or buy a fixed amount of electricity in the future at a given exercise
price (not widely traded in the power markets)
Interconnector: electrical connection between two countries/market areas. Higher interconnector
capacity leads to a higher convergence of prices (both average and price profiles).
Security of supply
Adequacy: Availability of sufficient generation, transmission and distribution resources (long term).The
ability of the electric system to supply the aggregate electrical demand and energy requirements of the
customers at all times, taking into account scheduled and reasonably expected unscheduled outages of
system elements. This is backed by planning reserves (in comparison to operating reserves).
Security: The ability of the electric system to withstand sudden disturbances such as electric short
circuits or unanticipated loss of system elements such as generators or transmission lines. This is backed
by operating reserves.
Spinning reserves: Reserves provided by power plants operating at <100%. They are operational and can
therefore react quite fast (in some countries remunerated through regulating power markets)
Contingencies: possibility of sudden disturbances, e.g. forced outages: unexpected stop of a system
component (e.g. power plant or transmission line)
Lost load/load shedding: Disconnection of load involuntarily – can take place without a total black-out of
system. Whenever demand cannot be covered by supply, a certain amount of customers will be
disconnected (=lost load/load shedding). That way, the frequency for the remaining system remains at
50Hz and a blackout is prevented.
Value of Lost Load: VOLL: The value of the lost load – this can be determined according to a number of
different criteria. Examples: Value of the electricity that would have been sold during the cutoff period,
value of commercial/industrial damage due to the lack of electricity, willingness to pay of private
consumers to avoid losing their entire load.
Network regulation: Power sector efficiency regulation
Structural regulation: determines limitations on the positions and interactions of different actors in the
respective value chain, e.g. to what extent network and generation ownership/operation have to be
separated as a prerequisite for a liberalised electricity market.
Price regulation: Rules and limitations on the price that can be charged to customers under a natural
monopoly. In Europe, this typically refers to networks only; in non-liberalised markets with integrated
generation and network operation, it can also refer to the total energy/transmission price.
Natural monopoly: A natural monopoly is given if a certain amount of a good can be supplied cheaper by
one firm that by several firms (cost subadditivity). Due to the lack of competition, price regulation is
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justified to avoid negative effects on total welfare. This is typically the case for networks (electricity, gas,
district heating).
Cost-plus regulation: The monopolist can recover all its costs/expenditure among its customers. Plus:
Bound capital yields a regulated interest rate.
Incentive regulation: The monopolist’s revenue is (partially) decoupled from its own costs. Thus, very
efficient operation can yield higher revenues. Over time, these gains in efficiency can be passed on to
consumers via lower tariffs.
DEA (Data Envelopment Analysis): A common method to determine the efficiency differences between
firms. Achieved input factor combinations/output are related to each other. Then, the best
combinations are interpolated. If a company only reached the same output with a higher factor input
than a comparable company, it is considered inefficient. As a consequence, it will be expected to catch
up to its benchmark within a certain time period.
Quality regulation: Focusing on network costs only disregards the quality level, e.g. failure times and
durations. This can be compensated by setting incentives to reach an optimal quality level (e.g. in
relation to the Value of Lost Load).
4 Environmental Economics
Market imperfections, market failure and externalities
Market imperfection: market does not supply all goods that have a potential demand or does not
supply in the optimal quantity
Public good: A good that is not priced in a market and possess the following properties (common good)


Non-excludable: A specific customer cannot be excluded from consuming the good
Non-rival: Consumption of the good by consumer x does not reduce the consumption
possibilities of consumer y
Free-riders: in relation to public goods declare a lower willingness-to-pay than their real value, because
they cannot be excluded from consuming in the market for a public good (they don’t pay for the clean
air)
Market failure: market does not provide a good that has an aggregated willingness-to-pay, but no way of
limiting consumers from consuming without paying
Externality cost: costs that are not incurred by the person/business causing the costs – cost that is
imposed on an individual/society unwillingly
Positive externality: Example: producing an output good x makes available also a joint freely accessible
output y. Public R&D produce innovations/knowledge available to all.
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Negative externality: Example: a power plant when producing electricity may emit pollutants that are
transported in the atmosphere and when inhaled can cause damage on human health
Market failure and externality: Market does not take account of externalities (market does not price the
external effects) – the external effect will be supplied at too high level (pollution)
Environmental impacts (local/regional): impacts on humans, plants, materials, ecosystems that are
caused by releasing either substances (e.g. fine particles) or energy (noise, radiation, heat) into the
environmental media: air, soil and water
Global impacts: impacts due to release of greenhouse gases. Greenhouse gasses stay in the atmosphere
unchanged long time, disperse evenly and cause global effects that can be significant for the next
century or two
Human health impacts: morbidity and mortality – the most important damage category of air pollution
in Europe today
Environmental Valuation:
Economic Valuation: Subjective preferences by individuals – only humans can express preferences and
assign value
Intrinsic value: The value of environment by itself – not included in total economic value
Use Value + Non Use Value: Use is from individuals enjoying their leisure time (view, air, beauty) nonuse is from individual utility derived from existence of species, habitats, reserves etc.
Direct Value: Individual use and non-use value from environment (leisure time + existence value)
Indirect value: Value obtained from environment as input in production of other goods and services
(resource inputs + environment as sink capacity)
Stated Preference
WTP Willingness To Pay: The value obtained from questionnaires or interviews from individuals on the
amount they would pay for access/rights/ to environmental resources or improvement in environmental
quality/conditions (include use value+non use value)
WTA or WTAC Willingness To Accept Compensation: Value for accepting a decline in environmental
quality (environmental stocks)
Contingent Valuation Method (CVM): The most used stated preferences method
Revealed preference methods (RP): using values from choices already made that depends on the value
of environment (price of assets that include environmental attributes)
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Hedonic price method: use of markets prices for goods that include price effects of environmental
characteristics (housing prices, property, vacation packages)
Travel costs: information about travel distance and time used to calculate costs of visiting an
environmental resource area/recreational site
Production function: Using the reduced output/forgone profits as a consequence of marginally reducing
the environmental quality/stock resource
Opportunity costs: the maximum profits that could alternatively have been extracted from the
environmental resource
Mitigation costs: How much are the repair costs of the environmental damage –
Impact pathway analysis (IPA): used for assessment of the environmental impacts and calculation of the
damage costs of different pollution sources. Analysis follows pollutants from their release to the
affected receptors (population, crops, forests, buildings etc.)
Dose-Response functions: relate the quantity of a pollutant that affects a receptor to the physical impact
on the receptor
Command and Control regulation (CAC)
Inflexible regulation
Standards and quotas (fixed): same quantity regulation for all (for example: -10% emission next year), or
different levels but independent of abatement/pollution control costs
Maximum standard for emission level per plant output of electricity: emission/kWh
Standards for energy consumption: maximum allowed energy consumption for electric appliance
Quotas (non-tradable): tonnes of SO2 emissions allowed for each plant, for each consumer etc.
Efficiency results: inefficient as total control costs (abatement costs) are inefficiently high, because the
abatement does not take place where it is cheapest.
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Economic policy instruments: (economic incentive regulation)
Taxes and tradable quotas:
Consumption tax: a tax levied at the final consumption level, not on industry
Fuel tax/energy tax: a tax levied on inputs in production and in private consumption
Emission tax: tax on the emissions measured at source or calculated by inputs (CO2 emission tax)
Damage taxes: a tax on the damages caused by the externality (for example from emissions)
Pigouvian tax: a tax at a level that exactly corresponds to the marginal damage result in an optimal
pollution level (the externality is internalised in the market)
Tradable quotas: trading in the emission or pollution quotas are allowed, polluters with high abatement
costs will buy quotas and polluters with low abatement costs will sell quotas
Grandfathering quotas: emission or fuel quotas assigned for free based on emission/consumption in
previous years, the assigned quota will be below the required so that abatement must take place
Auctioned quotas: the quota is auctioned so that the firm has to buy the necessary amount of quotas
Result with tradable quota: Marginal abatement cost (MC) will be equalised across all emitters/polluters
Support schemes for the extended use of renewable energy technologies
Investment support schemes: Financial support for an eligible technology is granted per unit [n] or
capacity [MW] or as a percentage of costs.
Operating support schemes: Financial support for an eligible technology is granted per energy unit
produced [MWh].
Price-based support: A sub-category of operating support. In this case, the price level of support is
defined (e.g. €/MWh, most common: feed-in tariffs or price premiums). RES-E generation (quantity) is a
result.
Quantity-based support: A sub-category of operating support. In this case, the quantity level of RES-E
generation is defined (MWh/year).
Tradable Green Quota/Certificate: A sub-category of quantity-based support. Per MWh of RES-E
electricity, a certificate is issued and can help in achieving the target. Either consumers (commonly
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handled by their retailers) or producers are obliged to fulfil the quota. Certificates are tradable and
therefore, the support level (certificate price) is a result and does vary.
Tendering: A sub-category of quantity-based support. The government sets a quantitative target in MW
and holds an auction. The bidder that matches auction criteria best (typically lowest price per MW or
per generated unit) wins the tender and will receive support according to his bid. Tendering for offshore wind parks are held that assigns a fixed tariff for the generated electricity from a specific site for
the winner of the tender.
Feed-in tariff: Price based support. A fixed, guaranteed price paid per kWh of electricity production to
qualified electricity producers for a certain time span. This is commonly combined with priority dispatch,
i.e. units can always generate.
Price premium: Price based support. On top of electricity market prices, the qualified unit operator
receives a fixed premium (€/MWh).
Energy Savings instruments and policies:
Information campaigns: Information distributed in an accessible language through popular channels
about costs and benefits of undertaking specific saving investment (actions)
Awareness: information about the consequences of neglecting savings and environmental protection
actions – targeted at behaviour
Labelling: simplifying the collection of information and comparison process for consumers (widely used
for electric appliances) A-G with the best being for example the lowest electricity consumption
Standards: minimum efficiency or maximum consumption requirements, for example in transport
(gCO2/km), in building codes
Investment/replacement programmes: Examples: financial subsidies for example to renovate apartment
blocks , all equipment older than a given date etc, diesel trains with electric trains.
Economic Growth:
Measure of a country’s performance

absolute

relative
Measured in
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
Economic activity = Gross Domestic Product

monetary measure of the total value of output of a country

monetary measure of a country’s total income/consumption

real GDP – GDP in fixed prices (i.e. adjusted for inflation)

Income = GNP (incl. income transfers)
Economic Growth = change in GDP over years
Exogenous technological change
-
Manna from the heaven
–
decoupling of the economic growth from the resource use
Endogenous growth

Links the technological progress to R&D effort or accumulation of human capital (knowledge
and skills) – include explicit assumptions on production of knowledge

Induced technological change

Instruments like taxes can increase the incentive to invest in R&D (and increase the stock of
knowledge) and thereby increase energy efficiency (reduce emissions)
International externality:

The actions of one country decrease the welfare of another country

No supranational government to internalise the externalities
Uniformity/non-uniformity of damages
Relates to the DAMAGE EFFECTS on each country/region of the pollution
-
Uniformity of damages
-
All countries suffer the same damages per unit of pollution output
–
Non-uniform damages
–
Each country suffer different dameges per unit of pollution
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Uniformity/non-uniformity of mixing
Relates to the CONTRIBUTION to the overall pollution potential from each country
-
Uniformity of mixing
-
One unit of pollution from Country 1 contributes to the overall pollution potentiel (opp) with the
same impact as one unit of pollution from country 2, 3, 4, …, N
–
opp = impact1+impact2+…+impactN
–
where impact1=impact2=…=impactN
-
Non-uniformity of mixing
-
One unit of pollution from each country contributes differently to the overall pollution potential
–
opp = impact1+impact2+…+impactN
–
where impact1=/≠impact2 =/≠ … =/≠ impactN
Pareto Efficiency:
-
-
An allocation of goods is Pareto Efficient:
–
if there does not exist another allocation
–
which makes at least one agent better off
–
without making other agents worse off
A Pareto improvement
–
is a change in allocation

that makes at least one agent better off

without making other agents worse off
Transaction cost
… is a cost connected to economic activities
-
going to the store
-
choosing the goods to buy
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-
Examples of transaction costs:
–
search costs
–
bargaining costs
Polluter Pays Principle
Adopted by the OECD in 1972
”The price of a good or service should fully reflect its total costs of production, including the costs of
all resources used” (Turner et al. pp. 145)
-
the producer pays for the pollution his production causes
-
the consumer pays for the pollution his consumption causes from buying the product, consuming
it and disposing the waste
Precautionary principle:
-
unknown risks
-
take precaution when setting emission standards
Pigovian taxes (1920)
Environmental tax should correspond to the marginal damage cost
-
It gives the firm an incentive to adjust its emission (pollution) to a socially optimal level
-
The tax is efficient as it secures that marginal abatement costs across all industries and firms are
equalised even in the case that these costs are not known by the regulator
-
If optimal emission level is not known the tax is still the most efficient way (least cost) to reduce
emissions
Permit trading
-
Auction:
–
all firms bid for permits from single seller
–
when all permits sold inter-firm trade takes place
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-
Grandfathering
–
all permits are given to existing firms
–
all trade is inter-firm
Rebound effect
Income effects and substitution effects
-
partly or entirely offset the direct energy saving from a new technology
Substitution effect:
-
energy service becomes cheaper => you buy more energy service
Income effect:
-
energy service becomes cheaper => you get relatively richer => you buy other products also
implying an energy consumption
General equilibrium effect:
-
energy service becomes cheaper => structural change and changes in relative prices => consumers
adjust
Backfire:
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when these effects MORE THAN offsets the direct energy savings…
Negative economic effects of environmental regulation
Cost consists of:
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Tax collection
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Recycling transaction costs
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Distortionary costs:
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Less efficient input composition means lower productivity (higher costs)
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Distortion of consumption bundle reduce consumer welfare
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Loss of Competitiveness in foreign trade
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Lower output
18
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Lower employment
Small open economies
19