Avoiding adverse employment effects from electricity taxation in Norway: What does it cost?

Welfare analyses of energy taxes typically show that systems with uniform rates perform better than differentiated systems. However, most western countries include some exemptions for their energy-intensive export industries and thereby avoid this potential welfare gain. Böhringer and Rutherford (1997) find that uniform taxation of carbon emissions in combination with a wage subsidy preserves jobs in these industries at a lower welfare cost compared with a differentiated system. The wage subsidy scheme generates a substantial welfare gain per job saved. This study, however, finds that welfare costs are substantial when less accurate policy measures, represented by production-dependent subsidies, protect jobs in Norwegian electricity-intensive industries. The welfare cost per job preserved by this subsidy scheme amounts to approximately 60% of the wage cost per job, suggesting that these jobs are expensive to preserve. A uniform electricity tax combined with production-dependent subsidies preserves jobs at a lower welfare cost compared with the current differentiated electricity tax system.     

Pricing district heating by marginal cost

A vital measure for industries when redirecting the energy systems towards sustainability is conversion from electricity to district heating (DH). This conversion can be achieved for example, by replacing electrical heating with DH and compression cooling with heat-driven absorption cooling. Conversion to DH must, however, always be an economically attractive choice for an industry. In this paper the effects for industries and the local DH supplier are analysed when pricing DH by marginal cost in combination with industrial energy efficiency measures. Energy audits have shown that the analysed industries can reduce their annual electricity use by 30% and increase the use of DH by 56%. When marginal costs are applied as DH tariffs and the industrial energy efficiency measures are implemented, the industrial energy costs can be reduced by 17%. When implementing the industrial energy efficiency measures and also considering a utility investment in the local energy system, the local DH supplier has a potential to reduce the total energy system cost by 1.6 million EUR. Global carbon dioxide emissions can be reduced by 25,000 tonnes if the industrial energy efficiency measures are implemented and when coal-condensing power is assumed to be the marginal electricity source.     

White Certificates for energy efficiency improvement with energy taxes: A theoretical economic model

In this paper we analyze interactions of two energy policy instruments, namely a White Certificates (WhC) scheme as an innovative policy instrument for energy efficiency improvement and energy taxation. These policy instruments differ in terms of objectives and final impacts on the price of electricity. We examine the effect of these policy instruments in the electricity sector, focusing on electricity producers and suppliers in a competitive market. Using microeconomic theory, we identify synergies between market players and demonstrate the total effect on the electricity price when suppliers internalize the behaviour of producers in their decisions. This model refers to an ideal market situation of full liberalization. The cases we examine consist of electricity producers with and without a carbon tax, electricity suppliers with and without an electricity tax, and with WhC obligations. Furthermore, we present a parallel implementation of WhC for electricity suppliers with carbon tax on electricity producers and an electricity tax with WhC obligations to electricity suppliers. We demonstrate differences in optimization behaviour of producers and suppliers. Based on a couple of cases of WhC with carbon and electricity taxes, various positive and negative effects of both schemes in terms of target achievement and efficiency are present, which can lead to an added value of such schemes in the policy mix, although uncertainties of outcomes are quite high. A basic finding is that in a merit order several parameters can increase final electricity price after the implementation of different policies: demand for electricity and electricity supply cost at a large scale and then follow the level of level of obligation for energy saving, level of penalty, and price of WhC (representing the marginal costs of energy saving projects). The impact magnitude of parameters depends on the values chosen and on the initial position of suppliers (i.e. if their actual behaviour deviates from full compliance with targets).     

A comparative analysis of energy and CO2 taxes on the primary energy mix for electricity generation

In many countries, economies are moving towards internalization of external costs of greenhouse‐gas (GHG) emissions. This can best be achieved by either imposing additional taxes or by using an emission‐permit‐trading scheme. The electricity sector is under scrutiny in the allocation of emission‐reduction objectives, not only because it is a large homogeneous target, but also because of the obvious emission‐reduction potential by decreasing power generation based on carbon‐intensive fuels. In this paper, we discuss the impact of a primary‐energy tax and a CO₂ tax on the dispatching strategy in power generation. In a case study for the Belgian power‐generating context, several tax levels are investigated and the impact on the optimal dispatch is simulated. The impact of the taxes on the power demand or on the investment strategies is not considered. As a conclusion, we find that a CO₂ tax is more effective than a primary‐energy tax. Both taxes accomplish an increased generation efficiency in the form of a promotion of combined‐cycle gas‐fired units over coal‐fired units. The CO₂ tax adds an incentive for fuel switching which can be achieved by altering the merit order of power plants or by switching to a fuel with a lower carbon content within a plant. For the CO₂ tax, 13 €/tonCO₂ is withheld as the optimal value which results in an emission reduction of 13% of the electricity‐related GHG emissions in the Belgian power context of 2000. A tax higher than 13 €/tonCO₂ does not contribute to the further reduction of GHGs. Copyright © 2005 John Wiley & Sons, Ltd.     

Gradual green tax reforms

Green tax reforms have become an important tool not only in protecting the environment but also in bringing about a more efficient tax system. However, reforms often imply accepting sacrifices in the short-run and bring about the risk of potential political opposition. Within this framework, the debate on whether to implement green tax reforms in one-step or gradually becomes of great interest. In this paper, we use a dynamic general equilibrium model, calibrated to the Spanish economy, to evaluate different reforms that consist in increasing energy taxes and adjusting capital taxation in a revenue-neutral framework. Our findings show that, although an environmental dividend is always granted, the existence of an efficiency dividend depends on the type of reform, its size and how gradually it is implemented. Thus, one-step reforms that produce an efficiency dividend would imply large efficiency costs in the short-run. In this case, the reform could only produce efficiency gains in the short-run if it is implemented gradually, although such gains would end up disappearing in the long-run.     

Energy-related taxation as an environmental policy tool—the Finnish experience 1990–2003

Finland has over 10 years experience of environment-based energy taxation. The design and level of the CO₂ and energy tax scheme has been changed several times on an ad hoc basis. In recent years, Finland has introduced more and more tax “departures”, i.e. deviations and exceptions from an “ideal” type of environmental tax. Examples of this include fuel-specific and user-specific exemptions or lowered tax levels taxes on electricity production from non-fossil energy sources, plus refund systems for fossil fuel and electricity users. Thus, it is apparent that Finnish energy taxation aimed at improving the environment has developed ineffectively. Increases in the level of CO₂ tax on fossil fuels have served mostly fiscal purposes with reduced CO₂ emissions being only a side benefit. No systematic follow-up or ex post analysis on the impacts of the CO₂ and energy taxes has been carried out. From the perspective of greenhouse gas mitigation, the discussion on economic instruments has shifted from CO₂ taxation towards emissions trading in the international context of the European Union and the Kyoto Protocol.     

Are green hopes too rosy? Employment and welfare impacts of renewable energy promotion

In view of pressing unemployment problems, policy makers across all parties jump on the prospects of renewable energy promotion as a job creation engine which can boost economic well-being. Our analytical model shows that initial labor market rigidities in theory provide some scope for such a double dividend. However, the practical outcome of renewable energy promotion might be sobering. Our computable general equilibrium analysis of subsidized electricity production from renewable energy sources (RES-E) in Germany suggests that the prospects for employment and welfare gains are quite limited and hinge crucially on the level of the subsidy rate and the financing mechanism. If RES-E subsidies are financed by labor taxes, welfare and employment effects are strictly negative for a broad range of subsidy rates. The use of an electricity tax to fund RES-E subsidies generates minor benefits for small subsidy rates but these benefits quickly turn into significant losses as the subsidy rate exceeds some threshold value.     

The effect of carbon taxation on cross-border competition and energy efficiency investments

Carbon taxes increase costs for energy-consuming firms and can impact firms‘ ability to compete with other firms located in regions without that tax. This paper considers the effect of asymmetric carbon taxation when firms are able to adjust their energy efficiency investment levels to reflect the presence of the tax. Using a dynamic model of firm competition, we find that allowing firms to adjust their energy efficiency levels in response to a carbon tax could potentially allow firms to significantly mitigate the competition effects of that carbon tax. In our baseline parameterization, additional energy efficiency investments non-trivially mitigates profit loss for the firm facing the carbon tax as well as spurring adding energy efficiency investments in the non-taxing jurisdiction, thus reducing carbon leakage. This increase in energy efficiency can potentially reduce total energy usage by the firm in the taxing jurisdiction by more than the carbon tax alone. While the quantitative impact of energy efficiency investments on firm competitiveness depends on the nature of the industry, from a policy standpoint, the ability of energy efficiency investments to mitigate cross-border emissions leakage and negative competition effects without policy interventions such as a carbon border tax softens these two common criticisms of unilateral regional carbon taxes.     

Perspectives on implementing energy efficiency in existing Swedish detached houses

In this study, we first analyse energy-efficiency measures in existing electrically heated houses in Sweden from a societal economic perspective. Measures to a house envelopes and to energy supply chains are evaluated through a system analysis approach and we include the external costs of climate change and the effect of different Swedish climatic zones. We find that in a typical house from the 1970s, conversion from electric heating is highly motivated since the mitigation cost of conversion is lower than the estimated external costs of emitted CO₂. Both conversions and house envelope measures are more motivated in the northern part of the country, where there is a higher heat demand. A successful implementation of changes requires them to be attractive for consumers to adopt. We therefore secondly analyse the economic conditions for Swedish house owners to implement societal economic cost-efficient measures. We include the economic influence of an investment subsidy for heating system conversion, an income tax deduction for changing windows, customer electricity tax, real estate tax and of the cost of purchased energy from different energy suppliers. Apart from the economics, several other factors affect a house owner's decision to change heating systems. We therefore thirdly analyse house owners’ perceptions of different heating supply alternatives based on the results of two comprehensive questionnaires. These different perspectives are combined in a discussion whether the studied policy instruments encourage house owners to implement changes in accordance with the energy-efficiency goals of decision makers. We find that the investment subsidy could be useful to break the lock-in effect of resistance heaters, which house owners seemed to experience. The electricity tax makes heating systems in line with national goals more competitive and efficiency measures to the house envelope more profitable. The reduction of the electricity tax in the northern part of the country has the opposite effect. Also, the increase in real estate tax when implementing energy-efficiency measures gives a contradictory message. The price differences between energy suppliers has a larger impact on the house owners’ economic conditions than both subsidies and tax rate changes, and possibly also affect the house owner's attitudes towards various systems.     

Government policy and industrial investment in cogeneration in the USA

This paper presents an economic analysis of investment in cogeneration in selected industries and assesses the impact of investment tax credits policy directed at cogeneration. We use a dynamic partial equilibrium model that is derived under the assumption that investment in cogeneration occurs if and when the annualized cost of the incremental investment is less than the annualized benefits of avoiding electricity purchase from the utilities. Policy simulations show that investment in cogeneration is economically feasible even without the tax credits; the tax credit policy marginally increases investment in cogeneration. The welfare distortions and revenue loss to the US Treasury are also estimated. External benefits required per barrel of oil to offset distortion costs would come to $2.83.     

Assessing the economic value of renewable distributed generation in the Northeastern American market

Incentive programs and tax rebates are commonly offered to offset the high initial costs of small-scale renewable energy systems (RES) and foster their implementation. However, the economic costs of RES grid integration must be fully known in order to determine whether such subsidies are justified. The objective of this paper is to assess the economic value of RES, including their environmental benefits, using hourly generation information in conjunction with hourly wholesale price data. Reaching the paper′s objective will provide a better estimate of the bias that could result from neglecting 1) the time pattern of the hourly wholesale price, 2) the impacts of carbon taxes on the hourly wholesale price and 3) the value of the marginal hourly GHG emissions. Selected RES include two types of grid-connected photovoltaic panels (3 kWp mono- and poly-crystalline) and three types of micro-wind turbines (1, 10 and 30 kW) modeled for different climatic conditions in the province of Quebec (Canada). The cost of electricity is based on the technical performance of these RES using a life cycle costing methodology. The economic value of RES electricity is estimated using the hourly wholesale electricity price in Northeastern American markets in 2006–2008. Results show that distributed generation (DG) has no economic benefits using the selected RES, even with a US$100/tonne of CO₂-equivalent carbon tax. This finding remains the same when the value of the avoided GHG emissions is fully internalized, except for one scenario (micro-wind 30 kW). Our results are key to understanding the extent to which subsidies for distributed RES can be economically sustainable when the latter are integrated into regional networks driven by centralized electricity production.     

Industrial electricity demand and energy efficiency policy: the case of the Swedish mining industry

The purpose of this paper is to analyze long-run electricity demand behavior in the Swedish mining industry with special emphasis on the impact of energy prices and private research and development (R & D) on electricity use. Methodologically, we estimate a generalized Leontief variable cost function using a panel data set of nine mining operations over the time period 1990–2005. Since the lower boundary of a set of short-run cost functions confines the long-run cost function, we can compute the long-run own- and cross-price elasticities of electricity demand. The empirical results indicate that long-run electricity demand in the mining industry is sensitive to changes in the own price, and already in a baseline setting Swedish mining companies tend to allocate significant efforts towards improving energy efficiency, in part through private R & D. From a policy perspective, the results imply that taxes (and tax exemptions) on electricity can have significant long-run impacts on electricity use. Moreover, future evaluations of so-called voluntary energy efficiency programs must increasingly recognize the already existing incentives to reduce energy use in energy-intensive industries.     

Designing an electricity tax system in presence of international regulations and multiple public goals: An empirical assessment

The European competition rules restrict governments’ opportunity to differentiate terms of energy accessibility among firms and industries. This easily runs counter with regional and industrial goals of national energy policies. Norway levies a tax on use of electricity, but exempts main industrial usages. This analysis assesses alternative, internationally legal, designs of the system in terms of their effects on efficiency and distribution, including industrial objectives. Among the reforms we explore, removing the exemptions would be the most effective way of raising revenue, but it would be politically costly by deteriorating the competitiveness of today's favoured industries. An entire abolishment of the electricity tax, and replacing revenue by increased VAT, would generate a more equal distribution of standard of living and, at the same time, avoid the trade-off between efficiency and competitiveness.     

Welfare evaluation of subsidies to renewable energy in general equilibrium: Theory and application

While support schemes to renewable energy are ubiquitous around the world today, there are few systematic welfare evaluations of their social benefits and costs in an economy-wide setting. We develop a general equilibrium cost–benefit rule to assess changes in quantity based subsidy schemes, “green” certificates, that support renewable electricity generation. An advantage to large-scale numerical models of the same issue is that we can go “into the black box” and uncover key economic mechanisms. We study a second-best economy with distorting taxes and pollution, so that a perturbation of the certificate scheme causes both benefits and costs; these items can be uncovered and estimated using our framework. To this end, we provide a user-friendly approximation for empirical implementation, which means that data requirement is modest relative to a typical computable general equilibrium model. We apply the theory to a currently existing scheme in Sweden taking into account “trickle-down” effects, including e.g. a loss of value-added tax income in the rest of the economy and environmental costs (i.e. externalities from electricity generation not currently internalized). We first present an ex post estimate, i.e. the welfare consequences of having scrapped the existing system 2003–2017 and then an ex ante analysis of extending the system to 2045. The latter includes a systematic sensitivity analysis based on Monte-Carlo simulation. Overall, we find net present value gains from removing the subsidy scheme, taking into account externalities, “trickle-down” and public finance repercussions.     

Prospects for PV: a learning curve analysis

This article gives an overview of the current state-of-the-art of photovoltaic electricity technology, and addresses its potential for cost reductions over the first few decades of the 21st century. Current PV production cost ranges are presented, both in terms of capacity installation and electricity generation, of single crystalline silicon, multi-crystalline silicon, amorphous silicon and other thin film technologies. Possible decreases of these costs are assessed, as expected according to the learning-curve methodology. We also estimate how much PV could gain if external costs (due to environmental and health damage) of energy were internalised, for example by an energy tax. Our conclusions are that, (1) mainly due its high costs, PV electricity is unlikely to play a major role in global energy supply and carbon emissions abatement before 2020, (2) extrapolating learning curves observed in the past, one can expect its costs to decrease significantly over the coming years, so that a considerable PV electricity share world-wide could materialise after 2020, (3) niche-market applications, e.g. using stand-alone systems in remote areas, are crucial for continuing ‘the ride along the learning curve’, (4) damage costs of conventional (fossil) power sources are considerable, and their internalisation would improve the competitiveness of PV, although probably not enough to close the current cost gap.     

The impact of tax reform on new car purchases in Ireland

We examine the impact of recent tax reforms in Ireland on private car transport and its greenhouse gas emissions. A carbon tax was introduced on fuels, and purchase (vehicle registration) and ownership (motor) taxes were switched from engine size to potential emissions. We use a demographic model of the car stock (by age, size, and fuel) and a car purchase model that reflects the heterogeneous distribution of mileage and usage costs across various engine sizes. The model shows a dramatic shift from petrol to diesel cars, particularly for large engines. The same pattern is observed in the latest data on car sales. This has a substantial impact on tax revenue as car owners shift to the lower tax rates. The tax burden has shifted from car ownership to car use, and that the overall tax burden on private car transport falls. As diesel engines are more fuel efficient than petrol engines, carbon dioxide emissions fall modestly or, if we consider the rebound effect of travel costs on mileage, minimally. From the perspective of the revenue, the costs per tonne of carbon dioxide avoided are (very) high.     

Optimisation of merged district-heating systems—benefits of co-operation in the light of externality costs

Studies have shown that separate actors can benefit from co-operation around heat supply. Such co-operation, for example, might be between an industry selling waste heat to a district-heating system or two district-heating systems interconnecting their respective systems. Co-operation could also be expected to reduce the environmental impacts of the energy systems by choosing the plants with the lowest emissions. It is widely accepted that the production of heat and electricity causes damage to the environment. This damage often imposes a cost on society, but not on company responsible. In general, using a broader system perspective when analysing local energy systems results in a lower total cost, more efficient use of plants and a greater potential for producing electricity in combined heat-and-power (CHP) plants. Internalising the externality costs in the energy system model facilitates the study of what co-operation can mean for reducing emissions. This study shows that co-operation between the two systems is on the whole cost-effective, but the benefits are greater when external costs are not included in the calculation. Considering externality costs in combination with current electricity prices would lead to a higher system cost, but the quantity of emission gases will be lower. If, on the other hand, the calculation is made taking externality costs and corresponding adjusted electricity prices (the adjustment being necessary to compensate for the additional cost due to externality costs) into consideration, the quantities of emission gases will rise because more heat-and-power will be generated by one of the CHP plants.     

Oil taxation in the presence of consumer adjustment costs and volatile prices: The case of small countries

Politicians in various countries (e.g. in the USA, Switzerland and Austria) have suggested the levy of different forms of taxes or duties on crude oil. One of the major (normative) arguments behind all these proposals seems to somehow smooth oil prices after observing the dramatic oil price collapse and because of the conjecture of another, future oil price hike. Hence, these arguments refer (implicitly or explicitly) to adjustment costs to justify government intervention. This paper analyses whether the instrument of a tax on crude oil may improve welfare if oil prices are volatile and adjustment costs are important. It will be shown that these proposals are only defensible if the government is smart (uses foresight) and when the consumers are myopic. However, the optimal commodity tax should be zero if consumers and the government use the same forecast (perfect foresight).     

What does Europe pay for clean energy?—Review of macroeconomic simulation studies

This paper analyses the macroeconomic costs of environmental regulation in European energy markets on the basis of existing macroeconomic simulation studies. The analysis comprises the European emssions trading scheme, energy taxes, measures in the transport sector and the promotion of renewable energy sources. We find that these instruments affect the European economy, in particular the energy-intensive industries and the industries that produce internationally tradeable goods. From a macroeconomic point of view, however, the costs of environmental regulation appear to be modest. The underlying environmental targets and the efficient design of regulation are key determinants for the cost burden.     

The marginal cost of electricity used as backup for solar hot water systems: A case study

In this study, a method is developed for estimating the long run marginal cost to electric utilities of providing backup service for solar residential heating and hot water (HHW) systems. This method accounts for all investment, fuel, and operating costs required to provide the added electric service for HHW. From the information produced using this method, the impacts of various rate design philosophies and of government tax and regulatory policies on annual homeowner costs, fuel consumption patterns, environmental pollutants, and the net social cost of providing HHW service can be computed. Also, the differences in these parameters among solar, electric, and conventional HHW systems can be compared.In an initial study, it was found that for one Northeastern utility the estimated marginal cost of electricity for backup to solar hot water (HW) systems was less than that for comparable electric HW systems for the period of the mid to late 1990s. Load management (shifting all electricity use to off-peak periods) substantially reduced marginal costs for both electric and solar systems and essentially eliminated any difference between them. In all cases, the marginal cost was lower than the average cost of all electricity generated for market penetration rates that can realistically be expected to be experienced. The impact on total annual costs to homeowners of various electricity rate schemes and the impacts of Federal tax credits and property tax exemptions were computed. Net changes in resource consumption patterns due to the use of solar systems were estimated.