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Environmental Regulation under Market Power: The Impact of Emission Trading on Optimal Energy taxes. Background Literature Theoretical Model > optimal tax (with & without abatement) Computable Model and Energy Market Data >effect on producers rents

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Background Literature Theoretical Model > optimal tax (with & without abatement)

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Background literature theoretical model optimal tax with without abatement

Environmental Regulation under Market Power:

The Impact of Emission Trading on Optimal Energy taxes

  • Background

  • Literature

  • Theoretical Model

  • > optimal tax (with & without abatement)

  • Computable Model and Energy Market Data

  • >effect on producers rents

  • > welfare effect of existing tax (S‘)

  • > welfare effect of optimal variation of existing tax

  • Summary

Department of Economics

CAU-Kiel

1


Background literature theoretical model optimal tax with without abatement

Background & Motivation

Climate change policy in Germany:

Energy Tax since 1998

(i.e. tax on electricity consumption, ~ 2 cent/kWh for households)

+

European CO2–Emission Trading Program in 2005

(~500 Mio. t CO2 for energy sector in 2005)

compatibility of instruments?

Department of Economics

CAU-Kiel

2


Background literature theoretical model optimal tax with without abatement

Theoretical Model

Pigou (1938), - Perfect Competition

Buchanan (1969), Barnett (1980) - Monopoly

Ebert (1992) symmetric Oligopoly

Requate(1993) asymmetric Duopoly (Bertrand/Cournot)

optimal tax on emission

optimal output tax with emission trading?

Department of Economics

CAU-Kiel

3


Theoretical model

Theoretical Model

Profitfunctions of the k firms:

(1)

total production,

ecotax

emission of firm i

allowance price

Properties of the cost functions:

Department of Economics

CAU-Kiel

4


Theoretical model1

Theoretical Model

FOCs of the firms:

(2)

(3)

comparative static effects w.r.t.

< 0

if (4)

< 0

Department of Economics

CAU-Kiel

5


Foc of the government w r t 5 plugging in the focs of the firms lead to the optimal tax rate 6

Theoretical Model

FOC of the government w.r.t.

(5)

plugging in the FOCs of the firms lead to the optimal tax rate

(6)

Department of Economics

CAU-Kiel

6


Theoretical model2

Theoretical Model

Applying comparative statics we get:

(7)

or

.

Hence, we can write equivalently

(6‘)

Department of Economics

CAU-Kiel

7


Background literature theoretical model optimal tax with without abatement

Theoretical Model

Scenarios

Department of Economics

CAU-Kiel

8


Background literature theoretical model optimal tax with without abatement

Theoretical Model: Results

  • Previous results can be obtained if two further assumptions are made:

  • A: Demand is not too convex

  • B: Marginal damage is greater then the price of emission permits.

  • The sign of the optimal tax depends on

  • A: The firm`s cost structures

  • B: Slope of demand curve and

  • C: Noninternalized damage

Department of Economics

CAU-Kiel


Background literature theoretical model optimal tax with without abatement

Theoretical vs. Computable Model

  • Single demand sector vs. Sectoral disaggregation

  • (differentiated electricity tax, VAT)

  • Abatement on firm level vs. Industrial abatement

  • k symmetric Cournot-players vs. four asymmetric players with competitive fringe

  • Ellersdorfer at al. (2001)

Department of Economics

CAU-Kiel


Profit function of firm i foc of firm i 7

Computable Model

Profit function of firm i

Foc of firm i

(7)

Department of Economics

CAU-Kiel

11


Background literature theoretical model optimal tax with without abatement

Computable Model:

Annual Demand

  • reference demand of four heterogeneously taxed sectors:

  • HH: 2,04 cent/kWh, DNLGEW: 1,63 cent/kWh , IND1: 1,22 cent/kWh, IND2: 0,0 cent/kWh

  • homogeneous elastiscity of demand : 0,6

Department of Economics

CAU-Kiel

12


Computable model marginal costs and marginal emissions

Computable Model: Marginal Costs and Marginal Emissions

Department of Economics

CAU-Kiel


Background literature theoretical model optimal tax with without abatement

The Computable Model:

Production Capacity of the Players

Department of Economics

CAU-Kiel

14


Background literature theoretical model optimal tax with without abatement

Computable Model

  • Firms react asymmetrically on the electricity tax in output and emission

  • powerful agents (RWE, e.on) react

  • less price elastic

  • Vattenfall has got a flatter response function

  • and reacts most price elastic

  • The return on the firms capital is asymmetrically effected

  • Welfare effect and optimal tax?

Department of Economics

CAU-Kiel

15


Background literature theoretical model optimal tax with without abatement

Computable Model:

Welfare Effect of Electricity tax

Department of Economics

CAU-Kiel

16


Background literature theoretical model optimal tax with without abatement

Computable Model:

Welfare Effect of a Variation of Electricity tax

Department of Economics

CAU-Kiel

17


Background literature theoretical model optimal tax with without abatement

Computable Model:

Welfare Effect of Optimal Electricity Tax

Department of Economics

CAU-Kiel

18


Summary of findings

Optimal tax rate

Theoretic Model

Computable Model

Marginal Damage (Lit)

Summary of Findings

Department of Economics

CAU-Kiel


Conclusion

Conclusion

  • The results seem to suggest an elimination of the german electricity tax

  • Other aspects might outweigh climate target,

  • e.g. energy efficiency in consumption

  • Permit market competitive or monopolisitc bottle neck? (allocation of permits?)

  • Compensation of tax revenue (social insurance system?)

  • Effect of multi regulation ?

Department of Economics

CAU-Kiel


Background literature theoretical model optimal tax with without abatement

Outlook: Multiregulation of Firms

two climate policies vs. four policies in 2005:

>feed-in tariffs for

renewables

combined heat and power production

additional environmental regulations might further decrease the effectivness of ecological taxes

> shift of welfare effect

Department of Economics

CAU-Kiel

21


3 das quantitative modell weitere optimalit tsbedingungen

3. Das quantitative Modell Weitere Optimalitätsbedingungen

  • Produktionsgrenze,

  • Produktion,

  • Markträumung,

  • Marktanteil,

  • Nichtnegativitätsbedingungen.

Department of Economics

CAU-Kiel


Berechnung der wohlfahrtseffekte wohlfahrtsdifferenz zweier szenarien

Berechnung der Wohlfahrtseffekte(Wohlfahrtsdifferenz zweier Szenarien)

  • Wohlfahrt = Bruttorente(BR) – Kosten(K) - Schaden(D)

  • Grenzschaden (konstant):

Department of Economics

CAU-Kiel


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