Conference Agenda

Flexible resources are essential for power system reliability, especially with the increasing integration of variable renewable energy sources as the electricity industry moves towards decarbonization. This paper employs a real options approach to develop a model for valuing assets with power generation, storage and operational flexibility. Using a non-market valuation framework, we apply the no-arbitrage principle to calculate the marginal value of flexible operations through the shadow price, which reflects the fair value implied by electricity markets and provides a robust measure of the stringency of regulation on flexible operations. To assess the incentives for investing in flexible resources and offering flexible ramping products in power markets, we conduct extensive elasticity and sensitivity analyses. These analyses explore how the scarcity and cost of resources for power production and electricity price signals influence asset value and shadow price. In our numerical experiment, the optimal operation of a medium-sized prototype hydro power plant is formulated as an optimal control problem, where electricity prices follow a Markov regime-switching process with jumps. Under the risk-neutral measure, the asset value is determined by a system of Hamilton-Jacobi-Bellman Partial Differential Equations, which we solve numerically using the finite difference method with semi-Lagrangian time stepping. Our results indicate that while the plant value steadily decreases, the shadow price exponentially increases as ramping constraints become more restrictive. Both flexible ramping up and flexible ramping down are valued, but flexible ramping up holds significantly higher value for the power generator. The scarcity and cost of resources, along with electricity price characteristics, significantly impact asset value and shadow price, with varying magnitudes and directions of impact. The insights gained from this research can inform investment decisions in flexible resources, aid in the development of flexible ramping products markets, and guide the implementation of regulatory frameworks aimed at enhancing power system reliability while supporting environmental and climate goals.

The efficiency of carbon pricing hinges on markets broad enough to encompass heterogeneous economies and sectors. Linking carbon markets is gaining increasing attention, in particular for advanced systems in which caps are rapidly decreasing and prices are rising. Paradoxically, realizing linking surfaces economic and political threats that tend to be more severe the more advanced a system is. One is an immediate convergence of prices due to intertemporal arbitrage opportunities that emerge already when firms anticipate linking in the future. This paper shows that ensuring gradual price convergence across linked markets requires two instruments -- one to establish the exchange rate at which permits trade in each period, another to align intertemporal arbitrage incentives with the targeted sequence of exchange rates -- and characterizes how they should be calibrated jointly. These tools may enable policymakers to control price convergence while initiating linking, and offer more flexibility to manage the distributional and environmental impacts of linking, thus overcoming a main barrier to higher stringency. A calibrated numerical application to the EU ETS1 and ETS2 illustrates the different price paths and emission levels under various gradual linking policies.

The value of mortality risk reductions, conventionally expressed as the value per statistical life (VSL), often drives the benefits of environmental and other policies and regulations. While both theory and empirical evidence suggest that VSL varies depending on the characteristics of the individuals and the risks affected, it is often treated as a constant. Equity is the main justification for using a common VSL as it seemingly avoids making any judgement about how VSL should vary by individual characteristics. In particular, a uniform VSL is tantamount to attaching relatively larger weight to survival benefits for the disadvantaged and lower weight to survival benefits for the advantaged. Thus, a uniform VSL mimics the use of equity weights, while avoiding the challenges of explicitly computing the weights. The paper investigates the bias in policy ranking by using a uniform VSL instead of heterogeneous VSLs and equity weights. Focusing on the relationship between VSL and income, we find that the uniform VSL tends to over-estimate the utilitarian value of a policy because it neglects the distribution of costs and the welfare burden of policies on low-income individuals. A numerical application based on U.S. data suggests that the bias is sizable, especially when the policy costs are regressive and the survival benefits are progressive.

This paper explores how shifts toward more pro-environmental preferences can impact the welfare costs of the green transition. We propose a money-metric measure of welfare change that accounts for shifting preferences, respecting both initial and final tastes. We support our approach by showing that it adheres to desirable welfare-theoretical properties. We also show that an easily estimable Fisher price index approximates our theoretical measure well. In an application, we study food consumption in France. We use a unique consumer panel combining scanner purchase data (2011–2019) and repeated surveys on environmental attitudes. In a context of greening preferences, we find that richer individuals' preferences become greener faster. Compared to consumers with stable preferences, those with greening preferences experience similar inflation in a period of low inflation dispersion (2011-2015). They experience higher inflation when prices of high-emissions goods rise less than the average (2015-2019), consistent with our proposed welfare measure.