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Successful cap and trade programs for SO2 and NOx in the US allocate allowances to large emitters based on a historic base line for a period of up to thirty years. National Allocation Plans in Europe allocate CO2 allowances in an iterative approach first for a three then for a five-year period. The potential updating of the base line creates perverse incentives for operation and investment. Some allowances are also reserved for new entrants further distorting the scheme. We use analytic models and numeric simulations for the UK power sector to illustrate and quantify how these effects contribute to an inflation of the allowance price while reducing utilisation and investment in efficient technologies. The inflated allowance prices are likely to increase the European allowance budget and emissions, e.g. through the Linking Directive. As a result opportunity costs of emitting CO2 are reduced relative to an efficient cap and trade program.

Meeting the EU renewable fuel targets for 2020 will require a large increase in bioenergy feedstocks. To date, first generation biofuels have been the major response to meeting these targets. However, second generation biofuels from dedicated energy crops (e.g. miscanthus) or crop residues (e.g. straw) offer potential. Based on an on-farm survey of Farm Business Survey arable farmers in England and aggregated to national levels, we estimate that 5.27 Mt of cereal straw is produced annually on these farm types, of which farmers indicated that they would be willing to sell 2.5 Mt for bioenergy purposes, provided appropriate contractual conditions meet their needs. However, only 555Kt-840Kt would be obtained from straw currently incorporated into the soil. Timeliness of crop operations and benefits to soil were cited as key reasons for incorporating straw. A ‘good price’ represents the key incentive to encourage straw baling. With respect to dedicated energy crops, 81.6% (87.7%) would not consider growing miscanthus (SRC), while respectively, 17.2% (11.9%) would consider growing and 1.2% (0.4%) were currently growing these crops. Assuming 9.29% (average percentage of arable land set-aside between 1996-2005) of their utilised agricultural area to these crops, 89,900 ha (50,700 ha) of miscanthus (SRC) would be grown on English arable farms. Land quality issues, profitability and committing land for a long period of time were cited as both negative and positive reasons for farmer decisions about their level of willingness to grow these crops. Food and fuel policies must increasingly be integrated in order to meet societal goals without generating unintended consequences.

While policy targeting carbon mitigation has become a priority, the consumer has been sidelined. Within the EU standards and a carbon is price at the industrial level dominate mitigation efforts. There is little room for consumer preferences. Labels on some products do draw a demand for efficient goods, though the messages relayed vary, and the role of embedded emissions often ignored. Once purchased, the energy requirements of various goods and their energy settings are poorly understood by many. In this paper we suggest with appropriately structured policy, providing information and a nudge, that consumers have a willingness and potential to significantly reduce carbon emissions.

The paper critiques current European energy policy. The key market failures are identified and the reasons for intervention set out. In addition to the traditional concerns with monopoly and market failure, the public goods aspects of diversity and security of supply, together with environmental failures are highlighted. Whilst in the 1980s and 1990s, market power dominated in the context of excess supply, the new priorities of security of supply and climate change require new policy instruments--notably network interconnection, capacity markets, strategic storage, and enhancements to the EU Emissions Trading Scheme. The paper sets out the necessary reforms, together with the institutional structures at the EU level which would provide credibility.

It is a well established fact that electricity use increases with income. What is less well known is that - despite the positive correlation between electricity use and income - a significant portion of low-income households consume very large amounts of electricity. In this paper, we make a first step towards better understanding this phenomenon. Specifically, we test the hypothesis that the high electricity use is driven by the fact that low-income households find it difficult to purchase heating oil upfront/in bulk and so use electricity to heat their homes. Using data from the Northern Ireland Continuous Household Survey and the Living Cost and Food Survey, we show that an exogenous increase in income leads to an increase (decrease) in the probability that low-income households use oil (electricity) for heating by approximately 40 (30) percentage points. In addition, we provide evidence which is at odds with a set of alternative explanations for our findings.

Four years after the gas supply crisis of January 2009, this paper looks at the market and policy changes that have changed the European gas situation, and their implications in terms of security of supply. Several positive developments are identified, including the byapssing of Ukraine by Gazprom-sponsored pipelines; the acceleration of import diversification in large markets of western Europe; the process of 'commoditisation' of natural gas in north-west Europe. The lack of meaningful progress in market integration between western and eastern-central Europe, however, leaves in place one of the main factors that made the 2009 crisis possible and conferred it its political significance. Overall, the European gas security situation has evolved in a positive direction mainly because of external forces, not EU policies.

Firms have developed climate change strategies over the last decade in response to rising regulatory, social and competitive pressures. Increasingly, these strategies include the development of new products and services (P&S) to reducing the environmental impact of the firm and its customers. In this paper, I explore how managerial interpretation of climate change has evolved over time and how these changes in interpretation are associated with innovation outcomes. The existing literature suggests that interpreting environmental challenges as opportunities is more likely to lead to open and innovative strategies. Using qualitative survey data on 99 Global 500 firms over the period 2003 to 2009, I find that threat-based interpretation can in fact lead to positive innovation outcomes at early stages of new P&S development. I identify three main mechanisms through which the detailed identification of threats encourages innovation in response to climate change. Furthermore, I develop a temporal dimension to the relationship between interpretation and stages of P&S development. I find that at advanced stages of P&S development, a balanced and opportunity-focused interpretation becomes more important. The results imply that managerial interpretation can provide firms with added flexibility to provide innovative responses to social and environmental challenges. But the relationship between interpretation and innovation is not static, nor is it a question of threat or opportunity interpretation but a combination of the two at different times that provides flexibility.

Different countries of the world are affected differently by the adverse impacts of anthropogenic climate change. For a large country consisting of several regions with different geographical conditions, the direct geographical impacts of climate change may differ significantly. Given the inhomogeneous regional economic development typical for many large countries already for the present climate, this suggests that regional economic disparities may increase even further as global warming develops. It is thus important that the impacts of climate mitigation policies are assessed not only on global and national levels, but also on the regional level. The key tool for assessing the efficiency of climate mitigation policies and their impacts are Integrated Assessment models (IAMs), i.e. dynamic models of the coupled climate?socioeconomic system. The family of IAMs described in the present paper represent extensions and modifications of a set of actor-based system-dynamics models reported earlier in Hasselmann K. (2013), Detecting and responding to climate change, Tellus B 65, 20088, http://dx.doi.org/10.3402/tellusb.v65i0.20088 (open access). The models focus on the strategies of key decision-making aggregate economic actors (often pursuing conflicting goals) that jointly govern the dynamic evolution of the socio-economic system. We start from a global IAM in which both fossil-fuel-based capital and renewable-energy-based capital determine the production function. We compare a business-as-usual scenario (no mitigation policy) with various mitigation scenarios with different global carbon tax rates. The revenues from the carbon tax in the mitigation scenarios are recirculated into the economy in the form of investments in renewable-energy-based capital. We explore both the case of constant productivity of renewable-energy-based capital and the case with endogenous improvement of renewable-energy productivity through learning-by-doing effects. The model simulations demonstrate that efficient mitigation policies are feasible with readily affordable costs. From this we develop a regionalized IAM along the same methodological lines. We consider a large country composed of two regions characterized by different climates and levels of economic development. This is coupled to large residual "country" representing the "rest of the world". It is assumed that a harmonized carbon tax is imposed in both regions of the country and also in the rest of the world. We explore to which extent the transfer of money from carbon tax revenues between the two regions undertaken by a national government can moderate regional disparities in economic development and climate change impacts. The research leading to these results has received funding from the European Community's Seventh Framework Programme under Grant Agreement No. 308601 (COMPLEX).