Average Marginal Cost Research Articles

Reform of the European electricity market: Should we prefer a price based on a weighted average of marginal costs with cross-subsidies?

On the wholesale electricity market, the equilibrium price is set each hour on the basis of the marginal cost of the last power plant called, which is a gas-fired power plant a large part of the time in Europe. The surge in gas prices since the end of 2021 therefore largely explains the rise in the price of electricity. This paper analyses the reform projects proposed within the European Union to curb this surge in wholesale prices. It proposes then to reform the system by opting for pricing based on the weighted average hourly marginal costs, with financial compensation for power plants whose marginal cost is higher than this average. The quantitative study is conducted over the period January 1, 2020 through December 31, 2022 using ENTSOE hourly data. By implementing a compensation framework founded on average marginal costs, the market price experiences a significant decline, resulting in typically negative residual profits. Consequently, the fixed costs associated with the power plant fleet necessitate funding through the capacity market. This approach would enable French electricity consumers to align their payments with the structure of the national electricity fleet, specifically reflecting the average costs of power stations characterized by substantial fixed costs, such as nuclear facilities. The adoption of this proposed system is poised to expedite the energy transition toward a low-carbon economy.

Allocation scheme selection for transportation carbon allowance -evidence from China's top ten economic regions

Establishing a scientific allocation scheme for transportation carbon allowance (TCA) is an inevitable requirement of China's sustainable development. Previous studies on the allocation problems of TCA considered the single goal, but this study constructs an allocation model of TCA under the framework of zero-sum gains data envelopment analysis and a spatial simultaneous panel. Furthermore, a profit maximization function model is used to measure the allocative efficiency and the differences in regional abatement costs of three different transport allocation mechanisms in China's top 10 economic regions from 1998 to 2019. Empirical results revealed four key results. (1) The efficient scheme is beneficial to regions with a high level of economic development and high-carbon emission efficiency, but it is easy to cause widening regional wealth disparities. (2) The equitable scheme is beneficial to regions with low transportation carbon emission efficiency, immature transportation structures, and green transportation technology, but it is easy to cause an unsuitable punishment effect. (3) Compared with the above two schemes, the comprehensive scheme is beneficial to more regions because it can both minimize the average marginal abatement costs and mitigate regional development inequalities. (4) With the gradual improvement of the national transportation carbon trading market, the comprehensive scheme is more sustainable and should be used more in the future. This study contributes to the formulation and implementation of energy allocation policies in the transportation sector.

A Comparative Financial Analysis of Four Crops Based Cropping Patterns with Existing Cropping Patterns in Different Locations of Bangladesh

This study was undertaken to assess the comparative financial analysis of four crops based cropping pattern (FCP) with existing cropping pattern (ECP) in 35 upazilas of 25 districts under 7 divisions during the year of 2018-19 and 2019-20. Tabular technique and statistical analysis were done to achieve the objectives of the study. The Cobb-Douglas production function model was used for estimating the factors affecting FCP as well as ECP in the study areas. The major findings of the study were that cultivation of FCP was more profitable and feasible than ECP in terms of agronomic and economic point of view. The average total return per hectare for FCP was Tk. 529320.00 and Tk. 547896.00 and for ECP was an average Tk. 346788.00 and Tk. 348819.00 in 2018-19 and 2019-20 respectively. The total variable cost per hectare for FCP was Tk. 237134.00 and Tk. 238584.00 and for ECP was an average Tk. 175968.00 and Tk. 178294.00 in 2018-19 and 2019-20 respectively. Again the gross margin for FCP was Tk. 292186.00 and Tk. 309312.00 and for ECP was an average Tk. 170820.00 and Tk. 170525.00 in 2018-19 and 2019-20 respectively. The Benefit Cost Ratio (BCR) for FCP was 2.23 and 2.30 in 2018-19 and 2019-20 respectively. On the other hand, the BCR for ECP was 1.97 and 1.96 in 2018-19 and 2019-20 respectively. The average marginal benefit cost ratio (MBCR) in FCP over ECP was 2.98 and 3.30 in 2018-19 and 2019-20 respectively. Irrespective of locations, rice equivalent yield (REY), crop productivity, land use efficiency and profitability were higher in FCP than in ECP. The study also showed that FCP faced some problems mainly related to production and marketing of the crops. It may be concluded that the farmers should be encouraged to grow four crops in a calendar year rather than existing two or three crops to enhance productivity and profitability.

Operation related maintenance and reinvestment costs for hydropower scheduling

AbstractThis paper addresses the questions: How to calculate the cost of a start/stop cycle? How to calculate the cost of running one hour outside normal operating range, e.g., on part load? The paper presents a model for calculation of start/stop cost for individual hydropower units comprising both direct costs incurring at each start/stop cycle, and indirect cost because of reduced rehabilitation intervals for the main components. The fundamental assumption is that frequent start-ups lead to increased stress, degradation and wear reducing residual service life equivalent to a certain number of normal operating hours, thus accelerating the need for rehabilitation. The proposed model is used for calculation of both average cost and marginal cost for one start/stop cycle. When calculating the marginal cost, the technical condition of the turbine and generator as well as the length of the stand-still period can be considered. Applying a similar approach, the model is extended to calculate the cost of ramping, part load and overload operation, i.e., costs incurring when using the unit outside the normal operating range. This extension for operation related costs is important to include when deciding hydropower scheduling in systems with large shares of variable generation from wind and solar. Such operation related costs are very important to consider when calculating of the optimal operating strategy for the hydropower units in power systems where hydropower delivers flexibility in terms of load following and different types of reserves.

Accelerate Large-Scale Biomass Residue Utilization via Cofiring to Help China Achieve Its 2030 Carbon-Peaking Goals.

Cofiring biomass with coal for power generation is an affordable and ready-to-deploy technology to help reduce carbon emissions and resolve residual biomass. Cofiring has not been widely applied in China primarily because of some practical limitations, i.e., biomass accessibility, technological and economic constraints, and lack of policy support. We identified the benefits of cofiring with consideration of these practical limitations based on Integrated Assessment Models. We found that China produces 1.82 Bts/year of biomass residues, 45% of which is waste. 48% of the unused biomass can be utilized without fiscal intervention and 70% can be utilized with the subsidized Feed-in-Tariffs for biopower and carbon trading. The average Marginal Abatement Cost of cofiring is twice that of China's current carbon price. Cofiring can help China create 153 billion yuan of farmers' income annually and reduce 5.3 Bts of Committed Cumulative Carbon Emissions (CCCEs, 2023-2030), contributing to the needed CCCE mitigations to China's overall sector and the power sector by 32 and 86%, respectively. About 201 GW of coal-fired fleets are not compliant with China's 2030 carbon-peaking goals, and 127 GW can be saved by implementing cofiring, representing 9.6% of the total fleets in 2030.

Use of public transport as a means to reach national climate objectives - On the importance of accounting for spatial differences and costs

Sweden has since the end of the 1990s, when the environmental objective system was adopted, had the ambition of being an environmental frontrunner. In line with this, in 2009 the Parliament adopted the goal of achieving a fossil free vehicle fleet in 2030. Replacing private car use with public transport is expected to contribute to this goal. In 2008, a co-operation between actors in the public transport sector was launched with support from the Government with the aim to double its use. Sweden however is a country with important geographical differences. Much of the country is sparsely populated, especially in the north. From previous research it is well known that usage of public transport is dependent on population density and accessibility to employment and schools. Understanding how spatial differences influence the cost of public transport provision is therefore crucial when discussing if public transport is a cost-efficient way to achieve national goals for the transport sector. In this paper, Swedish county level panel data, including variables that provide information on geographical differences between the counties, have been used to estimate average marginal costs of boardings. Results show that these are much lower in the three counties with the largest urbanized areas. In the other counties there is a variation which illustrates that there are a number of factors that influence the average marginal costs. In relation to policy, we find that the doubling ambition established in 2008 has not been achieved.

Estimating the cost efficiency and marginal cost of carbon reductions in the production of drinking water

Access to safe, reliable and affordable drinking water is a human right that should be achieved without neglecting Sustainable Development Goal 13 of the United Nations related to climate action. The production of drinking water involves using a non-negligible amount of energy, leading to relevant economic costs and greenhouse gas (GHG) emissions. Here, we employed a parametric method to assess the cost efficiency of a sample of drinking water treatment plants (DWTPs) and to estimate the marginal cost of reducing GHG emissions. The average cost efficiency was 0.386, indicating that the evaluated DWTPs had notable room (61.4%) to save costs. The average marginal cost was estimated at 30€ per ton of CO2eq. When comparing this value with the current carbon costs of carbon trading systems, reducing the GHG emissions of DWTPs might be cost-effective. The parametric approach enabled us to evaluate the influence of several environmental variables on the cost efficiency and marginal cost of reducing GHG emissions. Specifically, the size of the facility and source of raw water significantly influenced DWTP performance. In conclusion, this study provides a novel tool to obtain insights on the water-energy nexus for informed decisions towards a more sustainable urban water cycle.

Research on the economic abatement pathway of carbon peaking in China based on marginal abatement costs and abatement tasks allocation.

China needs to achieve its carbon peaking target with minimal economic costs. This paper proposes a framework for achieving the carbon peaking target that emphasizes economic effects. Based on the prediction, the parametric directional distance function (DDF) is adopted to calculate the total factor carbon emission efficiency and marginal carbon abatement cost in each region of China before 2030, and the allocation scheme of the abatement tasks necessary for carbon peaking is optimized from the perspective of least cost. The empirical results show the following: (1) The predicted rapid growth of China's economy from 2020 to 2030 will lead to a rapid increase in marginal abatement costs, with the average marginal carbon abatement cost increasing from 8,833 yuan/ton to 15,077 yuan/ton. The cost of carbon emission reduction in the future is very expensive. (2) The measured marginal abatement costs in China are positively correlated with carbon emission efficiency. In order to ensure economic development, developed regions should try to maintain the development trend, while the central and western regions take on more emission reduction tasks. (3) The emission efficiency is improved by optimizing the allocation scheme of the abatement tasks required to reach the peak, and the scientific and orderly path to reach the peak of each province and the corresponding lowest economic cost are obtained. This paper are of great theoretical and practical significance for the initial quota allocation in carbon trading market and ensuring the achievement of carbon peaking target under economic effect.

Pipes, Trains and Automobiles: Explaining British Columbia’s High Wholesale Gasoline Prices

I modify a coumot oligopoly model to examine the effect of pipeline capacity constraints on regional wholesale gasoline prices. The model includes a discontinuous supply function for a common input (transportation) with a constrained low-cost mode (pipelines) and an unconstrained higher cost mode (rail, truck or barge). The equilibrium outcome demonstrates a piecewise linear relationship between the low-cost capacity constraint and the equilibrium price. The shape of the transportation supply curve is also shown to affect the relationship between firm average marginal costs and the equilibrium price. I also present a test of the model’s implications, demonstrating that it is able to explain a recent pronounced increase in wholesale gasoline prices for cities in British Columbia Canada. While the exercise is motivated by a specific market, the model and its implications apply to a broad set of discussions on inter-regional arbitrage in the context of imperfect competition.

CO2 abatement costs in China and BRI countries: From the perspective of technological heterogeneity

As China cannot achieve its emission reduction target without cooperating with other countries, the international carbon trading market has become a part of China’s carbon trading market system. The Belt and Road Initiative (BRI) has brought many development opportunities to countries participating, but critics have also voiced concerns about the environmental and climate degradation it might bring. Thus China is making a great effort towards building a green and low-carbon BRI, part of which is a joint effort with other countries to cut greenhouse gas emission and achieve the 2,030 sustainable development goals. The estimation of abatement costs is the basis of regional carbon emission reduction cooperation and a prerequisite for establishing a regional carbon trading market. Taking into account the technological heterogeneity, this paper uses linear programming to estimate inefficiency level for China and BRI countries, and further calculates the marginal abatement cost (MAC) of carbon dioxide for each country. The results show that after considering technological heterogeneity, the average inefficiency level for China and BRI countries is 2.410%, which is about 26.526% lower than the traditional geographic grouping approach, indicating that the technological heterogeneity among BRI countries is significant and cannot be ignored. Most countries have a low inefficiency level, some countries show a clear trend. China has an average marginal abatement cost of 1440.183 USD/ton. As the marginal abatement cost varies greatly among countries, a large amount of abatement cost could be saved for China and BRI countries if the cost difference is exploited.

Comparison of potential CO2 reduction and marginal abatement costs across in the China and Korea manufacturing industries

Here, we use an input distance function approach to determine the shadow price of carbon dioxide (CO2), technical efficiency and potential for emission reductions of the industrial sectors of China and Korea, and impact of carbon trading on costs. Data from 20 industries in the manufacturing sectors of South Korea and China were analyzed during 2015–2019. The potential for CO2 emission reductions and cost-saving effects of emissions trading were compared between the two countries. The average technical efficiency score of 20 manufacturing industries in Korea was 0.71, indicating that production costs could be reduced by almost 30%, while for China, the potential cost savings were 4% higher. The average marginal abatement cost in Korea was estimated as US$6.46/ton, while the weighted average marginal abatement cost for CO2 emissions (p^us), was US$15.1/ton. For China, the respective values were similar, at US$3.21/ton and US$6.57/ton.

EFFECTS OF CLIMATE CHANGE ON ELECTRICITY CONSUMPTION: A DECOMPOSITION OF INDUSTRIAL, RESIDENTIAL, AGRICULTURAL, AND COMMERCIAL SECTORS

This study explores the impacts of temperature changes on electricity consumption in South Korea. In particular, the study estimates the impacts by separating them into the residential, commercial, industrial, and agricultural sectors. The study found that temperature changes affect the electricity consumption of all four sectors. However, the size and shape of impacts vary depending on the sector. While the commercial and industrial electricity consumption increase both in hot and cold temperatures, residential consumption increases only in hot temperatures. The agricultural sector shows that its consumption responds to cold temperatures more significantly than hot temperatures. These results suggest that the sectoral variations should be considered when predicting future electricity consumption. With an assumption of 2°C average temperature increases, the electricity consumption of residential, commercial, industrial, and agricultural sectors is projected to increase by 6%, 8%, 1%, and 4% in the summer season (July to September), respectively. In the spatial analysis, the annual consumption of residential and commercial sectors is projected to increase in most counties while the agricultural sector shows the opposite result. With 2°C and 5°C average temperature increases, the study found that total electricity consumption in August would increase by 4.1% (1.5[Formula: see text]TWh) and 11.3% (4.1[Formula: see text]TWh). This would create additional costs of $0.17 billion and $0.45 billion with an assumption that the average marginal cost of electricity in South Korea was 11 cents per kWh.

베트남 CDM 프로젝트의 온실가스 한계감축비용 추정

Korea plans to use the international carbon market to achieve its goal of reducing greenhouse gases (GHGs) by 2030. To ensure overseas GHG mitigation projects are cost-effective, an analysis of the costs of such projects is needed. Thus, this study estimated the abatement cost of GHGs in Vietnam using a methodology that estimated the abatement cost of GHGs from investment analysis data for CDM projects. Estimates showed that the average marginal abatement cost for the projects analyzed was 10.26$/tCO₂eq. (as of 2020). By project type, the average marginal abatement cost of methane avoidance projects was the lowest, followed by small hydro power, biomass, efficiency improvement, landfill gas, and wind power projects. Estimated marginal abatement costs were significantly lower than the estimated total cost per reduction performance considering the total cost of the project and excluding benefits such as selling electricity or reduced fuel costs. In particular, small hydro power and biomass projects had the greatest benefits beyond emission reduction sales.BR If carbon prices are low early in Vietnam

The Cost of Reducing Municipal Unsorted Solid Waste: Evidence from Municipalities in Chile

The management of municipal solid waste sector is crucial for a sustainable circular economy. Waste utilities are expected to provide high quality solid waste services at an affordable price. The efficient management of solid waste requires its assessment from an economic and environmental perspective, i.e., eco-efficiency assessment. Although the reduction of unsorted waste incurs an economic cost, its positive externalities are huge for the well-being of society, the environment, and people. Our study quantifies the marginal cost of reducing any unsorted waste using stochastic frontier analysis techniques which allow us to estimate the eco-efficiency of the waste sector. Our empirical approach focuses on the municipal solid waste collection and recycling services provided by several waste utilities in Chile. The results indicate that substantial eco-inefficiency in the sector exists, since the average eco-efficiency score is roughly 0.5 which means that the municipalities could approximately halve their operational costs and unsorted waste to produce the same level of output. The average marginal cost of reducing unsorted waste is 32.28 Chilean pesos per ton, although notable differences are revealed among the waste utilities evaluated. The results provided by this study are of great interest to stakeholders to promote sustainable management solutions and resource efficient solid waste services.

Assessing the marginal cost of reducing greenhouse gas emissions in the English and Welsh water and sewerage industry: A parametric approach

Reducing greenhouse gas (GHG) emissions involves effort from different sectors of the economy, including the water and sewerage industry. This study estimates the marginal cost of curtailing GHG emissions in the water and sewerage industry using stochastic frontier analysis techniques for a sample of ten English and Welsh water and sewerage companies over the 2010–2019 period. Results illustrated that the average marginal cost of reducing GHG emissions was 0.181 £/Kg CO2 equivalent. The marginal cost estimated notably differs across companies and over time. Findings further illustrate the impact of water companies' operating characteristics on the marginal cost of reducing carbon emissions.

Emission abatement cost in China with consideration of technological heterogeneity

Marginal emission abatement costs play an important role in the emission trading market and in the allocation of emission reduction allowances. The traditional methods for estimating marginal emission abatement costs do not account for technological heterogeneity, which leads to biased results. To solve this problem, an improved method that combines the clustering method with a parametric output directional distance function is proposed in this paper. This method integrates the economic proximity of each examined province into its assessment of the environmental production technology of the province and takes multiple pollutants (CO2, SO2 and NOX) into consideration. Based on this method, in this paper, the environmental performance of 30 provinces in China from 2006 to 2017 is measured, the marginal emission abatement cost of CO2 is estimated, and a nonlinear programming method is used to study the optimal allocation of emission reduction in China. The results indicate the following: First, categorizing the provinces according to their economic proximity results in groups that differ greatly from geographically based groups. Second, the average inefficiency of these 30 Chinese provinces is 2.551%, which is less than that estimated by the methods that do not consider heterogeneity. Third, China’s average marginal CO2 abatement cost is 797.79 CNY/ton, and it exhibits a growing trend. Finally, compared to the grandfathering rule, the optimal quota allocation proposed by this paper can save approximately 797.793 billion CNY.

The role of frequency regulation remuneration schemes in an energy matrix with high penetration of renewable energy

Renewable energies (RE) in Chile and around the world have experienced outstanding growth in recent years. However, RE technologies such as solar photovoltaic and wind generate an imbalance between generation (offer) and consumption (demand) because of their intermittent and variable nature. Moreover, RE’s natural variability makes it necessary for conventional technologies to play a significant role in adjusting for the imbalance in the electric system frequency. As variable RE penetration grows, the need for frequency regulation will increase and, depending on how those higher costs are financed, this could lead to a disincentive to invest in conventional plants that provide that service.In this paper we study the impact of increased photovoltaic energy penetration, the leading RE in Chile, on the profitability of different conventional generation technologies. Specifically, we analyze the role that the frequency control remuneration mechanism has on that impact. For this purpose, four different solar photovoltaic penetration scenarios are simulated in Chile’s Northern System, comparing two payment criteria for frequency regulation services: i) a cost-based pricing system whose payments relate to the incurred costs and ii) a market-based pricing system where the marginal cost of providing the services is paid. The results show that as installed photovoltaic capacity increases, the average marginal cost of energy (operation cost) decreases due to a displacement of more expensive power plants, but at the same time, investment cost may increase. In the long run, contract prices change as a result of falling operational costs and rising investment cost, resulting in changes in the profitability of all technologies. Finally, while both cost-based and market-based systems reward the ability to regulate frequency, the technologies performing the regulation receive different payments for the service, affecting both their profitability and the incentives for investment.

The impact of lynx and wolf on roe deer hunting benefits in Sweden

Large carnivores provide ecosystem and cultural benefits but also impose costs on hunters due to the competition for game. The aim of this paper was to identify the marginal impact of lynx (Lynx lynx) and wolf (Canis lupus) on the harvest of roe deer (Capreolus capreolus) in Sweden and the value of this impact. We applied a production function approach, using a bioeconomic model where the annual number of roe deer harvested was assumed to be determined by hunting effort, abundance of predators, availability of other game, and winter severity. The impact of the predators on the roe deer harvests was estimated econometrically, and carnivore marginal impacts were derived. The results showed that if the roe deer resource was harvested under open access, the marginal cost in terms of hunting values foregone varied between different counties, and ranged between 18,000 and 58,000 EUR for an additional lynx family, and 79,000 and 336,000 EUR for an additional wolf individual. Larger marginal costs of the wolf, in terms of the impact on roe deer hunting, were found in counties where the hunting effort was high and the abundance of moose (Alces alces) was low. If instead, hunters could exert private property rights to the resource, the average marginal cost was about 20% lower than it would have been if there was open access, and the difference in wolf impact between counties with high and low moose density was smaller. Together, results suggest that the current plan for expanding the wolf population in south Sweden can be associated with a substantial cost.

Controlling non-point source pollution in Cournot oligopolies with hyperbolic demand

This paper constructs an n-firm Cournot oligopoly in which the price function is hyperbolic. It provides a game-theoretic approach to characterize the ambient charge’s impact on NPS pollution’s total and individual emission levels. The main findings are as follows: (1) the positivity of individual Cournot output depends on the marginal production cost, the average abatement technology and the number of firms in the industry; (2) the ambient charge is effective for controlling the total amount of NPS pollution when the average marginal production cost is less than the average emission coefficient; (3) the ambient charge is also effective for controlling the individual pollution when the tax rate and the average pollution level are sufficiently high; (4) assuming hyperbolic rather than linear demand, stronger parametric conditions are necessary for the effectiveness of the ambient charge.

Demand monotonicity of a pavement cost function used to determine Aumann-Shapley values in highway cost allocation

Pavement thickness and traffic lanes are two essential requirements affecting the cost of a highway design project. The traffic loadings on a pavement are typically measured in 18-kip equivalent single axle loads (ESALs). In this paper, both ESALs and lanes are treated as two types of players and a pavement cost function is developed to determine the average marginal cost for each type of players. These averages are known as the Aumann-Shapley (A-S) values and are used to allocate the highway cost among all vehicle classes. The proposed pavement cost function is proved to be monotonically increasing as the traffic loadings (ESALs) are increased, a necessary condition for the function to be acceptable for computing Aumann-Shapley values. A severe limitation of the procedure to calculate marginal costs for the traffic-loading players is the extremely large number of permutations since the number of players is enormously high. To overcome this limitation, this article derives a compact form for the discrete A-S values of ESALs and lanes that allows the Aummann-Shapely values to be calculated in a computationally effective manner.