Marginal Cost Curves Research Articles

Estimating the economic costs of electricity deficit using input–output analysis: the case of Brazil

The objective of this article is to present a methodology to estimate the marginal cost of electric energy deficit in the long-term using input–output (I–O) analysis. We obtain a deficit marginal cost (DMC) curve that is not limited to a small number of levels, such as the curve used currently in Brazil, which is limited to four levels. The marginal cost of deficit is an important exogenous parameter used in the model’s chain to calculate the operation’s marginal cost and short-term market pricing. The electric energy deficit is a temporary lack of continuity in meeting demand, which is usually predictable and involves prior notice to the consumer. The cause of this deficit may be a lack of investment and/or low water inflows that impact the production of hydroelectric power plants. In this study, the marginal cost of the deficit is obtained from restrictions on the provision of electricity for productive sectors and by calculating the corresponding impact on the gross domestic product. The proposed methodology can be used with data from the I–O matrix of any country to estimate its marginal cost of electric energy deficit.

A Mine-Based Uranium Market Clearing Model

Economic analysis and market simulation tools are used to evaluate uranium (U) supply shocks, sale or purchase of uranium stockpiles, or market effects of new uranium mines or enrichment technologies. This work expands on an existing U market model that couples the market for primary U from uranium mines with those of secondary uranium, e.g., depleted uranium (DU) upgrading or highly enriched uranium (HEU) down blending, and enrichment services. This model accounts for the interdependence between the primary U supply on the U market price, the economic characteristics of each individual U mine, sources of secondary supply, and the U enrichment market. This work defines a procedure for developing an aggregate supply curve for primary uranium from marginal cost curves for individual firms (Uranium mines). Under this model, market conditions drive individual mines’ startup and short- and long-term shutdown decisions. It is applied to the uranium industry for the period 2010–2030 in order to illustrate the evolution of the front end markets under conditions of moderate growth in demand for nuclear fuel. The approach is applicable not only to uranium mines but also other facilities and reactors within the nuclear economy that may be modeled as independent, decision-making entities inside a nuclear fuel cycle simulator.

The False Economic Rent Theory

This paper proves that the so-called marginal cost curve in the traditional monopoly model is a false image built on some wasteful experimental average cost curve. This paper then reveals the ugly but true picture of monopolists, and proves that they will not be satisfied with such limited economic rent, but rather they plunder for unlimited monopolist profit. This paper concludes with the comment of how the false rent concepts have been abused to kill people and confiscate their properties.

Economic and environmental evaluation of climate change mitigation measures in the waste sector of developing countries

Abstract According to the IPCC Fourth Assessment Report, the mitigation potential of waste sector in developing countries is three times higher than the one of developed countries, which highlights the role of this sector for mitigation action in the developing world. In this paper, the analytical framework for assessment of climate change mitigation potential of waste sector, which is based on GHG Costing Model (GACMO), is adapted in order to incorporate the specifics of developing countries regarding waste generation, waste disposal and population growth. The methodology is further modified to generate marginal abatement cost curves based on achievable cumulative GHG emissions reduction (over the whole period), thus taking into account the timing of mitigation measure implementation. The adapted analytical framework is applied for the case of Macedonia's waste sector, evaluating the following four mitigation scenarios: Mechanical biological treatment (MBT) with an aerobic treatment (composting), MBT with an anaerobic treatment (anaerobic digesters with energy production), MBT with an anaerobic treatment-anaerobic digesters with energy production and refused derived fuel (RDF) utilization and MBT with an aerobic treatment (composting with RDF utilization). Each mitigation scenario includes also a gas extraction with flaring for the existing non-compliant landfills. The resulting marginal cost curve indicates a total achievable reduction of cumulative emissions for the period 2013–2030 of around 20 Mt, or nearly 80% lower than Business-As-Usual (BAU) waste sector cumulative emissions, at average specific reduction cost in the range 8.9–12.44 US$/t.

Estimating the opportunity costs of reducing carbon dioxide emissions via avoided deforestation, using integrated assessment modelling

Estimates show that, in recent years, deforestation and forest degradation accounted for about 17% of global greenhouse gas emissions. The implementation of REDD (Reducing Emissions from Deforestation and Forest Degradation in Developing Countries) is suggested to provide substantial emission reductions at low costs, although cost estimates show large uncertainty. Cost estimates can differ, as they depend on the approach chosen, for example: giving an economic stimulus to entire countries, taking landowners as actors in a REDD framework, or starting from protecting carbon-rich areas. This last approach was chosen for this analysis. Proper calculation of the economic cost requires an integrated modelling approach involving biophysical impact calculations and their associated economic effects. To date, only a few global modelling studies have applied such an approach. In modelling REDD measures, the actual implementation of REDD can take many forms, with implications for the results. This study assumes that non-Annex I countries will protect carbon-rich areas against deforestation, and therefore will refrain from using these areas as agricultural land. The opportunity costs of reducing deforestation within the framework of REDD were assessed using an integrated economic and land-use modelling approach comprising the global economic LEITAP model and the biophysical IMAGE model. One of the main methodological challenges is the representation of land use and the possibility to convert woodlands land into agricultural land. We endogenised the availability of agricultural land by introducing a flexible land supply curve, and represented the implementation of REDD policies as a reduction in the maximum amount of unmanaged land that potentially would be available for conversion to agriculture, in various regions in the world. In a series of model experiments, carbon-rich areas in non-Annex I countries were protected from deforestation. In each consecutive scenario the protected area was increased, starting off with the most carbon rich lands, worldwide systematically working down to areas with less carbon storage. The associated opportunity costs, expressed in terms of GDP reduction, were calculated with the economic LEITAP model. The resulting net reduction in carbon dioxide emissions from land-use change was calculated with the IMAGE model. From the sequence of experiments, marginal cost curves were constructed, relating carbon dioxide emission reductions to the opportunity costs. The results showed that globally a maximum of around 2.5Gt carbon dioxide emissions could be avoided, annually. However, regional differences in opportunity costs are large and were found to range from about 0 to 3.2 USD per tonne carbon dioxide in Africa, 2 to 9 USD in South America and Central America, and 20 to 60 USD in Southeast Asia. These results are comparable to other studies that have calculated these costs, in terms of both opportunity costs and the regional distribution of emissions reduction.

Danish heat atlas as a support tool for energy system models

In the past four decades following the global oil crisis in 1973, Denmark has implemented remarkable changes in its energy sector, mainly due to the energy conservation measures on the demand side and the energy efficiency improvements on the supply side. Nowadays, the capital intensive infrastructure investments, such as the expansion of district heating networks and the introduction of significant heat saving measures require highly detailed decision-support tool. A Danish heat atlas provides highly detailed database with extensive information about more than 2.5 million buildings in Denmark. Energy system analysis tools incorporate environmental, economic, energy and engineering analysis of future energy systems and are considered crucial for the quantitative assessment of transitional scenarios towards future milestones, such as EU 2020 goals and Denmark’s goal of achieving fossil free society after 2050. The present paper shows how a Danish heat atlas can be used for providing inputs to energy system models, especially related to the analysis of heat saving measures within building stock and expansion of district heating networks. As a result, marginal cost curves are created, approximated and prepared for the use in optimization energy system model. Moreover, it is concluded that heat atlas can contribute as a tool for data storage and visualisation of results.

Pricing Energy and Ancillary Services in a Day-Ahead Market for a Price-Taker Hydro Generating Company Using a Risk-Constrained Approach

This paper analyzes a price-taker hydro generating company which participates simultaneously in day-ahead energy and ancillary services markets. An approach for deriving marginal cost curves for energy and ancillary services is proposed, taking into consideration price uncertainty and opportunity cost of water, which can later be used to determine hourly bid curves. The proposed approach combines an hourly conditional value-at-risk, probability of occurrence of automatic generation control states and an opportunity cost of water to determine energy and ancillary services marginal cost curves. The proposed approach is in a linear constraint form and is easy to implement in optimization problems. A stochastic model of the hydro-economic river basin is presented, based on the actual Vinodol hydropower system in Croatia, with a complex three-dimensional relationship between the power produced, the discharged water, and the head of associated reservoir.

The optimal time path for carbon abatement and carbon sequestration under uncertainty: The case of stochastic targeted stock

We explore the optimal time path of carbon sequestration and carbon abatement in stabilizing CO2 levels under uncertainty of climate impacts. Using a two-period sequential decision making model, we analytically derive optimal rates for the two control variables, abatement and sequestration rates. Uncertainty is assumed to affect the desired future stabilization level of the CO2 stock but is resolved prior to the decision on how much to control the stock in the second period. Contrary to recent numerical studies, we find that uncertainty can make it optimal to use carbon sequestration either earlier or later depending on the relative rates of change in both marginal cost curves and on the amount of land that can be converted to forest. Comparative statics suggest that an increase in the discount factor could either increase or decrease the optimal rate of sequestration in the first period depending on the expected rate of change of the marginal cost of sequestration in the second period and on future benefits of current sequestration.

Marginal costs of freeway traffic congestion with on-road pollution exposure externality

The health cost of on-road air pollution exposure is a component of traffic marginal costs that has not previously been assessed. The main objective of this paper is to introduce on-road pollution exposure as an externality of traffic, particularly important during traffic congestion when on-road pollution exposure is highest. Marginal private and external cost equations are developed that include on-road pollution exposure in addition to time, fuel, and pollution emissions components. The marginal external cost of on-road exposure includes terms for the marginal vehicle’s emissions, the increased emissions from all vehicles caused by additional congestion from the marginal vehicle, and the additional exposure duration for all travelers caused by additional congestion from the marginal vehicle. A sensitivity analysis shows that on-road pollution exposure can be a large portion (18%) of marginal social costs of traffic flow near freeway capacity, ranging from 4% to 38% with different exposure parameters. In an optimal pricing scenario, excluding the on-road exposure externality can lead to 6% residual welfare loss because of sub-optimal tolls. While regional pollution generates greater costs in uncongested conditions, on-road exposure comes to dominate health costs on congested freeways because of increased duration and intensity of exposure. The estimated marginal cost and benefit curves indicate a theoretical preference for price controls to address the externality problem. The inclusion of on-road exposure costs reduces the magnitudes of projects required to cover implementation costs for intelligent transportation system (ITS) improvements; the net benefits of road-pricing ITS systems are increased more than the net benefits of ITS traffic flow improvements. When considering distinct vehicle classes, inclusion of on-road exposure costs greatly increases heavy-duty vehicle marginal costs because of their higher emissions rates and greater roadway capacity utilization. Lastly, there are large uncertainties associated with the parameters utilized in the estimation of health outcomes that are a function of travel pollution intensity and duration. More research is needed to develop on-road exposure modeling tools that link repeated short-duration exposure and health outcomes.

Piecewise smooth approximation of bottom–up abatement cost curves

Top–down models usually include piecewise-smooth functions to describe marginal cost curves, while bottom–up models use step function curves. When a bottom–up cost curve is available, we can explicitly represent this curve with a top–down model in order to replicate its shape instead of using arbitrary assumptions. We propose several methods to approximate a piecewise function from a step function using constant elasticity of substitution technologies. Specifically, we consider a pollution abatement sector and calibrate the parameters of the abatement function in order to allow proper assessment of the economic effects of an environmental policy. Our methodology can be applied to any sector characterized by decreasing returns to scale technologies. We conclude that the elasticities of substitution need not be estimated only on the basis of historical data, but can be precisely calibrated on the basis of engineering estimates of technology potential.

Assessment of climate change mitigation potential of the Macedonian transport sector

As forecasted by the International Energy Agency Energy Technology Perspectives baseline scenario, the largest increment in LDV (light-duty vehicles) stock, travel demand and transport sector energy consumption will take place in the developing world. In the developing countries where the import of used vehicles is allowed, a considerable portion of the LDV stock increment will be realized with used vehicles.In this paper, the analytical framework for assessment of climate change mitigation potential of transport sector in developing countries is adapted in order to incorporate the expected vehicle fleet increase with used vehicles. The evaluation of appropriate mitigation strategies is performed using the GHG Costing Model (GACMO), which compares each mitigation option with the BAU (business-as-usual) option and determines its environmental effectiveness (t CO2 reduced) and economic effectiveness (US$/t CO2 reduced).The adapted analytical framework is applied on the case of transport sector of Macedonia, evaluating appropriate options inline with five mitigation strategies: improvement of vehicle fleet, introduction of low carbon fuels, improvement of travel behaviour, advancement of vehicle equipment and improvement of driver behaviour. The resulting marginal cost curve for the year 2020 indicates a total achievable reduction of 22% with respect to BAU GHG transport sector emissions, with bulk of it at relatively high specific costs of around 90 US$/t CO2.

Horizontal mergers, efficiency gains and remedies

The combination of structural remedies and efficiency gains in a merger may lead to pro-competitive outcomes, thus maintaining pre-merger prices. Two types of efficiencies are necessary. The first corresponds to a flatter marginal cost function, the second to a decrease in the intercept of the marginal cost curve. If these efficiency gains are not sufficient to keep the post-merger price at the pre-merger level, then divestitures by the resultant merged entity are adopted. This paper allows a comparison between two kinds of divestitures and it can be shown that, depending on the efficiency gains, divested capital distributed among the remaining competitors in the market is optimal when compared to divested capital being placed on the hands of a single competitor.

Microeconomic aspects of government subsidies in the agricultural market

It is known from the Czech practice that a very actual problem of economic policy is created by the subsidies on the prices of agricultural products. A price subsidy of agricultural product causes the price to be kept above its equilibrium level. We will use the microeconomic knowledge about the behaviour of average and marginal costs curves in the short-run and long-run. We assume two agricultural firms in a perfect competition market. The agricultural large-scale company reaches a normal profit, but the small family firm has higher costs, therefore it runs at a loss. Using the subsidy can ensure that the prices of agricultural products are set at a level, at which the farmers have appropriate incomes. However, a loss of efficiency can occur because of the subsidy as the surplus, which is purchased by the government, and actually stays unused.  

OPTIMAL IMPLEMENTATION OF LIGHTWEIGHTING AND POWERTRAIN EFFI CIENCY TECHNOLOGY IN PASSENGERS' VEHICLES

Improving powertrain efficiency and reducing vehicle weight are two options for reducing vehicle energy use, emissions, and operating cost that often increase the purchase cost of passenger vehicles. Increasing drivetrain efficiency shrinks the potential for reducing energy use by lightweighting and conversely lighter vehicles benefit less from efficiency improvement. This paper describes a methodology for finding the optimum combination of light-weighting and efficiency measures to achieve minimum lifetime vehicle cost. Using representative technology cost assumptions for a mid-sized passenger car, marginal efficiency improvement in the range of 20 to 30% and lightweighting between 200 and 600 kg are optimal, depending strongly on marginal cost curve characteristics. A reduction in the total cost of vehicle ownership of between 18 and 42% is possible for the representative technology implementation scenarios. In the absence of reliable cost data, a general strategy of designing lightweight vehicles with lower powertrain efficiency or else higher-efficiency powertrains which are integrated in heavier vehicles is recommended.

Global economic potential for reducing carbon dioxide emissions from mangrove loss

Mangroves are among the most threatened and rapidly disappearing natural environments worldwide. In addition to supporting a wide range of other ecological and economic functions, mangroves store considerable carbon. Here, we consider the global economic potential for protecting mangroves based exclusively on their carbon. We develop unique high-resolution global estimates (5' grid, about 9 × 9 km) of the projected carbon emissions from mangrove loss and the cost of avoiding the emissions. Using these spatial estimates, we derive global and regional supply curves (marginal cost curves) for avoided emissions. Under a broad range of assumptions, we find that the majority of potential emissions from mangroves could be avoided at less than $10 per ton of CO(2). Given the recent range of market price for carbon offsets and the cost of reducing emissions from other sources, this finding suggests that protecting mangroves for their carbon is an economically viable proposition. Political-economy considerations related to the ability of doing business in developing countries, however, can severely limit the supply of offsets and increases their price per ton. We also find that although a carbon-focused conservation strategy does not automatically target areas most valuable for biodiversity, implementing a biodiversity-focused strategy would only slightly increase the costs.

Technoeconomic analysis of wheat straw densification in the Canadian Prairie Province of Manitoba

This study presents a technoeconomic analysis of wheat straw densification in Canada’s prairie province of Manitoba as an integral part of biomass-to-cellulosic-ethanol infrastructure. Costs of wheat straw bale and pellet transportation and densification are analysed, including densification plant profitability. Wheat straw collection radius increases nonlinearly with pellet plant capacity, from 9.2 to 37km for a 2–35tonnesh−1 plant. Bales are cheaper under 250km, beyond which the cheapest feedstocks are pellets from the largest pellet plant that can be built to exploit economies of scale. Feedstocks account for the largest percentage of variable costs. Marginal and average cost curves suggest Manitoba could support a pellet plant up to 35tonnesh−1. Operating below capacity (75–50%) significantly erodes a plant’s net present value (NPV). Smaller plants require higher NPV break-even prices. Very large plants have considerable risk under low pellet prices and increased processing costs.

Inviting Competition to Achieve Critical Mass

In this paper we analyze a network market in which it is beneficial for a producer to invite competitors to share a market, even when this is not needed in order to affect consumer beliefs. Because of the nature of such goods, the demand curve for network markets typically rises and then falls. If the marginal cost curve of the producer is also upwardly sloping, the firm may be either unable to profitably produce a sufficient quantity to satisfy demand at any price, or may be able to, but benefit more if there are other producers also. Interestingly, optimal behavior by the producer is independent of the type of competition that will exist between the firms after the competitors have entered the market. Because the firm controls the number of entrants, it can always guarantee that it will receive maximal profits given the demand function and its technology. Implications for antitrust legislation and for strategic behavior by the firm are discussed.

Application of the WFD cost proportionality principle to diffuse pollution mitigation: A case study for Scottish Lochs

The Water Framework Directive (WFD) aims to deliver good ecological status (GES) for Europe's waters. It prescribes the use of economic principles, such as derogation from GES on grounds of disproportionate costs of mitigation. This paper proposes an application of the proportionality principle to mitigation of phosphorus (P) pollution of 544 Scottish lochs at national and local water body scales. P loading estimates were derived from a national diffuse pollution screening tool. For 293 of these lochs (31% of the loch area), GES already occurred. Mitigation cost-effectiveness was assessed using combined mitigation cost curves for managed grassland, rough grazing, arable land, sewage and septic tank sources. These provided sufficient mitigation (92% of national P load) for GES to be achieved on another 31% of loch area at annualised cost of £2.09 m/y. Mitigation of the residual P loading preventing other lochs achieving GES was considered by using a "mop-up" cost of £200/kg P (assumed cost effectiveness of removal of P directly from lochs), leading to a total cost of £189 m/y. Lochs were ranked by mitigation costs per loch area to give a national scale marginal mitigation cost curve. A published choice experiment valuation of WFD targets for Scottish lochs was used to estimate marginal benefits at national scale and combined with the marginal cost curve. This gave proportionate costs of £5.7 m/y leading to GES in 72% of loch area. Using national mean marginal benefits with a scheme to estimate changes in individual loch value with P loading gave proportionate costs of £25.6 m/y leading to GES in 77% of loch area (491 lochs).

Marginal Abatement Costs and Marginal Welfare Costs for Greenhouse Gas Emissions Reductions: Results from the EPPA Model

Marginal abatement cost (MAC) curves, relationships between tonnes of emissions abated and the CO2 (or greenhouse gas (GHG)) price, have been widely used as pedagogic devices to illustrate simple economic concepts such as the benefits of emissions trading. They have also been used to produce reduced-form models to examine situations where solving the more complex model underlying the MAC is difficult. Some important issues arise in such applications: (1) Are MAC relationships independent of what happens in other regions?, (2) are MACs stable through time regardless of what policies have been implemented in the past?, and (3) can one approximate welfare costs from MACs? This paper explores the basic characteristics of MAC and marginal welfare cost (MWC) curves, deriving them using the MIT Emissions Prediction and Policy Analysis model. We find that, depending on the method used to construct them, MACs are affected by policies abroad. They are also dependent on policies in place in the past and depend on whether they are CO2-only or include all GHGs. Further, we find that MACs are, in general, not closely related to MWCs and therefore should not be used to derive estimates of welfare change. We also show that, as commonly constructed, MACs may be unreliable in replicating results of the parent model when used to simulate GHG policies. This is especially true if the policy simulations differ from the conditions under which the MACs were simulated.

Mean-Variance Optimization of Power Generation Portfolios Under Uncertainty in the Merit Order

In this article we discuss welfare‐optimal capacity allocation of different electricity generation technologies available for serving system demand. While the classical peak load pricing theory derives the efficient portfolio structure from a deterministic marginal production cost curve (merit order), we investigate in particular the implications of possible reversals in the merit order — sometimes also referred to as fuel switch risks — induced by uncertain operating costs. We propose a static, non‐convex optimization model combining the classic peak load pricing model with elements of mean‐variance portfolio (MVP) theory and analytically discuss possible solution cases and important optimality properties. We examine the approach in a case study on the efficient structure of generation portfolios consisting of CCGT and hard coal technologies in Germany.With special emphasis, we study the emergence of overcapacities (exceeding maximal demand) in efficient portfolios and show that diversification is not beneficial per‐se. The results show that the efficient technology mix may be significantly impacted by a risk for reversals in the merit order. Therefore, our findings support the importance of considering this risk factor especially with long‐term investment horizons.The model is applicable to various investment problems related to production of nonstorable goods under price uncertainty of input factors. Similar problems can e.g. be found in transportation systems or in the process industry.