Working Papers

Electricity Interconnection with Intermittent Renewables < Job Market Paper > (PDF)

Electricity interconnection has been recognized as a way to mitigate carbon emissions through dispatching more efficient electricity production and accommodating the growing share of renewables. I analyze the impact of electricity interconnection in the presence of intermittent renewables, such as wind and solar power, on renewable capacity and carbon emissions using a two-country model. I find that in the first-best, interconnection decreases investments in renewable capacity and exacerbates carbon emissions if the social cost of carbon (SCC) is low. Conversely, interconnection increases renewable capacity and reduces carbon emissions for a high SCC. Moreover, the intermittency of renewables generates an insurance gain from interconnection, which also implies that some renewable capacity is optimally curtailed in some states of nature when the SCC is high. The curtailment rate and the corresponding carbon emissions increase for more positively correlated intermittency. I calibrate the model using data from the European Union electricity market and simulate the outcome of expanding interconnection between Germany-Poland and France-Spain. I find that given the current level of SCC, interconnection may increase carbon emissions. The net benefit of interconnection is positive, with uneven distribution across countries.

Public Safety under Imperfect Taxation (with Nicolas Treich) (PDF) R&R Journal of Environmental Economics and Management

An important objective of many publicly-financed environmental projects is to reduce mortality. In this paper, we examine theoretically the effect of tax system imperfections on the optimal public investment in mortality risk reduction (or public safety). We compare three tax systems, namely first-best, uniform tax, and income tax. Moreover, we consider several sources of imperfection, namely individuals’ heterogeneity in wealth and in risk exposure, and labor supply distortion. We show that the effect of imperfect taxation critically depends on the source of imperfection as well as on the individual utility and survival probability functions. We conclude that imperfect taxation cannot generically justify less public safety. There is thus no fundamental reason to always adjust downwards the value of statistical life (VSL) because of imperfect taxation, nor to assume a marginal cost of public funds systematically greater than one for the benefit-cost analysis of environmental projects.

Do Correlated Climate Risks Induce Lower Emission?

In the context of climate change, the literature generally considers risks as independent or fully synchronized. This paper examines the role of correlated risks in determining the social optimal emission level. Correlated risks are defined as risks that are not independently distributed, but drawn from a joint distribution with other risks. This paper concludes that risks with higher correlation would result in a decrease in welfare and a reduction in optimal emission level when social preference is correlation-averse. When countries face heterogeneous risks, the optimal emission reduction would be proportional to the level of expected risk. In the face of correlated climate risks, cooperation among countries could achieve a higher social welfare level than a non-cooperative game. The modeling framework also applies to other pollution contexts.