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Journal ArticleDOI

CO2 cost pass-through and windfall profits in the power sector

TL;DR: In this article, the authors analyzed the implications of the EU ETS for the power sector, notably the impact of free allocation of CO2 emission allowances on the price of electricity and the profitability of power generation.
About: This article is published in Climate Policy.The article was published on 2006-01-01 and is currently open access. It has received 642 citations till now. The article focuses on the topics: Windfall gain & Marginal product.

Summary (4 min read)

THE SYSTEMATIC MISREPRESENTATION

  • John R. Michener, Steven D. Mohan, James B. Astrachan and David R. Hale, "Snake-Oil Security Claims" The Systematic Misrepresentation of Product Security in the E-Commerce Arena 9 MICH, also known as Cite as.
  • Second, the seller assumes the risk that the purchaser will breach.
  • Articles discussing jurisdiction related to electronic transactions nearly universally acknowledge the difficulty in determining controlling law.

A. Warranties

  • Under the U.C.C., which governs contracts for software in most states,2' there are two general categories of warranties: express and implied.
  • It is critically important in transactions related to electronic security products that the responsibilities of the seller include ensuring the proper functionality of the product.
  • The traditional framework to address such responsibilities is the warranties contained in the contract along with the remedies provided for their breach.
  • As discussed below, these mechanisms fail in the context of electronic security products.

1. Express Warranties

  • Express warranties are created when the seller represents that the product has particular features or qualities and where those qualities are a basis for the purchase.
  • U.C.I.T.A.'s language related to express warranties tracks the U.C.C.'s closely.
  • 3' A seller will almost always attempt to disclaim implied warranties when entering a contract.

B. Remedies

  • Even where the parties recognize a warranty, they may agree to limit remedies if the warranty is breached.
  • A repair and replace remedy would fail if the defective product could .
  • A damage limitation, however, is unlikely to be considered unconscionable in a commercial, non-consumer context, because courts treat the two parties as though the two commercial contracting parties have roughly equal bargaining powers and levels of 46 47 sophistication.
  • The personal computer has evolved over the past 30 years from a hobbyist's plaything to a critical cornerstone of modern business, commerce, and everyday life.

Credit Corp. v. Marvik Colour, Inc., 859 F.Supp. 686, 695 (S.D.N.Y. 1994); Am. Dredging Co.

  • See supra Section III; see also Clarke, supra note 9, at 54.
  • Spring 2003] 222 Michigan Telecommunications and Technology Law Review [Vol. 9:211 (e.g. Microsoft Windows / NT / XP families on the client and server side; and, Sun's Solaris, HP's HPUX, IBM's AIX, BSD, and Linux on the UNIX side).
  • 50 While more attention has been paid to system safeguards in the server environment, that level of attention, and its resulting capabilities and integrity, have not matched the needs of such a critical component of the infrastructure.

A. Software Development

  • The complexity of software grows with the volume of active code and the number of functions in the program.
  • 57 Initially, programs that contained hundreds of lines of active code and a small number of functions were considered large.
  • While the existence of software defects is an abysmal fact of life, the number and severity of software defects is something that the software manufacturers can substantially control, were they motivated to do so.
  • Unfortunately, commercial software vendors frequently do not understand the customer's business model and requirements," and customers may not know what their business model and requirements will be once they implement new technology.

B. Security Must be Designed in From the Start

  • Executives, managers, and software developers in the software and systems industry want to believe that security is similar to other system functionalities-a module you snap into an existing system to make it secure by adding appropriate security functions.
  • Not only are such risks ignored, no funding or schedule reserves are set aside to deal with the risks when (not if) they surface.
  • Attempting to prove that any arbitrary state of the hardware and software system will NOT result in a given form of unwanted behavior is prohibitively difficult because increasing the number of entities that can be combined creates a huge number of possible combinations.
  • Consequentially, it is very common for development teams and product managers to hide security relevant products and feature enhancements from the critical eyes of the corporate security expert.

C. The Security Problem and the Failure of Existing Practices

  • The problems of design oversights and software defects are probably most serious for areas of software, system security, system integrity, and survivability because these areas are not implemented by functional add-in modules and are most sensitive to errors of composition, omission, and undocumented features.
  • ROLLBACK can destroy critical system information including the registry, user account information.
  • Linux has long been known for its security vulnerabilities.
  • The model suggests dividing the software functionality into layers, each of which solves part of the functionality problem.

An analogy may be useful. An attacker substituting a module in a system is equivalent to the mafia replacing a government agent with his or her own man. The impostor can delete true information, insert false

  • All the module has to do is have the same input and output interfaces, which are typically standardized and frequently published.
  • "Reference monitors" are needed in highly trusted systems and in the old Trusted Computer Security evaluations (orange book), levels B2 and higher.
  • Code signing is not used much to protect the integrity of applications or operating systems, although it was integral to Novell's cryptographic infrastructure.

If attackers get an administrator to install one of these drivers, which

  • Are installed in the operating system kernel, they can control the system.
  • The vulnerability of systems to such exploits is well illustrated by the problem of cryptographic protection of communications and data.
  • Hence, keys are typically stored in system in encrypted form, with a weaker pass-phrase being used to unlock the real key.
  • Some states have enacted specific electronic acts that define and govern digital signatures.
  • The market for software and system products with integrated security functionality as well as stand-alone security products exhibits unusual and reprehensible characteristics because virtually all of the players (the vendors, the analysts, and the customers) are unwilling to address the underlying lack of system integrity.

D. Some Security Issues of e-Commerce Servers

  • In a commercial setting, vendors desire to limit their liability; buyers, however, want a representation that what they buy will work for the intended purpose and, if it does not, they will be made whole for subsequent damages.
  • Even where scope is limited, the vendor will also attempt to limit its liability for damages for a breach of warranty.
  • As an example of a security related product, consider the case of an e-commerce server.
  • Flaws in e-commerce servers have allowed wholesale capture of credit card numbers stored in the systems.
  • 121. Vulnerabilities can arise from the sheer number of layers, modules and packets, as well as the combinatorial explosion of interaction among layers, modules and packets.

Suggested Security Measures

  • The experience over the past several years of repeated break-ins' clearly illustrates the vulnerability of standard systems.".
  • If vulnerable systems are exposed to untrusted users, system functionality must be partitioned to detect and minimize the impact of such compromises.
  • The seller should not be forced to solely bear the risk of loss associated with a security product's failure.
  • Spring 2003] 246 Michigan Telecommunications and Technology Law Review [Vol. 9:211 expensive, and time consuming where security was not appropriately considered in the initial design, and where good development practices were not followed.
  • '43 Product evaluations are done under the "Common Criteria4'"* and the results are associated with an "assurance level."'.

Aspiring to "Best Practices"

  • While there is no reason to require that manufacturers submit their products for evaluation under NIAP/IATF guidelines, these guidelines and evaluation criteria do provide useful reference standards.
  • When manufacturers have their systems and their appropriate usage evaluated by competent organizations, such as required by the U.S. Government's NIAP program, they should be viewed as following best practices.
  • Innovators who develop new technologies will be operating outside of the NIAP/IATF purview but, as these new technologies are understood and their characteristics documented, they will be integrated into the NIAP/IATF environment.
  • The protection profile against which Windows 2000 was evaluated can be viewed as stating that such "Snake-Oil Security Claims" requirements are also following best practices, although they must expect that they may be required to prove their capabilities, assurance, processes, and the comprehensiveness and appropriateness of their documentation, in event of mishap.
  • Without the processes and controls needed for independent evaluation, the manufacturer, let alone the customer, has no understanding of the product's security properties.

CONCLUSION

  • The commercial software and systems industry now provide critical infrastructure for their society.
  • Willful and systematic security oversights in the industry created widespread vulnerabilities that create the potential for exceedingly large third party losses.
  • The imbalance in knowledge between the supplier and purchaser is so extreme that the legal assumption of comparable sophistication should be abandoned and the presumption should instead be that the purchaser is an ignorant consumer with associated product protections.
  • The software and systems industry, and the associated consulting 155.
  • Clearly very large and sophisticated organizations can be held to higher standards.

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Citations
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01 Oct 2008
TL;DR: Garnaut Climate Change Review as mentioned in this paper examines the impacts of climate change on the Australian economy, the costs of adaptation and mitigation, and the international context in which climate change is experienced and negotiated.
Abstract: Professor Ross Garnaut was commissioned by all of the Governments of Australia's Federation to examine the impacts of climate change on Australia and to recommend policy frameworks to improve the prospects of sustainable prosperity. The Garnaut Climate Change Review is one of the most important reports to be published in Australia for many years. It examines the impacts of climate change on the Australian economy, the costs of adaptation and mitigation, and the international context in which climate change is experienced and negotiated. It analyses the elements of an appropriate international policy response, and the challenges that face Australia in playing its proportionate part in that response. The Garnaut Climate Change Review is highly relevant to the global problem that is climate change. It considers what policies the international community should adopt in responding to climate change, and urges humanity to act now, and in concert, to develop the required policy response in time.

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Book
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TL;DR: The European Union's Emissions Trading Scheme (EU ETS) is the world's largest market for carbon and the most significant multinational initiative ever taken to mobilize markets to protect the environment as discussed by the authors.
Abstract: The European Union's Emissions Trading Scheme (EU ETS) is the world's largest market for carbon and the most significant multinational initiative ever taken to mobilize markets to protect the environment. It will be an important influence on the development and implementation of trading schemes in the US, Japan, and elsewhere. However, as is true of any pioneering public policy experiment, this scheme has generated much controversy. Pricing Carbon provides the first detailed description and analysis of the EU ETS, focusing on the first 'trial' period of the scheme (2005–7). Written by an international team of experts, it allows readers to get behind the headlines and come to a better understanding of what was done and what happened based on a dispassionate, empirically based review of the evidence. This book should be read by anyone who wants to know what happens when emissions are capped, traded, and priced.

527 citations

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Abstract: We examine the extent to which various environmental policy instruments meet major evaluation criteria, including cost-effectiveness, distributional equity, minimization of risk in the presence of uncertainty, and political feasibility. Instruments considered include emissions taxes, tradable emissions allowances, subsidies for emissions reductions, performance standards, technology mandates, and research and development subsidies. Several themes emerge. First, no single instrument is clearly superior along all the criteria. Second, significant trade-offs arise in the choice of instrument; for example, assuring a reasonable degree of distributional equity often will require a sacrifice of cost-effectiveness. Third, it is possible and sometimes desirable to design hybrid instruments that combine features of various instruments in their pure form. Fourth, for many pollution problems, more than one market failure may be involved, which may justify (on efficiency grounds, at least) employing more than one instrument. Finally, potential overlaps and undesirable interactions among environmental policy instruments are sometimes a matter of concern.

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Cites background from "CO2 cost pass-through and windfall ..."

  • ...But a study involving Germany and The Netherlands (Sijm et al., 2006) found pricing patterns consistent with the incorporation of the opportunity cost of the free permits being fed into prices....

    [...]

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TL;DR: In this article, the authors examine the extent to which various environmental policy instruments meet major evaluation criteria for pollution control, and they conclude that the choice of pollution control instrument is a crucial environmental policy decision.
Abstract: The choice of pollution control instrument is a crucial environmental policy decision. We examine the extent to which various environmental policy instruments meet major evaluation criteria...

485 citations

References
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Journal ArticleDOI
TL;DR: In this paper, the authors provide a framework to assess the economic incentives and distortions that provisions in NAPs can have on market prices, operation and investment decisions, and use both analytic models to illustrate the effects of the incentives, and results from numerical simulation runs that estimate the magnitude of impacts from different allocation rules.

253 citations

01 Mar 2005

147 citations


"CO2 cost pass-through and windfall ..." refers background in this paper

  • ...Companies can either use these allowances to cover the emissions resulting from the production of these installations or sell them to other companies that need additional allowances (Reinaud, 2005)....

    [...]

  • ...Companies can either use these allowances to cover the emissions resulting from the production of these installations or sell them on the market (to other companies that need additional allowances (Reinaud, 2005))....

    [...]

01 Sep 2005
TL;DR: In this paper, the authors analyzed the relationship between EU emissions trading and power prices, notably the implications of free allocation of emissions allowances for the price of electricity in countries of North-western Europe.
Abstract: The present study analyses the relationship between EU emissions trading and power prices, notably the implications of free allocation of emissions allowances for the price of electricity in countries of North-western Europe. To study this impact, it uses a variety of analytical approaches, including interviews with stakeholders, empirical and statistical analyses, theoretical explorations, and analyses by means of the COMPETES model. The study shows that a significant part of the costs of freely allocated allowances is passed through to power price and discusses its implications in terms of higher electricity prices for consumers and windfall profits for producers. It concludes that free allocation of emission allowances is a highly questionable policy option for a variety of reasons and suggests that auctioning might offer a better perspective.

128 citations


"CO2 cost pass-through and windfall ..." refers background in this paper

  • ...This is typically a successful approach in the case of non-cointegrated AR(1) processes (but does not have the quick convergence properties that otherwise characterize estimations using levels)....

    [...]

  • ...Figures 5 and 6 present trends in dark/spark spreads and CO 2 costs per MWh over the years 2004–2005 in Germany and The Netherlands, based on forward (i.e. year-ahead) prices for power, fuels and CO 2 emission allowances....

    [...]

  • ...2 For a full discussion and illustration of these reasons, see Chapter 4 of Sijm et al. (2005)....

    [...]

  • ...For more details on this model, see Sijm et al. (2005) and references cited therein, as well as the website http://www.electricitymarkets.info....

    [...]

  • ...…Hobbs of the Johns Hopkins University (Baltimore, USA) as well as those ECN staff members who contributed to the ‘CO 2 Price Dynamics’ project, notably Stefan Bakker, Michael ten Donkelaar, Henk Harmsen, Sebastiaan Hers, Wietze Lise and Martin Scheepers (for details, see Sijm et al., 2005, 2006)....

    [...]

Posted Content
TL;DR: In this article, the authors show that owners of existing generation assets may be better off paying for carbon dioxide emission allowances than having them distributed for free, and that it takes just 7.5% of the revenue raised under an auction to preserve the asset values of existing generators.
Abstract: Paradoxically, owners of existing generation assets may be better off paying for carbon dioxide emission allowances than having them distributed for free. This analysis shows that it takes just 7.5% of the revenue raised under an auction to preserve the asset values of existing generators.

125 citations

Journal ArticleDOI
TL;DR: In this article, the authors show that owners of existing generation assets may be better off by paying for carbon dioxide emission allowances rather than having them distributed for free, and that it takes just 7.5 percent of the revenue raised under an auction to preserve the asset values of existing generators.

92 citations

Frequently Asked Questions (9)
Q1. What have the authors contributed in "Cp_61_47_sijm.pmd" ?

This article analyses the implications of the EU ETS for the power sector, notably the impact of free allocation of CO 2 emission allowances on the price of electricity and the profitability of power generation. As well as some theoretical reflections, the article presents empirical and model estimates of CO 2 cost pass-through for Germany and The Netherlands, indicating that pass-through rates vary between 60 and 100 % of CO 2 costs, depending on the carbon intensity of the marginal production unit and various other marketor technology-specific factors. 

A main purpose of the free allocation of emissions allowances under the US capand-trade programmes for SO2 and NO x , as well as under the EU ETS for CO 2 , is to obtain thepolitical support of large emitters. 

if the infra-marginal unit is more carbon-intensive than the marginal unit, it suffers from a loss, as the increase in power price is lower than the increase in its carbon costs per MWh; notably if allowances have to be bought on the market. 

The extent to which carbon costs are passed through to power prices also depends on changes in the merit order of the supply curve due to emissions trading. 

CO2costs of gas-generated power have also increased over this period, but less dramatically, i.e. from d4 to d11/MWh (partly due to the relatively low – but constant – emission factor of gas-generated electricity). 

As coal generators benefit from this gas cost-induced increase in power prices, this leads to an overestimation of the pass-through rate of CO2 costs for coal-generated power. 

Earthscanshows the costs of CO 2 allowances required to cover the emissions per MWh generated by a coalfired power plant (with an emission factor of 0.85 tCO 2 /MWh). 

in the latter case, some grandfathering to this inframarginal unit may be justified to break even, depending on the relative carbon intensity of this unit. 

While all generators profit from the higher prices, the effect of a smaller market dominates this effect and therefore slightly reduces their revenues.