On the environmental impact of energy market liberalisation: Environmental policy, economic reform and endogenous technology

textabstractIn the literature, attention has been paid to the environmental consequences of lower energy prices caused by market liberalisation: the drop in energy prices reduces the attractiveness of investing in energy-saving technologies. In this paper we develop a simple model of investment decision-making emphasising the importance of not only levels but also volatility of energy prices for actual investment behaviour. The general finding is that lower energy prices and higher uncertainty reduce the propensity to invest. To empirically assess the importance of changes in both levels and volatility, we use US natural gas price data over the market liberalisation period and apply the information to the investment decision with respect to a specific energy-saving technology in the paper industry. We find that energy market liberalisation reduces the propensity to invest in energy-saving technologies substantially, not only because of the lower energy price but also because of its increased volatility