Greed is good? Of equilibrium impacts in environmental regulation

This paper presents a novel method to quantify the market equilibrium impacts of tighter environmental policies. The approach is taken to evaluate the welfare effects of emerging environmental regulations to protect the biodiversity of river ecosystems that put pressure on reducing hydropower generation capacity. A dataset of 129 million bids in the Nordic electricity market is used to calculate how small reductions in hydropower capacity change market outcomes and surpluses hour-by-hour for the years 2011-2022. Reaching the EU Biodiversity Strategy target of 2030 is estimated to reduce 56 MW of hydropower capacity in Finland. Such a change would lead to quantifiable welfare losses of euro62 million over time, not counting environmental benefits. Notably, the producer surplus increases by euro318 million over time through electricity market price changes, suggesting that instead of lobbying against biodiversity enhancing regulation, agreeing to an industry-wide implementation could benefit both the environment and the firms. Yet the fact that consumer costs increase more than the mere implementation cost reads as a sign of caution when tighter biodiversity policies are introduced.

Automated summary

This paper presents a novel method to quantify the market equilibrium impacts of tighter environmental policies, specifically in evaluating the welfare effects of emerging environmental regulations on river ecosystems. Through using a dataset of bids in the Nordic electricity market, the study found that achieving the EU Biodiversity Strategy target would lead to reduced hydropower capacity in Finland and result in economic losses but increased producer surplus. Therefore, it suggests that an industry-wide implementation of biodiversity-enhancing regulations could benefit both the environment and the firms, although caution is needed due to higher consumer costs.