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The interaction between environmental tax and trading systems

The Environment Agency selected Oxera to publish a paper on the interaction of tax and emissions trading systems and present it at a seminar of government economists.

The report included a review of the academic literature on the interaction of tax and trading systems in ‘hybrid systems’. It also explored the dynamic features of such policy mixes. The theory was applied to the UK climate and waste policies in two case studies.

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The impact of average zonal transmission losses applied throughout Great Britain

Following a comprehensive cost–benefit study undertaken by Oxera, the Department of Trade and Industry has announced that it is not minded to include average zonal transmission losses (AZTL) in the Great Britain Balancing and Settlement Code that will be established under the British Electricity Trading and Transmission Arrangements.

Oxera carried out full load-flow modelling of the Great Britain electricity transmission networks in conjunction with modelling of the wholesale electricity market to compare outcomes under uniform and zonal loss charging.

The report found that the benefits of AZTL were ambiguous if implementation costs in England and Wales were taken into account, while there would be significant redistributional consequences. However, the analysis found that the impact of AZTL on renewables was likely to be small.

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Cost–benefit analysis of proposed FSA regulation of soft commissions and bundled brokerage

Following on from the research report on soft commissions and bundled brokerage services, Oxera was commissioned by the Financial Services Authority to undertake a cost–benefit analysis of the regulations that it proposed to introduce.

Evidence was gathered from a series of interviews with fund managers, brokers and research companies. Using publicly available financial data and data provided from the surveys of fund managers and brokers, the savings from the likely reductions in the excessive consumption of research and other services acquired by fund managers were estimated. Estimates of compliance costs were made, based on publicly available data and interview evidence.

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An assessment of soft commission arrangements and bundled brokerage services in the UK

Oxera was commissioned by the Financial Services Authority to examine the practice of soft commissions and bundled brokerage services, to establish whether they pose regulatory risks and/or competition problems.

In-depth interviews were conducted with pension fund trustees, fund managers, brokers, research companies, industry experts and regulators, to obtain insight into competitive conditions in the markets concerned, and into the various horizontal and vertical relationships and contractual arrangements between market participants. This was followed by an extensive questionnaire for pension funds, fund managers and brokers. The principal objectives were:

to obtain quantitative evidence to underpin the economic analyses of competition, bundling and soft commissions;
to estimate the order of magnitude of bundling and soft commissions;
to test various hypotheses and statements that have been made about these practices.

In addition, Oxera reviewed the literature on soft commission arrangements, and examined and compared regulations on soft commissions and bundled brokerage services in several major countries.

The Financial Services Authority used the research findings in formulating policy proposals, and subsequently commissioned Oxera to perform a cost–benefit analysis on the proposed set of new rules (see Related items).

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Interoperability and horizontal markets in European digital television

Oxera was commissioned by the European Commission to investigate the issues surrounding the introduction of interoperability of interactive services and the creation of horizontal retail markets for equipment in the context of digital broadcast services in Europe.

The study involved an economic analysis of the European television market, identification of technological gateways in digital television and the development of policy options to introduce interoperability and horizontal markets.

In addition, the study addressed the related issue of the degree to which the market is likely to deliver certain types of digital services or products and whether there are any market failures and bottlenecks that need to be addressed. The final report was published in March 2003, and formed a significant input into the formulation of policy to govern the process of standardisation and interoperability in the European digital broadcast market.

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A social time preference for use in long-term discounting

Oxera prepared a comprehensive review of the literature on social time preference rates for HM Treasury’s revised Green Book, published in January 2003.

It set out the cases for and against a change from a constant social discount rate to one that declines over time, illustrating the results with simulations and examples from transport, climate change and nuclear policy. The Treasury then adopted a declining social discount rate using the rate of decline proposed by Oxera.

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The role of custody in European asset management

Following the research report on the ‘Risks and regulation in asset management: is there a role for capital requirements’, the European Asset Management Association (EAMA) commissioned Oxera to undertake research specifically investigating custody arrangements in the asset management industry, the report for which was published by EAMA. The aim of the custody project was to evaluate the extent to which external custodianship of client assets protects investors from operational risks.

As part of the research, Oxera looked into the services provided by custodians, and the regulatory and contractual responsibilities of custodians in relation to asset managers and their clients. In addition, a questionnaire was sent to asset managers and custodian banks across Europe, to obtain further information about the level of client protection afforded by current custody arrangements.

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The Capital Structure of Water Companies

The Oxera report on capital structure, prepared on behalf of Ofwat, examined the question of how high levels of gearing affect companies' cost of capital, the potential social consequences of highly leveraged utilities, and how regulators should respond in arriving at their gearing assumptions at periodic reviews.

The study explored the various theories of capital structure determinants, the drivers of increased gearing in water, and the potential effects on the cost of capital for those companies pursuing the restructuring route. On balance, the study urged caution, and that, in making assumptions about the capital structure of companies, regulators should not place too much weight on recent water company restructurings.

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Clearing the air: public transport and cleaner vehicles

This report provided an industry reference on the environment, fuels, and vehicles and support mechanisms for the UK public transport sector.

It covered new low-emission engine and fuel technologies in the bus and rail sectors, and included:

the current state of play regarding emissions reduction across the transport sector;

modal shift and technological change to meet lower-carbon policies;

EU and UK environmental policies, including those on low carbon, air quality and noise, for bus and rail, as well as the effects of private vehicle policy development and voluntary agreements;

environmental reporting by public transport companies;

a technical review of cleaner fuels and engine technologies (including exhaust after-treatment, electric and hybrid engines, and hydrogen and fuel cells);

EU and UK support mechanisms, and UK fiscal policy, including discussion areas for policy and change.

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Regional renewable energy assessments

Oxera reviewed the economic and technical aspects of the UK regional assessments of the potential for renewable energy generation in 2010 for the Department of Trade and Industry and the Department for Transport, Local Government and the Regions.

In particular, we examined whether the proposed regional targets in aggregate were sufficient to meet the government’s target, and whether the assumptions made were consistent and reasonable, with consideration by Arup Economics and Planning of the planning issues.

Key conclusions from the report were that the 10% Renewables Obligation target is more or less reached under the high targets proposed in the regional assessments, but not under the low targets. Half of the total of the regions’ assessments consisted of on- and offshore wind, whereas landfill gas and biomass make up most of the remaining half. However, those technologies were also the most problematic in terms of obtaining planning consent.

A more positive planning system would assist the achievement of the national target. The planning system may take several years to incorporate the regional targets into forward plans, and hence into development control decisions. Nevertheless, there were actions that government could take which would have an immediate effect, and which would also deliver improvements in the future.

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