Lars Bergman

This chapter provides an overview of the evolution and subsequent expansion of the Nordic market—encompassing Denmark, Finland, Norway, and Sweden, and considered among the most successful competitive markets in the world. The Nordic market experienced and survived a severe hydro shortage during 2002–2003, where reservoirs in the hydro-dominated system fell to unprecedented low levels. But despite this natural shock, the market held together, without mandatory rationing, blackouts, price manipulation, or major financial ruin of any of the players. This, in contrast to other markets is an important hallmark of the Nordic market. However, fears regarding supply, security, and adequacy are likely to be unfounded. Nevertheless, as inherited overcapacity is eroded and new market-based environmental regulation takes effect, tighter market conditions are to be expected. It is then crucial that retail markets be fully developed to allow consumers to adequately protect themselves from occurrences of price spikes. There seems to be four main factors explaining this: 1) the market design of the Nordic market is simple but sound and to a large extent made possible by the large share of hydropower, 2) dilution of market power, attained by the integration of the four national markets into a single Nordic market, has been rather successful, 3) there has been a strong political support for a market-based electricity supply system without intervention in the market mechanisms in stressful situations, 4) the Nordic power industry seems to have a strong voluntary informal commitment to public service.

Policies aimed at eliminating or significantly reducing serious environmental problems almost by definition imply significant, or even dramatic, emission reductions. But large emission reductions tend to have a large impact on costs in one or several sectors of the economy, and these shifts in relative costs are likely to induce general equilibrium effects throughout the whole economy. For this reason it is often useful to evaluate major environmental policy measures within the frame of a computable general equilibrium (CGE) model of the economy. More precisely a CGE model makes it possible to estimate the costs of environmental policy measures, taking substitution mechanisms in production and consumption as well as market clearing conditions into account. Thus, policy evaluations based on CGE models can provide insights often neglected when more partial methods are used.