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Introduction on Energy Policy

Introduction on Energy Policy. Economists’ first presumption is that energy is just another good and service and should be allocated by market. There are many important qualifications:

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Introduction on Energy Policy

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  1. Introduction on Energy Policy Economists’ first presumption is that energy is just another good and service and should be allocated by market. There are many important qualifications: Pollution externalities: a wide variety of harmful by-products of production (health, property, global warming, congestion, …) International complications:security of oil supply, military implications, monopsony power,… Business cycles: oil price shocks associated with inflation and recessions. Market failures: monopoly, regulation, subsidies, poor metering, network externalities, incorrect intertemporal discount rates, … Technological externalities: positive externalities from research and development (R&D). These are corrected by government subsidies, intellectual property rights (patents, …), regulation, and other Distributional: is energy a “merit good” along with food, health care, and shelter that should be subsidized for low-income households (normative); high prices increase inequality (normative).

  2. Generic Strategies for Policies A. Taxes on “bads” Carbon tax on CO2 emissions; taxes on ozone-depleting chemics B. Subsidies on “goods” 1. Subsidies for private actions (usually tax credits) “incentives” for vehicles, electricity, non-oil fuels, … 2. Federal expenditures Federal energy R&D, renewable electric, advanced nuclear C. Regulations that are implicit taxes or redistribute private costs 1. Efficiency standards vehicles (CAFE), appliance standards 2. Misc. market regulations integrate renewables into electricity grid, “reduce barriers” to siting

  3. Overview of energy system Capital, labor, … Non-energy goods and services Capital, labor, … Utility: U(c1, c1, …, cn) Energy goods and services (passenger miles, warm house, hot coffee, … Energy resources (oil in ground,…) Energy fuels (gasoline, electricity, …)

  4. External effects Market boundary Capital, labor, … Non-energy goods and services Capital, labor, … Utility: U(c1, c1, …, cn) Energy goods and services (passenger miles, warm house, hot coffee, … Energy resources (oil in ground,…) Energy fuels (gasoline, electricity, …) Consumption externalities: congestion, … Production externalities: SO2, CO2, …

  5. More detailed overview of the energy system

  6. Units of energy system Source: Gruebler et al., Energy Primer, to be posted

  7. Source: Energy Information Agency at eia.doe.gov

  8. McKelvey diagram on resources

  9. Questions about exhaustible resources • Is it an “essential” resource? Question of elasticity of substitution between resource and other inputs. - Is there a backstop technology? At what price? • Is the use of the resources “sustainable”? This refers to whether net investment in the economy is positive. - E.g., investment in capital greater than disinvestment in value of resources • Are we overdiscounting the value of future resources? - This is the discount rate question we discuss later

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