Transcript Introduction on Energy Policy

Agenda
Monday:
Rebound
Wednesday: Behavioral energy
Friday: Lint to lead review
Next week:
Monday: Begin geosciences
Friday: Midterm
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Where are we on energy?
• We have gone over energy geology, economics, policy.
• This is essentially the same as climate-change economics
• Assume you need some level of energy services, S*, then you
have production function: S* = F(K, E).
• Once prices reflect social costs (including Pigovian taxes),
then the equilibrium is efficient (see next slide)
• So, which agents can foul things up?
– Governments, firms (markets), consumers
• What are the major problems? Failures of:
– Institutions, information, decisions, preferences
• We will take just one issue today. Problem of using regulation
rather than prices to reduce energy consumption:
… the rebound effect
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Isoquant
K
S* = F(K, E)
Energy
3
Policies on Oil (Energy) Use
Background
– In general, first-best policy for reducing oil (energy) use is taxes
on oil (energy).
– However, because of “tax-aversion,” governments often
substitute regulations.
– For example, regulations on minimum energy efficiency
– A standard question is their efficiency relative to fuel taxes.
One specific case is: Does the higher efficiency actually increases
energy consumption? The Rebound Effect
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In an efficient
energy market
K
S* = F(K, E)
Energy
Emax
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Rebound effect
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Jevons paradox
“The economy of labour effected by the introduction of new machinery
throws labourers out of employment for the moment. But such is the
increased demand for the cheapened products, that eventually the
sphere of employment is greatly widened.”
“The number of tons of coal used in any branch of industry is the
product of the number of separate works, and the average number
of tons consumed in each. Now, if the quantity of coal used in a
blast-furnace be diminished in comparison with the yield, the
profits of the trade will increase, new capital will be attracted, the
price of pig-iron will fall, but the demand for it increase; and
eventually the greater number of furnaces will more than make up
for the diminished consumption of each.”
Jevons, The Coal Question
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Rebound effects: categories
1. Direct rebound effect: Increased fuel efficiency lowers the cost of
consumption, and hence increases the consumption of that good
because of the substitution effect.
2. Indirect rebound effect: Through the income effect, decreased cost of
the good enables increased household consumption of other goods
and services, increasing the consumption of the resource embodied
in those goods and services.
3. Economy wide effects: New technology creates new production
possibilities in and increases economic growth.
For small industries, #1 will dominate.
#2 will almost always be too small to offset small #1.
#3 is unclear about the mechanism that the authors are talking about.
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Price of vmt
Direct rebound effect…
Effect of efficiency
improvement
“Rebound effect”
Before mpg
improvement
After mpg
improvement
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9
Gasoline consumption
G
Price of vmt
… or maybe …
Effect of efficiency
improvement
“Rebound effect”
Before mpg
improvement
After mpg
improvement
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10
Gasoline consumption
G
Price of vmt
But welfare improvement is
unambiguous
(assuming no externalities)
Welfare
improvement
G
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Vmt
Economics of direct rebound effect
Assume that regulation increases energy efficiency of a capital good
from mpg0 to mpg1 . The question is whether the lower cost of a vmt
(vehicle-mile traveled) would offset the lower cost.
(1) vmt = f vmt (p vmt , p cars ), vehicle miles traveled,
(2) cars = f cars (p vmt , pcars ), number vehicles
From this we can get the following:
(3) Gasoline use = G = vmt/mpg
(4) p vmt = p gasoline /mpg
(5) d ln G / d ln mpg  -1   d ln vmt / d ln p vmt    d ln p vmt / d ln mpg 
But we know from (4) that  d ln p vmt / d ln mpg     d ln p vmt / d ln pgasoline  , so
(6) d ln G / d ln mpg  -1   d ln vmt / d ln p vmt    d ln p vmt / d ln p gasoline 
which gives us the important result:
(7) d ln G / d ln mpg  1   d ln vmt / d ln p gasoline 
So rebound effect is equal to the elasticity of vmt with respect to gasoline prices,
which we have observed in countless studies.
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Energy goods v. energy services
A key issue in measurement is the difference between
energy goods or inputs and energy outputs or services.
E.g., ounce of whale oil v. lumen; gallon of gasoline v.
(vmt, comfort, safety, noise, …)
Production function:
Energy services = f(capital, labor, fuel, infrastructure,…)
Basic point: There have been vast improvements in energy
services per unit of primary energy over time (call it
“efficiency”)
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The price of fuel for lighting
Roger Fouquet and Peter J.G. Pearson
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The long-term price of light
Roger Fouquet and Peter J.G. Pearson
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Example of lighting 1800 - 2000:
Did increased efficiency increase lighting use?
Price per lumen-hour
10.000
1.000
0.100
0.010
0.001
5
50
500
5,000 50,000 500,000
Output of lighting
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Example of lighting
Dependent Variable: LOG(Output of lighting)
Method: Least Squares
Included observations: 7 after adjustments
Variable
C
LOG(Price of lighting)
LOG(GDP)
R-squared
Adjusted R-squared
S.E. of regression
Coefficient
Std. Error
t-Statistic
3.23
-0.62
1.31
1.32
0.35
0.62
2.437
-1.762
2.111
0.985
0.978
0.714
Mean dependent var
S.D. dependent var
Prob.
0.071
0.152
0.102
6.764
4.847
Suggests that Jevons effect does not hold. Inelastic demand.
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Empirical estimates of rebound effect for autos
Basic results from many demand studies:*
Short-run gasoline price-elasticity on vmt = -0.10 (+0.06)
Long-run gasoline price-elasticity on vmt = -0.29 (+0.29)
Therefore, the rebound would offset 10 to 29 percent of mpg
improvement.
This can be applied to other areas as well.
Reference: Phil Goodwin, Joyce Dargay And Mark Hanly, “Elasticities of Road Traffic and Fuel
Consumption with Respect to Price and Income: A Review,” Transport Reviews, Vol. 24, No. 3,
275–292, May 2004, available at http://www2.cege.ucl.ac.uk/cts/tsu/papers/transprev243.pdf
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Source: UK Energy Research Centre, The Rebound Effect
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What is the lesson here?
1.
2.
3.
4.
Most regulations target K rather than E because of tax aversion.
Using “second-best” instruments can have paradoxical effects.
In extreme case, could actually increase energy use because of
rebound effect.
Economists conclude that should use first-best instruments that
target the externality rather than an indirect approach.
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