Transcript Introduction on Energy Policy

Resource Economics,
Energy Externalities,
and Energy Policy
Economics 331b
Spring 2010
1
Agenda
Monday: Finish sketch of non-linear dynamic systems
Introduce energy policy and externalities
Peak oil hypothesis
Wednesday: Hotelling theories
Friday: Energy primer
2
What are major issues?
What is special about energy?
What are the market and efficient allocation of exhaustible
resources (Hotelling theory)? How does this relate to
peak oil theory?
What are the major reasons to have an “energy policy”?
Special sectors:
- oil, autos, nuclear power, relation to global warming
3
Introduction on Energy Policy
1. Economists’ first presumption is that energy is just another
good and service and should be allocated by market.
2. There are many important qualifications:
a. Pollution externalities: a wide variety of harmful by-products of production
(health, property, global warming, congestion, …)
b. International complications: security of oil supply, military implications,
monopsony power,…
c. Business cycles: oil price shocks associated with inflation and recessions.
d. Market failures: monopoly, regulation, subsidies, poor metering, network
externalities, incorrect intertemporal discount rates, …
e. Technological externalities: positive externalities from research and
development (R&D). These are corrected by government subsidies,
intellectual property rights (patents, …), regulation, and other
f. 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).
4
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
Vehicle (CAFE) standards, appliance standards
2. Misc. market regulations
Feed-in tariffs, mandate market shares for renewables (ethanol)
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Overview of energy system
Capital,
labor, …
Capital,
labor, …
Non-energy
goods and
services
Utility:
U(c1, c1, …, cn)
Energy
resources
(oil in
ground,…)
Energy fuels
(gasoline,
electricity, …)
Energy goods
and services
(passenger
miles, warm
house, hot
coffee, …
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External effects
Market boundary
Capital,
labor, …
Capital,
labor, …
Non-energy
goods and
services
Utility:
U(c1, c1, …, cn)
Energy
resources
(oil in
ground,…)
Energy fuels
(gasoline,
electricity, …)
Production
externalities:
SO2, CO2, …
Energy goods
and services
(passenger
miles, warm
house, hot
coffee, …
Consumption
externalities:
congestion, …
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MB, MC
Social MC
Private MC
MB
Pollution
Efficient Pollution
Market Pollution
MB, MC
Social MC
Private MC+tax
Pigovian tax
Private MC
MB
Pollution
Efficient Pollution= Market
MB, MC
Pollution
regulation
Social MC
Private MC
MB
Pollution
Efficient Pollution= Market
McKelvey diagram on resources
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Questions about exhaustible resources
1. Is it an “essential” resource? Question of elasticity of
substitution between resource and other inputs.
- Is there a backstop technology? At what price?
2. 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
3. Are we overdiscounting the value of future resources?
- This is the discount rate question we discuss later
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