Course Introduction:
Econ 3391

Prof. Richard Sweeney

Course website:

http://www.richard-sweeney.com/econ3391/

Slides for today:

https://www.richard-sweeney.com/econ3391/extras/IntroLecture/Intro.html

Outline for today

• Energy is economically important
• Energy markets are economically inefficient
• This course: Using economics to help power growth without destroying the planet
• Course logistics

Energy is important

• for most of human history, energy was biomass used for cooking and heating
• coal error coincided with massive electrification
• then the rise of the automobile ushered in the era of oil
• recently renewables have grown a lot, but they are still a tiny share of total energy consumption (<10%)

Energy growth and economic growth

Also clear in the cross-section

New challenge: AI

AI will require incredible amount of energy

The speed and scale of this shift will be determined by our ability to build enough (cheap) power

How to do this without driving up prices and hurting the rest of the economy

After decades of flat electricity prices, the cost of electricity is rising rapidly

Core policy goal: Ensure cheap, reliable energy necessary for 21st century economy

Emerging issue: Where to put this infrastructure?

Problem: Our current energy mix is unsustainable (and economically inefficient)

Energy use is associated with many negative externalities

An externality exists when the consumption or production choices of one person or firm enter the utility or production function of another entity without that entity’s permission or compensation.

(more on this next class)

BP Oil Spill, Gulf of Mexico, 2010

Pollution from energy is a leading cause of death worldwide

Source: EPIC

Going forward the biggest challenge is climate change

Need abrupt action to avoid things getting much worse

Source: Axios

Adapting to climate change depends on economic growth and energy infrastructure

Good News: Basic outline of a solution is clear

• 75% of global CO2 emissions come from energy
  • Other big sources are deforestation and industrial production (like cement and steel)

Step 1: Electrify everything

• Switch essentially all energy use to electric power
• heating, transportation (!)

Step 2: Decarbonize electricity production ASAP

• Shut down coal plants
• Switch to wind and (mainly) solar
• Increase energy efficiency of durables (ACs, water heaters, etc)

We will focus on the economics of the energy transition

• Basic engineering / technical aspects of the problem are well known.
• The main challenges are economical, political and regulatory.

• Do we need to get completely decarbonize? Or is 90% good enough?
  • Big debate in us about banning ICE’s vs just making driving very expensive.
• How quickly do we need to decarbonize?
  • Costs of wind and solar, batteries and heat pumps are falling rapidly. Should we wait?
• How to get there? Stick (Taxes) or Carrots (Subsidies)?
  • Should the rich be given subsidies?
    

Key insight of economics is that we want to maximize net benefits

Course overview

Goal 1 of the class: Learn how to apply econ toolkit to an important policy problem

• Econ is the study of how to “best” allocate scarce resources
  • There are tradeoffs! Want to max net benefits
• Think on the margin
• Use economic models to predict and understand human behavior
• Use incentives (ie prices) rather than bans
• Market power: firm’s don’t always behave as we’d want them to

Goal 2: Teach you about energy markets

• Energy markets have some unique features that make them different from other markets
• Understanding these features is essential for applying economics to energy and environmental policy
• We’ll go over basic energy terminology and concepts over the course of the semester
• Useful for those of you who want to work in the energy sector

AI has changed the way I approach this course

• Previously more focused on problem sets, applying basic econometrics and project work
• This year I’m assuming that the way that you all use AI makes those exercises less useful (and uninformative for grading)
• Instead, I’m focusing more on in-class activities and discussion
• Idea is to hone the skills that are actually valuable in today’s AI powered work place
  • Critical thinking and ability to apply econ concepts

• In class exercises will help, but they are not enough for you build lasting knowledge (or to do well on the exams)
• “Homework” will be assigned after most classes.
• You can use AI, but you should use it to help you learn, not to do the work for you

There will also be some more ambitious (but short) pre-class assignments

• While these are crazy times in higher ed, I’m still trying to be an AI optimist.
• AI has made the hardest parts of my old assignments much less painful
• Coding is incredibly easy now. But you still need to practice giving AI problems, implementing the solutions, and interpreting the results.
  • I’ve planned some short assignments which basically ask you to vibe-code something and then we’ll discuss in class.
• Math should also be much less of a barrier than before.
  • The power of economics comes from its formality, and the core insights and models all require some math.
  • In previous years, I avoided equations, derivatives, statistical identities because I didn’t have time to re-teach these concepts.
  • This year I’m assuming that you can use AI to help you if you need a refresher on any of these concepts (or if you don’t understand some math in the slides or in an assigned paper).
  • I think this will allow us to go much deeper in our discussion of the economics of energy and environmental policy.

Syllabus

Up next: Review of markets and market failures

Complete the semester start survey prior to next class