- US spends more than $1.3 trillion on energy each year
- Approx $4,000 per capita, 6% GDP
- Moreover, this energy supports most other consumption.
- Integral for economic development too
- Therefore, sense in which it is going only going to become more important over time
One goal of this course is to simply provide an economic introduction to these important markets
Much of this class will focus on regulation and public policy aimed at improving energy markets.
Two reasons why we think unregulated energy markets will not be economically efficient:
Externalities from energy production/ consumption
These are textbook market failures: ALL economists agree regulation can increase welfare.
Historically prices were set by the government
By 1970's, regulatory inefficiency was increasingly apparent
- Nuclear power plants coming in way over cost
- Gasoline and natural gas shortages common
Response has been to gradually deregulate these markets
- Electric power deregulation
- PURPA (1970s)
- Wholesale markets (1990's)
- Natural gas wellhead prices deregulated (1978 - 1985)
- Oil price controls removed (1981)
Many energy markets remain imperfectly competitive
Energy production and consumption also associated with many social costs
BP Oil Spill, Gulf of Mexico, 2010
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.
Negative externalities will be oversupplied by the market.
To produce energy, humans took a lot of previously sequestered carbon and put it in the atmosphere.
75% of global CO2 emissions come from energy
- Other big sources are deforestation and industrial production (like cement and steel)
We need to switch essentially all energy use to electric power
- transportation (!)
Then decarbonize electricity production as fast as possible
- shut down coal plants [carbon capture and storage]
- switch to wind and (mainly) solar
Increase energy efficiency of durables (ACs, water heaters, etc)
US currently undergoing an oil and gas boom
- Need to understand context
- some unique features complicate standard prescriptions
- we'll review important institutional details
- Use economic theory
- understanding (and harnessing) incentives is essential for efficient regulation
- must think on the margin!
Theory and engineering are important, but many policy questions are empirical
- Use modern, rigorous empirical methods
- Emphasis on causality
- what can be said with the available data?
- Study recent, rigorous, policy-relevant empirical literature
- Emphasize methods employed (and how they relate to the policy question) as well as results
- Use what you've learned to identify and answer your own energy policy question