US spends almost $1 trillion on energy each year
Moreover, energy is essential for modern life
Integral for economic development too
Therefore, sense in which it is going only going to become more important over time
One goal of this course is to simply provide an introduction to these important markets
Two classic economic justifications for regulation:
Externalities from energy production/ consumption
These are textbook market failures:
All economists agree regulation can increase welfare
Historically prices were set by the government
By 1970's, regulatory inefficiency was increasingly apparent
Electric power deregulation
Natural gas wellhead prices deregulated (1978 - 1985)
Oil price controls removed (1981)
What are the costs of imperfect competition in energy markets?
Which segments of energy markets shouldn't be deregulated?
Which markets / firms should be broken up more?
BP Oil Spill, Gulf of Mexico, 2010
An externality exists when the consumption or production choices of one person or firm enter the utility or production function of another entity without that entity's permission or compensation.
From a social perspective, negative externalities will be oversupplied by the market.
In this context, economists universally agree that regulation correcting this market failure can improve welfare.
Good evidence that it increases mortality and morbidity rates, reduces property values, and even impacts test scores or worker productivity
Global combined land and ocean surface temperature anomalies relative to the average from 1986 to 2005. (IPCC 2014)
Well known physical relationship
Current CO2 equiv. concentrations 450 ppm
Reduce / reverse rate of deforestation
Change industrial production processes (example: cement production)
Switch essentially all energy use to electric power
Decarbonize electricity production as fast as possible
Increase energy efficiency of durables (ACs, water heaters, etc)
2020 US LCOE ($/MWh), from BNEF
How much will it cost to make our energy system ``greener''?
How should the we meet our CO2 targets?
Answer to these questions depends largely on what happens to hydrocarbon and transportation markets
We'll take an economic approach to answering these questions