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Energy & Environmental Economics (Basics I)

2015-2016

Introduction.Measurement. Energy Balances. The Italian and European energy systems through the energy

balance

General information

• Title: Energy & Environmental Economics • Classes: 48 hr , energy and environment

approximately 50/50% • Examination MAFIB students: written, consisting of two/three

open-answer questions, including the comment of some data (chart, table etc.)

EGM students: a written essay, of 6.000/8.000 words, based on the contents of the course and on a set of assigned readings + a discussion of the essay (possibility to choose the MAFIB mode)

Materials (I)

Energy:

Evans, J.-Hunt,L.C. (eds.)

International Handbook on the Economics of Energy Edward Elgar,Cheltenham 2009

Chapters: 1;3-4-5-6-7-8; 11; 16; 20; 22.

Materials (II)

Environment Perman, R.-Common, M.-Maddison, D.-McGilvray, J Natural Resource and Environmental Economics Pearson, Harlow, 2011 Chapters 1,2,4 (paragraphs 4.8-4.9-4.10-4.11), 5 (except paragraphs

5.9 to 5.12), 6 , 9, 11 and 12. UN (1987) Our Common Future: Report of the World Commission on

Environment and Development Chapter 2: Towards Sustainable Development: pp. 36-52 http://conspect.nl/pdf/Our_Common_Future-

Brundtland_Report_1987.pdf

Materials (III)

Slides of the course (to be published on the course e-learning page) represent an important part of the examination materials, at least on some subjects. Moreover, some “flavour” of real-world data can be appreciated by going though the slides.

Some general remarks on method

Method I: The other disciplines

Energy & environmental economics is mainly

ECONOMICS

NOT engineering, physics, chemistry environment & climate sciences, although we should learn from these

THEREFORE…

Method II Course requirements: theory

Knowledge of (at least) the basics of economic reasoning is required to any student

(utility-profit maximization-costs-demand theory, externalities & public goods etc.)

Important: by “Economics” I mean what in Italian is specifically called “Economia Politica”

Method III Course requirements: Empirics

Energy and environmental economics are mainly applied subjects. This does not mean:

- that ignoring economic theory is allowed (see previous slide)

while:

- statistical knowledge cannot be replaced by some loose conversation on tables and graphs

If one ignores economic theory and statistics, one is just doing

journalism,

not energy/environmental economics

In the past few years I have noticed serious lacks of economic and statistical knowledge in the students attending this course. Take care!

Some (very few) review lectures are included in the program (the first one very soon)

Method IV Economics and Medicine

Some economists like to present themselves as the “doctors” of the society, capable of healing its many diseases. This is a bad habit indeed !

However, it is true that economic investigation follows procedures that are similar to what doctors do when diagnosing (possibly treating) a disease

Doing applied economic analysis . A comparison with medicine

Medicine • The patient comes up with a

problem (perceived symptoms)

• The physician examines the patient and orders additional exams. The choice of exams is guided by “theory”

• Evaluation of the available evidence and possible new round of exams

• Diagnosis, prognosis and therapy

Economics • The economic system exhibits

some interesting, unusual, relevant (not necessarily bad) phenomenon

• Economists examine the prima facie evidence and proceed to further enquiries, guided by a “model”

• Evaluation of the available evidence and possible new round of enquiries

• Explanation, forecast, and (possibly) policy recommendations.

Oil Price

Diagnostic Example One

The symptom source: www.eia.gov/dnav/pet/xls/PET_PRI_SPT_S1_D.xls

0

20

40

60

80

100

120

140

feb 01,

2013

apr 01,

2013

giu 01,

2013

ago 01,

2013

ott 01,

2013

dic 01,

2013

feb 01,

2014

apr 01,

2014

giu 01,

2014

ago 01,

2014

ott 01,

2014

dic 01,

2014

feb 01,

2015

apr 01,

2015

giu 01,

2015

ago 01,

2015

Brent spot price ($ per barrel)

Brent spot price ($ per barrel)

First step: understanding the data

• What kind of data are these ?

- What is Brent ?

- What is a barrel?

- What is EIA ?

Source: www.eia.gov/dnav/pet/xls/PET_PRI_SPT_S1_D.xls http://www.eia.gov/

An overview of the course

• Energy: definitions, measurement, estimation, forecasting

• The energy industries: oil, gas, coal, nuclear, renewables, electric power

• Energy policies and instruments • Environment and the economy. Sustainability • Measuring the environment • Evaluation of environmental goods • Environmental policies and instruments • International Environmental policies

Natural resource Economics

Any human activity (including economic ones) entails a direct or indirect use of natural resources.

Natural resources can be distinguished according to two criteria:

- Energy vs Non-energy resources

- Public vs private natural resources

Energy economics deals with exploitation, transformation exchange and consumption of nrg natural resources (public and private as well)

Examples: oil (an nrg private natural resource). photovoltaic nrg (a public nrg natural resource) Environmental economics deals with exploitation,

transformation exchange and consumption of public natural resources (nrg & non-nrg as well)

Examples: landscape (a non-nrg public natural resource). The stream of a river used to operate some hydroelectric

plants (an nrg public natural resource)

Other natural resources

There obviously exist other private, non-nrg natural resources (example: diamonds) which fall outside the scope of E&E economics.

1. Energy: Definitions and Measurement Units

2. Sources, Vectors, Users

3. The national nrg balance

4. A broad view of the Italian and European nrg systems

What is Energy?

• “It is important to understand that we have no exact idea of what energy is”

(P. Feynman).

What is energy ?(II) A strong background in physics or chemistry of nrg is not required to study the economic aspects of it (at least in the beginning) although some elementary notion can be useful. In general, nrg is the capability to do work (in the physicists sense) Work is measured in Joules (and equivalents) Joule: the variation in kinetic energy required to move a mass of 1 kg by 1 metre with an acceleration of 1 metre/second per second.

What is energy (III)

Correspondence between kinetic nrg and thermal nrg and between work and heat Calorie: nrg required increase the temperature of 1 gram of distilled water from 14°.5 to 15°.5 C 1 calorie = 4,184 Joule (Joule experiment: http://demonstrations.wolfram.com/JoulesExperiment/) Correspondence between work and electric nrg: 3600 joules= 1 watt/hour

Commonly used measurement units for Energy

• British Thermal Unit (Btu): thermal energy required to increase the temperature of 1 pound of water from 59,5° to 60,5° F (=1055,56 Joule)

• Tons of Oil Equivalent (TOE-Tep) heat produced by burning 1 metric ton of (standard) oil (=10.000 Kcal)

Primary Energy Sources

Non-renewables (Exhaustibles) Renewables

Fossil fuels -Oil (crude) -Natural Gas -Coal -Nuclear Fuels (uranium, deuterium)

-Hydro (& Tidal) - Wind -Solar -Biomass -Geothermal

Energy vectors or secondary sources

Energy must be given a form which is suitable to specific uses. Then primary sources are often transformed into secondary sources before use (with some loss of energy in the process)

• Steam

• Biofuels

• Hydrogen

• Electric power

• Products from oil and coal (gasoline, LPG, coke…)

The National Energy Balance(NEB)

• An accounting framework which organizes and summarizes the information about the energy system in a consistent and orderly way.

• It is to nrg economics what national accounts are to macroeconomics

• It is formulated both in physical measurement units, (which differ according to the source) and in nrg units (toe or teracalories)

Energy Balance

Primary source

Production+Imports+Initial Inventories=

Exports+End Inventories+ Gross Internal Consumption

Gross Internal Consumption =Primary Industry Consumption+Transf. to the secondary Industry+Final Consumption (nrg & non-nrg)+Bunkers

Secondary Source

Imports=

Exports + Gross Internal Consumption

+ Gross Internal Consumption +Transf. From Primary Industry = Secondary Industry Consumption+Final Consumption

NEB: the fundamental stucture

Sources Uses

Imports

Inventories (beginning)

Production

Exports

Inventories (end of period)

Balance: Gross Internal

Consumption

Structure of Gross Internal Consumption

Sources Uses

Gross Internal Consumption

Consumption and Losses of

Energy Industry

Final Uses of energy

NEB: Primary sources

Structure of Gross Internal Consumption (primary sources)

Sources Uses

Gross Internal Consumption

Consumption and Losses of The

primary Energy Industry

Transfers to secondary energy

industries

Final Uses of the primary source

NEB : secondary source

Structure of Gross Internal Consumption (secondary sources)

Resources Uses

Gross Internal Consumption

Transfers from primary energy

industries

Consumption and Losses of The

secondary Energy Industry

Final Uses of the secondary

source

Definition of GIC for a secondary source

Reources Uses

Imports

Inventories (beginning)

Production

Exports

Inventories (end of period)

Balance: Gross Internal

Consumption

NEB: final uses

Structure of final uses

Final Uses

Energy Uses

Non-energy uses

Italy’s NEB 2012 Millions of tons of Oil equivalent

Resources

and

Uses Coal Gas OilRenewa

bles

Electric

PowerTotal

1. Production 0,633 7,047 5,397 24,802 37,880

2. Imports 15,947 55,467 86,278 2,088 9,981 169,761

3. Exports 0,230 0,114 29,173 0,053 0,502 30,072

4. D Inventories -0,214 1,045 -1,087 0,019 0,000 -0,237

5.Gross Internal consumption

(1+2-3-4) 16,563 61,355 63,590 26,818 9,479 177,805

6. Consumption and Losses

of the energy industry -0,328 -1,618 -5,015 -0,008 -41,618 -48,586

7. Transfers to

Electric industry -11,788 -20,565 -3,300 -21,715 57,368

8. Total final uses

(5+6+7) 4,447 39,173 55,274 5,095 25,229 129,218

- industry 4,356 12,285 4,263 0,270 9,810 30,983

- transport - 0,753 36,181 1,273 0,925 39,132

- residential 0,004 25,545 3,675 3,402 13,996 46,621

- agriculture 0,123 2,167 0,151 0,499 2,940

-non-energy uses 0,088 0,467 5,864 - 6,419

- bunkers - - 3,124 - 3,124

year 2012

Italy’s Energy System 1995-2009

Source: Adjusted Italy’s Energy Balances (Courtesy of Enzo Di Giulio)

Italy’s Energy balances are available at http://dgerm.sviluppoeconomico.gov.it/dgerm/ben.as

p

Grwoth rates of final uses

-8

-6

-4

-2

0

2

4

6

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Tassi di crescita degli impieghi finali 1995-2009

Tassi di crescita degli impieghi finali 1995-2009

The structure of final uses (I)

Solidi 4%

Gas 28%

Petrolio 51%

Totale impieghi

finali Rinnovabili

1%

Energia Elettrica

16%

Final uses by source 1995 Solidi

2%

Gas 29%

Petrolio 47%

Totale impieghi

finali Rinnovabili

3%

Energia Elettrica

19%

Final uses by source 2009

The structure of final uses(II)

Industry 32%

Residential 33%

Transportation

33%

Agriculture &Fisheries

2%

Final uses by sector 1995

Industry 24%

Residential 38%

Transportation

35%

Agriculture &Fisheries

3% Final uses by sector 2009

Electric power generation in Italy by source

Coal 20%

Gas 48%

Oil 12%

Renewables 20%

2009

Coal 13%

Gas 19%

Oil 50%

Renewables 18%

1995

Final uses by source: Industry

0

0,05

0,1

0,15

0,2

0,25

0,3

0,35

0,4

0,45

Solidi Gas Petrolio Rinnovabili Energia Elettrica

Industria 1995

Industria 2009

Final uses by source : Tranportation

0

0,2

0,4

0,6

0,8

1

1,2

Solidi Gas Petrolio Rinnovabili Energia Elettrica

Trasporti 1995

trasporti 2009

Final Uses by source: Residential

0

0,1

0,2

0,3

0,4

0,5

0,6

Solidi Gas Petrolio Rinnovabili Energia Elettrica

Terziario e residenziale 1995

Terziario e residenziale 2009

Final Uses by source : agriculture

0

0,2

0,4

0,6

0,8

1

1,2

Solidi Gas Petrolio Rinnovabili Energia Elettrica

Agricoltura 1995

agricoltura 2009

International Comparisons

Source: EU – Statistical Pocketbook 2010

Import dependence

0,0

20,0

40,0

60,0

80,0

100,0

120,0

UK PL RO NL BG SI HR HU LT SK TR ES IT CY MT

Tito

lo a

sse

Net imports/(Bunkers+GIC)

Net imports/(Bunkers+GIC)

Gross Internal Consumption by source

Solid fuels 18%

Oil 37%

Natural gas 24%

Nuclear 13%

Renewables 8%

Other* 0%

Gross Internal Consumption by source 2007 EU-25

Solid fuels 9%

Oil 44%

Natural gas 38%

Nuclear 0%

Renewables 7%

Other* 2%

Gross Internal Consumption by source2007 Italy

Final uses by source

Solid fuels 5%

Oil 42%

Gas 23%

Electricity 21%

Derived heat &

Industrial waste

4%

Renewables *

5%

EU 27 Final uses by source2007 Solid fuels

3%

Oil 43%

Gas 30%

Electricity 20%

Derived heat &

Industrial waste

2%

Renewables *

2%

Italy Final uses by source2007

Power generation by source(TWh)

- Coal 29%

- Oil 3%

- Gas 23% - Other

Power Stations

0%

Nuclear 28%

Pumped Storage

1% Renewables *

16%

Power generation by source2007 EU 25

- Coal 14%

- Oil 11%

- Gas 57%

- Other Power

Stations 0%

Nuclear 0%

Pumped Storage

2% Renewables * 16%

Power generation by source2007 Italy

Energy Intensity

0

200

400

600

800

1000

1200

CH IE DK UK NO AT IT DE SE LU FR NL EL ES PT MT BE CY FI TR SI HR LV PL HU LT SK CZ EE RO BG

Energy intensity 2007