energy policy
DESCRIPTION
Energy Policy. Robert P. Murphy Mises University 2014. OUTLINE. Energy Supplies “ Market Failure ” Fuel Economy Standards “ Social Cost of Carbon ”. Labor-Time Needed for Energy. Source: Energy, the Master Resource. Paradox? Oil Reserves INCREASE Over Time. - PowerPoint PPT PresentationTRANSCRIPT
Energy PolicyEnergy Policy
Robert P. MurphyMises University 2014
Robert P. MurphyMises University 2014
OUTLINE
I. Energy Supplies
I. “Market Failure”
I. Fuel Economy Standards
I. “Social Cost of Carbon”
Labor-Time Needed for EnergyLabor-Time Needed for Energy
Source: Energy, the Master Resource
Paradox? Oil Reserves INCREASE Over Time
Paradox? Oil Reserves INCREASE Over Time
World Crude Oil, Billions bbls, Proved ReservesSource: Energy, the Master Resource
Will We Run Out of Oil?Will We Run Out of Oil?
Based on Year 2000 Consumption RatesSource: Energy, the Master Resource
Plenty of Fossil Fuels, If NeededPlenty of Fossil Fuels, If Needed
Years of Consumption as of 2003Source: Energy, the Master Resource
Production Up, Pollution DownProduction Up, Pollution Down
Emissions of EPA’s 6 Criteria Air PollutantsSource: Energy, the Master Resource
Government in Energy Markets
Government in Energy Markets
There are many claims of “market failure” to justify government intervention in specific areas. E.g. “natural monopoly” in electricity and natural gas delivery.
But must be tempered with general Austrian critique of central planning (incentives and calculation problem).
Do beer companies have “rolling blackouts” in the summer?
Gov’t Already Subsidizes “Alternatives”
Gov’t Already Subsidizes “Alternatives”
Tradeoff in CAFE standardsTradeoff in CAFE standards• To conserve energy, mitigate
climate change, and reduce foreign dependence, gov’t passes fuel economy mandates.
• To comply with fuel economy mandates, manufacturers make lighter vehicles.
• Since standards introduced in the 1970s, caused an estimated 42,000 – 125,000 traffic fatalities.
Source: http://www.americanthinker.com/2010/04/death_by_cafe_standards.html
“Social Cost of Carbon” (SCC)“Social Cost of Carbon” (SCC)• The social cost of carbon (SCC) is “an estimate of the
monetized damages associated with an incremental increase in carbon emissions in a given year.” (White House Technical Support Document May 2013)
• If negative, SCC means carbon emissions produce net benefits to other parties.
Careful! SCC can be expressed in $/ton of carbon dioxide or of carbon; latter is 3.67 times higher.
Why Is SCC Important?Why Is SCC Important?
• Estimates of SCC already being used to guide federal agencies in cost/benefit of proposed regulatory actions.
• In economics literature, SCC is closely related to concept of “optimal” carbon tax or “cap and trade” program.
Two ApproachesTwo Approaches• A carbon tax seeks to “internalize the
externality” of greenhouse gas emissions. Based on work of AC Pigou.
•A “cap and trade” program has gov’t issue fixed amount of permits entitling holder to emit a ton of greenhouse gases. Can be traded.
• Two approaches equivalent, but only if we assume certainty. In practice…
Recent White House Working Group Estimate (May 2013)
Recent White House Working Group Estimate (May 2013)
YearSCC in 2007 $/ton CO2 (avg of outcomes, 3%
discount rate)
2010 $33
2020 $43
2030 $52
2040 $62
2050 $71
Initial Benefits of Global WarmingInitial Benefits of Global Warming
SOURCE: Tol (2009) “The Economic Effects of Climate Change” JEP.
>0 means Global
Benefits
Estimates of SCC Uncertain; Recently Fallen Estimates of SCC Uncertain; Recently Fallen
SOURCE: Tol (2011) “The SCC,” ESRI Working Paper #377
(Tol’s survey of studies that use 3% “pure time preference” rate.)
Mean
Upper 90% Confidence Interval
CarbonBenefits
Working Group Estimate (May 2013) Global vs Domestic
Working Group Estimate (May 2013) Global vs Domestic
Year
Global SCC as reported in
document/media
Range ofDomestic
SCC
2010 $33 $2 - $8
2020 $43 $3 - $10
2030 $52 $4 - $12
2040 $62 $4 - $14
2050 $71 $5 - $16
Discount Rate Is Crucial
Discount Rate Is Crucial
• Damages occur in distant future, so discount rate for turning future $$ into today’s $$ has huge impact on calculated SCC.
• “[A]gencies traditionally employ…discount rates of both 3% and 7% in accordance with OMB Circular A-4.” (Working Group 2010)
Discount Rate Crucial in May 2013 Estimates
Discount Rate Crucial in May 2013 Estimates
Year
GlobalSCC at
7%
Global SCC at
5%Global
SCC at 3%(headline
#)
GlobalSCC at 2.5%
2010 ?? $11 $33 $52
2020 ?? $12 $43 $65
2030 ?? $16 $52 $76
2040 ?? $21 $62 $87
2050 ?? $27 $71 $98