Energy Policy

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