Economics -energy market exam
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SlidesEnergyEfficiency.ppt
Energy Efficiency
Energy Efficiency
- Improvements in energy efficiency are a major part of all proposals for significant reductions in global GhG emissions.
- Higher energy efficiency can also yield other air quality improvements as energy use falls
- lower emissions from autos & electricity generators
- Moreover, energy efficiency gains are often described as being among the very least expensive ways to reduce emissions. Indeed, it is often argued that many energy efficiency gains can be achieved with direct economic benefits that exceed the costs.
- As environmental economist Robert Stavins puts it: EE gains are not just a free lunch, they will pay you to have lunch.
- For example, see the McKinsey global GhG emissions abatement curve
Energy Efficiency
- Improvements in energy efficiency are a major part of all proposals for significant reductions in global GhG emissions.
- Higher energy efficiency can also yield other air quality improvements as energy use falls
- lower emissions from autos & electricity generators
- Moreover, energy efficiency gains are often described as being among the very least expensive ways to reduce emissions. Indeed, it is often argued that many energy efficiency gains can be achieved with direct economic benefits that exceed the costs.
- As environmental economist Robert Stavins puts it: EE gains are not just a free lunch, they will pay you to have lunch.
- For example, see the McKinsey global GhG emissions abatement curve
Global CO2 Abatement Cost
An Energy Efficiency (EE) Gap
- McKinsey MAC graph highlights EE opportunities
- It includes many EE improvements with positive NPV (negative abatement cost)
- But there is also lots of evidence that firms and households are slow to make EE investments on autos, appliances, HVAC, housing, etc.
- Big question – WHY aren’t more of these investments being made??
An Energy Efficiency Gap
- Economic studies from 1980s document very high implicit discount rates implied by consumer choices over appliances with different costs and energy efficiencies. Analysts using a variety of methodologies found implicit discount rates ranging from 25 % to over 100 %.incentives (e.g., landlord vs tenant)
An Energy Efficiency Gap
- Economic studies from 1980s document very high implicit discount rates implied by consumer choices over appliances with different costs and energy efficiencies. Analysts using a variety of methodologies found implicit discount rates ranging from 25 % to over 100 %.
- Possible reasons for an EE gap?
- Lack of information about EE opportunities, or about size of savings
- Lack of access to financing for households
- Myopia or bounded-rationality of decision-makers
- Split incentives (e.g., landlord vs tenant)
Federal EE Programs
National Appliance Energy Conservation Act (1987)
Mandatory standards for energy efficiency of household appliances. To ensure that manufacturers are building products that are at the maximum energy efficiency levels that are technically feasible and economically justified.
Energy Star program - https://www.energystar.gov/
Corporate Average Fuel Economy (CAFÉ)
Regulations first enacted by Congress in 1975, after the 1973–74 Arab Oil Embargo, to improve the average fuel economy of cars and light trucks produced for sale in the US
State/Local EE Programs
- State Programs
- There are many, many state-level EE programs –
- see the Database for State Incentives for Renewables and Energy Efficiency (DSIRE)
- Arizona
- Property tax exemption for certain energy-efficient technologies or improvements
- AZ Corporation Commission Energy Efficiency mandate for utilities
- Utility Programs
- https://www.tep.com/efficiency/
Potential Market Failures Potential Policy Options
Energy market failures
Environmental externalities Emissions pricing (tax, cap-and-trade)
Average-cost electricity pricing Real-time pricing; market pricing
Energy security Energy taxation; strategic reserves
Capital market failures
Liquidity constraints Financing/loan programs
Innovation market failures
R&D spillovers R&D tax credits; public funding
Learning-by-doing spillovers Incentives for early market adoption
Information problems
Lack of information; asymmetric info Information programs
Principal–agent problems Information programs
Learning-by-using Information programs
Potential Behavioral Failures
Bounded rationality Education; information; product standards
Heuristic decision-making Education; information; product standards
Buildings and EE
- We know that there are some market failures regarding energy use for buildings
- What does EE look like in the building/construction sector?
U.S. Energy Consumption by Sector*
* DOE Buildings and Energy Data Book (2010): http://buildingsdatabook.eere.energy.gov/
Residential Building
- Uses more energy than commercial buildings
- Major industry in Arizona (historically)
- Pepper Viner Homes
- What are main household energy uses? See next slide
* DOE Buildings and Energy Data Book (2010): http://buildingsdatabook.eere.energy.gov/
How do I know if my house or building is green?
- The world of environmental certification for homes and buildings
- US Green Building Council introduced its Leadership in Energy and Environmental Design (LEED) program in 2000
- LEED Video Clip
- Other private programs
- E.g. – NAHBGreen – National Green Building Program
- Federal programs
- Energy Star
Evidence on value of green certification for commercial buildings?
- Split incentive problem can cause market failure – Do we need government intervention to solve this?
- A couple of recent studies provide evidence that green certification is a signal translates into extra market value – the studies and results are described in: http://insight.gbig.org/leed-value-of-a-market-signal/
Installed costs lagged wholesale PV module price (2007-2009) decline $0.2/W compare with $1.3/W
*
Economic Impact of EE
- EE programs lead to appliances – refrigerators, AC units, TV’s, … – that are less costly to use, since they use less energy.
- Does this cause behavior to change??
Do EE standards deliver?
- Note that more energy efficiency means that the effective price-per-unit of energy services falls
- Greater EE implies LOWER price per unit of energy services
- What happens when you lower the price of something??
- For EE, this change in behavior is called the rebound effect.
- An extreme version is, backfire effect.
Energy Efficiency in Transportation
- The centerpiece of US energy efficiency policy for transportation is the Corporate Average Fuel Economy (CAFÉ) policy
- CAFÉ established in 1975
- Mandated an 18 MPG fleet average for model year 1978
- CAFÉ progressively raised since 1978 for cars and light trucks
CAFÉ over time
Year Cars Light Trucks
1980 20 15
1990 27.5 20
2000 27.5 20.7
2010 27.5 23.5
2015 35.0 28.2
2025* (goals) 54 46
CAFÉ Computations
- Each automaker is required to meet the CAFÉ MPG standard for the average MPG of their fleet of new model autos (and light trucks).
- An automaker that sells cars in U.S. must pay penalties if its fleet doesn’t meet CAFÉ standard
- Currently $55 per MPG above standard, per vehicle sold (had been scheduled to rise to $140)
Do EE standards deliver?
Reformed CAFÉ*
- In 2008, under the Energy Independence and Security Act (EISA), NHTSA’s authority to set the CAFE standards was altered.
- First, EISA mandated attribute-based standards for cars, meaning that each vehicle would be subject to its own standard based on its attributes (in this case vehicle size), rather than using one standard for all cars or for all trucks. In addition, under the new rules, NHTSA was required to set standards for vehicle fuel efficiency each year (whereas before, the agency was allowed to do so) and was required to set them at the “maximum feasible” levels through 2030.
- The other major change was that EPA was given authority to regulate GHG emissions and would now do so under the CAFE standards. The so- called “reformed standards” were established jointly by NHTSA and EPA, with the first phase for model year (MY) 2012–2016 vehicles finalized in 2011, and the second phase for MY 2017– 2025 vehicles finalized in August of 2012.
* See Virginia McConnell, RFF 2013
Main Economic Effects of
CAFÉ Standard
- Benefits of reducing U.S. demand for oil
- Smaller macroeconomic effects of oil price shocks
- Counter OPEC market power (reduce oil price mark-ups and final oil prices)
- Reduced environmental impacts
- Lower CO2 emissions
- Can we quantify these benefits?
- Improvements in local air quality?
Main Economic Effects of
CAFÉ Standard
- Changes in incentives for automakers
- Pricing and production of auto and truck models – go through analysis in class
- Incentives for design features and for R&D and innovation
- Are there market failures here?
- Auto design
- Auto R&D and innovation
Other Economic Effects of
CAFÉ Standard
- Role of prior fuel taxes
- Rebound Effect
- CAFÉ standard reduces gallons/mile; may increase # miles travelled (by lowering relative cost of driving)
- Rebound effect likely offsets 10 – 20% of overall fuel reduction
- More miles travelled
- Greater congestion costs
- More accidents/deaths
- Fleet mix and safety
15
Exhibit 5
The first conclusion that stands out is that a significant portion of the abatement
potential, approximately 7 gigatons of annual emissions on the left side of the
curve, would be at a negative cost to society. In other words, these actions
would earn a positive economic return derived largely from savings in energy
costs through, for example, more energy-efficient lighting or more fuel-efficient
vehicles.
The second key point is that under the cost curve’s assumptions, the world can
achieve the 27 gigatons per year of abatement required in 2030 to stay below
500 ppmv for a marginal cost of under €40 per ton. Finally, the cost curve
counters a number of myths about carbon abatement—for example, that there
are only limited low-cost abatement opportunities in the developed world or that
we can only achieve abatement with new technologies (Exhibit 6).
If the world were to take these abatement actions, the annual total cost to
society would be €500 billion–€1,100 billion in 2030 or 0.6–1.4 percent of that
year’s projected global GDP, assuming growth continues on its long-term trend.
This cost estimate is roughly in the middle of the range of 0.2–3.0 percent of
