1. Chapter 2 Energy, Markets, and Society Part B
Peter Schwarz, Professor of Economics
and Associate, Energy Production and Infrastructure Center (EPIC),
University of North Carolina Charlotte

2. Chapter 2 Outline (continued)
I. Introduction
II. What is Different about Energy?
III. Efficiency (continued)
IV. Social Welfare
V. Sustainability
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3. Efficiency: Economies of Scale
Declining long run average cost (LRAC) over relevant range of demand
Natural monopoly
Transmission, Distribution
Generation? Marketing?
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4. Efficiency: Other Market Failures
Imperfect information
Second-best world
Macroeconomic instability
Non-efficiency market failures
Inequity
Unsustainability
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5. Efficiency: Imperfect Information
Asymmetric information
You buy compact fluorescent bulb that is predicted to last 20x longer.
Seller knows that it won’t last that long if you turn lights on and off frequently.
Also, you may not be aware of mercury content.
Or difficulty of disposing of burned-out bulbs.
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6. Second-best considerations
Is subsidy for alternative fuels justified?
Yes, if carbon (or other) emissions go unpriced.
Renewable Portfolio Standards (RPSs) and Feed-in-Tariffs second-best policies
If you rule out carbon tax, cap-and-trade.
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7. Efficiency: Macroeconomic Instability
Rising energy prices have triggered most of the recessions in the U.S. since 1973
Inflation
Unemployment
Green energy could provide jobs
But at what cost?
Recent paper by Meredith Fowlie, et al.
Looks at government program
Do Energy Efficiency Investments Deliver? Evidence from the Weatherization Assistance Program
investments-deliver/
Stagflation
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8. Equity Ex. Taiwan a repository for old car batteries
Can leak battery acids
Including lead.
Chester PA
Used for toxic wastes
Environmental (in) justice
Larry Summers
Taiwan ex. is efficient.
Equity-efficiency tradeoff
The Memo
DATE: December 12, 1991
TO: Distribution
FR: Lawrence H. Summers
Subject: GEP (Global Economic prospects)
'Dirty' Industries: Just between you and me, shouldn't the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Less Developed Countries]?
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9. Sustainability Special form of inequity Different ethic
Not including future generations in your decision
Precautionary Policy
Do no harm
Different ethic
Value ethic
Motive matters
Vs. utilitarianism
Consequences matter
But not motive.
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10. Social Welfare Many possible efficient points Which to choose?
Some may favor wealthy, others favor the poor
Which to choose?
Equity criteria
Simplest: $ = $
Just choose the one with the largest net gain.
As in Cost-Benefit Analysis
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11. Social Welfare (2) Pareto Pareto Improvement
Possible to make someone better off without making someone else worse off.
Efficiency
Impossible to make someone better off without making someone else worse off.
Hicks-Kaldor
Potential Pareto Efficiency
Winners could compensate the losers
But compensation does not take place
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12. Social Welfare (3): CBA Consumer Surplus (CS) Producer Surplus (PS)
Total Surplus = CS + PS
Use market values for price, cost in competitive market if available
Otherwise approximate competitive values
If no markets, calculate shadow price.
Price of carbon
EU market
Adjusted for competition
Or survey of willingness to pay for C reduction.
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13. Social Welfare (4): CBA (2)
Example
Alaskan Pipeline
Trans-Alaskan Pipeline (TAP)
Alternative McKenzie Valley Pipeline (MVP)
MVP better from efficiency and equity perspective
No tradeoff
Which was selected?
TAP
More profitable for producers.
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14. Sustainability Economic Environmental Social (Physical) Capital
Human Capital
Natural Capital
Natural resource accumulation/depletion
Social Capital
Relationships among people that foster production
Triple Bottom Line
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15. Sustainability (2): Energy
Is the future better off if we spend $1 billion today on carbon sequestration project that has $3 billion benefit 50 years from now, or if we invest the money at a 3% interest rate?
Strong
Leave future as much of a specific resource as we have today.
Weak
Leave future as much production capacity as we have today.
Robert Solow: An obligation to conduct ourselves so that we leave to the future the option or the capacity to be as well off as we are.
Weak sustainability
Examples: Norway– Oil revenues go into pension system.
Texas – Oil revenues go towards University system.
Alaska – Oil revenues pay dividend to current citizens (not sustainable).
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16. Sustainability (3): Energy (2)
Efficiency misses evolution (very slow changes)
Brock and Xepadadeas (2003)
So sustainability corrects efficiency bias.
Corrects “Defective Telescopic Faculty.”
Pigou (1932)
Equity
Future generations are not here to represent themselves
John Rawls: Theory of Justice (1971)
Veil of ignorance
We don’t know if we’ll be born today or in the future.
We’re only as well off as our worst-off citizen.
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