1. Autos in Econ 331b

2. Agenda Wednesday: Autos Section: Misc and oil premium Monday: Continue autos and rebound effect Wednesday: Behavioral energy economics Pset 3 due 2

3. Overview of energy system 3 Energy resources (oil in ground,…) Capital, labor, … Energy fuels (gasoline, electricity, …) Capital, labor, … Energy goods and services (passenger miles, warm house, hot coffee, … Non-energy goods and services Utility: U(c 1, c 1, …, c n ) Market boundary

4. External effects 4 Energy resources (oil in ground,…) Capital, labor, … Energy fuels (gasoline, electricity, …) Capital, labor, … Energy goods and services (passenger miles, warm house, hot coffee, … Non-energy goods and services Utility: U(c 1, c 1, …, c n ); externalities(-)] Production externalities: SO2, CO2, … Consumption externalities: congestion, smog, … Market boundary

5. Pollution MB, MC Private MC MB Market Pollution 5

6. Pollution MB, MC Private MC MB Market PollutionEfficient Pollution Social MC 6

7. Damages and taxes for gasoline use 7 Pollution, health Global warming

8. What are current estimates for US? 8

9. 9 Generic Strategies for Policies A. Taxes on “bads” Carbon tax on CO 2 emissions; taxes on ozone-depleting chemics B. Subsidies on “goods” 1. Subsidies for private actions (usually tax credits, roll-in) “Incentives” for vehicles, electricity, non-oil fuels, ethanol, … 2. Federal expenditures Federal energy R&D, renewable electric, advanced nuclear C. Regulations that are implicit taxes or redistribute private costs 1. Efficiency standards Vehicle (CAFE) standards, appliance standards 2. Misc. market regulations Feed-in tariffs, mandate market shares for renewables (ethanol) D. Innovational strategies (particularly important for long run) Key problem here is that there is a double-externality (pollution and knowledge).

10. Pollution MB, MC Private MC MB Efficient Pollution= Market Social MC Pollution regulation 10 Regulation

11. Pollution MB, MC Private MC MB Efficient Pollution= Market Social MC Pigovian tax Private MC+tax 11 Taxes

12. Current approach in US Aside from gasoline taxes, virtually no energy taxes. Instead, use regulation of new energy-using capital Rationale: - to avoid taxation and fiscal impacts (political) - to induce innovation on energy technology (questionable economics) Questions: - is it an efficient way to reduce energy consumption? - why do we override consumer/producer preferences (“lightbulb socialism”?) - rebound effect. 12

13. DOE regulations on capital equipment 13

14. US Corporate Average Fuel Efficiency “Corporate Average Fuel Economy (CAFE) is the sales weighted average fuel economy, expressed in miles per gallon (mpg), of a manufacturer’s fleet of passenger cars or light trucks with a gross vehicle weight rating (GVWR) of 8,500 lbs. or less, manufactured for sale in the United States, for any given model year.” “Congress specified that CAFE standards must be set at the maximum feasible level. Congress provided that the Department’s determinations of maximum feasible level be made in consideration of four factors: (1) technological feasibility; (2) economic practicability; (3) effect of other standards on fuel economy; and (4) need of the nation to conserve energy. Separates cars from “light trucks” (the growth the SUV culture) Averaging across corporate fleet Harmonic mean 14

15. US standards 15

16. Global standards 16

17. 17 Gasoline (gpm) gpm K Excess cost of gasoline reduction Simple economics of efficiency standards 0 0 1 1 2 2

18. Example of savings from higher mpg with diesel 18

19. Estimated cost of improvement, compact car 19 Nat. Acad. Sci., Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards,2002. Jetta, 2011

20. Cost to reduce gasoline 20 Note: Calculated as [cost per year]/[gallons saved per year]. Important question raised by behavioral economics: Are consumers rational in their choices of gasoline mileage? We return to next week.

21. Critique of CAFE Standards 1.Ineffective because so far from target of policy (mpg rather than gasoline. 2.Ineffective because of “rebound effect” which arises when target wrong input (capital instead of fuel). 3.Ineffective because covers such a small fraction of market (automobiles in global carbon market). 4.Not cost-beneficial if already have energy taxes that cover the externality. 5.Blunt instrument that leads to SUV culture. 21