1. Energy Policy Robert P. Murphy Mises University 2014 Robert P. Murphy Mises University 2014

2. OUTLINE I.Energy Supplies I.“Market Failure” I. Fuel Economy Standards I. “Social Cost of Carbon”

3. Labor-Time Needed for Energy Source: Energy, the Master Resource

4. Paradox? Oil Reserves INCREASE Over Time World Crude Oil, Billions bbls, Proved Reserves Source: Energy, the Master Resource

5. Will We Run Out of Oil? Based on Year 2000 Consumption Rates Source: Energy, the Master Resource

6. Plenty of Fossil Fuels, If Needed Years of Consumption as of 2003 Source: Energy, the Master Resource

7. Production Up, Pollution Down Emissions of EPA’s 6 Criteria Air Pollutants Source: Energy, the Master Resource

8. 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?

9. Gov’t Already Subsidizes “Alternatives”

10. Tradeoff 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

11. “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.

12. 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.

13. Two 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…

14. Recent White House Working Group Estimate (May 2013) Year SCC in 2007 $/ton CO2 (avg of outcomes, 3% discount rate) 2010$33 2020$43 2030$52 2040$62 2050$71

15. Initial Benefits of Global Warming SOURCE: Tol (2009) “The Economic Effects of Climate Change” JEP. >0 means Global Benefits

16.  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 Carbon Benefits

17. Working Group Estimate (May 2013) Global vs Domestic Year Global SCC as reported in document/media Range of Domestic SCC 2010$33$2 - $8 2020$43$3 - $10 2030$52$4 - $12 2040$62$4 - $14 2050$71$5 - $16

18. 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)

19.  Discount Rate Crucial in May 2013 Estimates Year GlobalS CC at 7% Global SCC at 5% Global SCC at 3% (headline #) Global SCC at 2.5% 2010??$11$33$52 2020??$12$43$65 2030??$16$52$76 2040??$21$62$87 2050??$27$71$98