Energy Economics Assignments
Name
Institution
Question #1
Climate change remains a very important theme shaping the general local and global social, economic, and political discourse. This is majorly because a majority of its effects are unknown and very hard to predict in the short and long term. The negative effects of climate change remain high and very costly for most human populations in developing and developed nations. As such, there is a need for experts to anticipate the effects of climate change. Most of the world powers have failed to achieve a middle ground of compromise and reduce their over-dependence on climate change. Various factors are usually considered in creating future predictions on how climate change might affect society in general. This includes the growth of technology, investment trends in certain fields, policies, and the general world political and stability trends. Politics play an important role in climate change as it defines the policymakers, and their views play an important role in shaping policies for the most part. This can be very unpredictable and uncertain, as it may result in the development of policies during a specific period and tearing down the same policies in another. There comes a need for a fool-proof strategy to be deployed to define policies and their impacts in the future to maintain the integrity of the environment and the people who depend on the said environment.
In the section first section of this report, the paper outlines what Integrated Assessment Models are and how they were implemented and how they worked to sustain or predict certain trends key for policymaking on a future date. It also outlines whether they were successful and what degree they helped the policymakers define current practices around emission and pollution. Summarily in the article Decompositions and Policy Consequences of an Extraordinary Decline in Air Pollution from Electricity Generation by Stephen P. Holland, Erin T. Mansur, Nicholas Z. Muller, and Andrew J. Yates, researchers used the integrated assessment model or IAM to calculate the overall economic value gained from the extraordinary decline in emission from major US power plants. They measured the local and global air pollution damages cost from various perspectives, gaining a holistic view into how the earlier proposed models in 2010 contributed to the general wellness and reduction in plant emission eight years later. The research identifies that in 8 years, the recommendations made in 2010 to increase the use of renewable energy and decry the use of fossil-based energy sources manifested in a 46% reduction of damages costs which is equivalent to $112 billion. In the subsequent article, titled Is Air Pollution Regulation Too Stringent? by Joseph S. Shapiro and Reed, Walker scientist creates an analysis on the marginal costs versus marginal benefits of the introduced air pollution regulation regimes, i.e., “important yet underexplored provision of the Clean Air Act requiring new or expanding plants to pay incumbents in the same or neighboring counties to reduce their pollution emissions” (Shapiro, Walker, 2020, 2). They majorly focus on its effects across the US to assess its general usefulness.
Generally, integrated assessment models or IAM outline the technologies, institutional requirements, and the roles policies (social, economic, cultural, and political) play in achieving a certain goal or target in regard to climate change. With increased technological innovations and increased political instability across the world, there is a need to establish a model that predicts the outcome of a just implemented policy and its effects in the future. Integrated Assessment Models do not predict a scenario but provide an exploration of the future or the past to see how useful certain paths taken have worked to limit climate change or increase its effects across the local space and the world. Effectively, in the two papers, the IAM allows the scientists and policymakers to have a reasonable scene of the past and, as such, work to provide them an effective and reasonable scene in the future.
In both papers, researchers use integrated assessment models to inform policymakers on guiding principles that will become useful in the future since the future is majorly an unknown landscape for the current generation of people. Integrated assessment models center their analysis on various scenarios to appraise certain methods as effective or not. They create a working formula that provides policymakers with a variety of options that would be useful in their positions. They establish the underlying costs, risks, and institutional structural requirements necessary for achieving certain targets explicitly. The general idea is to provide an environmental outlet to certain points in time. There is an important need for social, economic development, and background outlined through the given period in time, and an unpainted picture on various environmental themes central to their target goals.
Having established the agency of Integrated assessment models, how have the two reports achieved this outcome? In the first report, titled Decompositions and Policy Consequences of an Extraordinary Decline in Air Pollution from Electricity Generation, researchers centered their activities on identifying the economic benefits of emission reduction from 2010 through 2017. They critically established the social costs of carbon emission first using the AP3 integrated assessment models, centering on pollution exposure, physical impacts. Finally, They approached their target by measuring the monetized damage. They established the benefits of introducing renewable energy sources, and the rise in electric cars, and how they have contributed to the decline in damages overall.
In this regard, they measured in line with the social-economic development of the period between 2010 and 2017, the extent to which a rise and increased accessibility for technology with lower emissions resulted in reduced emissions across the country. They point out that despite an increase in population by 5%, the GDP expanded by 15% during the same period, the electricity needs remained relatively unchanged, and emission from pollutants fell down drastically, which also reduced damages costs by at least $112 billion (Holland et al. 2020). The integrated assessment models approached the subject from a damage function and measured the theme from various cost-relevant perspectives. Holland et al. (2020) outline that they identified, for example, that within plants, damages costs fell by 62 billion dollars. The research also identifies an important trend in regard to marginal damage costs. Stating that “Running counter to these three effects (fossil fuel use, plant emission reduction and changes in generation shares across plants), the valuation of damage per unit of emissions increased damages by $35 billion. This increase was driven by changes in the composition of the atmosphere, population growth, and demographic change, and increases in the social cost of carbon” (Holland et al. 2020, 267). Outlining these new themes of population growth, and demographic changes, etc., as the new battlegrounds for climate change control in the US.
In the second article, researchers wanted to establish the marginal costs and benefits achieved by implementing the Clean Air Act across the US. This was aimed t outline whether the models adopted early to inform the policies were effective in affecting changes in air quality and climate change which has been very impactful to the general population in the US. Their integrated assessment models approached the goals from two critical functions the damage function and the marginal function. Like in the study above, the assessment revealed a lower marginal cost compared to the benefit costs achieved. They also identify global and local emission sources and establish how pollution abatement opportunities gained from the regulation have worked to police these sources in order to reduce the general damages caused.
Integrated assessment models as such paint the general themes that are central to understanding the social-economic developments that have defined certain demographic and environmental spheres. The models have also accurately assessed the impacts of policies, identified problem areas, and outlined the best performing solutions. The IAM provides a projection of the state and policies of environmental laws in the past, present, and, more importantly, in the future.
Question#2
Pollution has an external cost to society in the form of physical damages, increased exposure that is harmful, and overall monetized costs. Consider a scenario where there are two groups of people, Pollutants M and J, who have a factory uphill, and Persons R and S, who have a home downhill, and the wind flows from uphill downhill. Now assume that the Pollutants are not affected by the pollution they cause, and persons C and D are the only individuals affected by the pollution since they live exactly on the path of the wind that carries the smoke produced for the factory. Now consider the following graphs:
Figure 1 above outlines the benefits of polluting for person M and J, M polluting curve is represented by DM, and J’s is DJ. They are both utilized to find the total demand curve, which caps at $60. There is a price point for each unit of emission made. For M, the most she can emit per day is indicated at 20lbs, given the most they can spend is $13 (this cost is discussed below); for J, it’s 14lbs at the same amount of money. If the price per unit emission were $0, M could reach a sizable 40lbs emission, and J could reach a sizable 20lbs of the total possible 60lbs. The total quantity of emissions per day given the $13 price tag becomes 34lbs. Figure 2 below outlines the marginal costs of pollution curves. MCs indicate the cost effects of pollution on S, and MCr indicates the costs for R. Since R and S are affected by pollution, the curve is vertical, and vice versa for M and J in Figure 1 above. In the same regard, the marginal costs of pollution for S in MCs is $9 by the time it has reached 34lbs, and for R in MCr, it is $4 totaling $13 per pound, which acts as a guiding force to determine the price per unit of pound polluted in figure 1 above.
The final figure below brings together the marginal cost of the pollution for both S and R and the total price per unit of pollution for both M and J in order to find an efficient solution which is now why $13 is charged per pound of pollution.
Suppose there are no emission reduction policies available to guide M and J from polluting and there are no avenues for S and R to force M and J to stop polluting, their pollution rates will pollute up to the point where the marginal benefit for M and J has reached 0. This will be overall counterproductive and generally be very harmful to S and R, and in both cases, no one will benefit anything by additional pollution. The creation of reduction regulations allows both parties to be accountable, ensuring a greater net benefit for both parties.
Question #3
i. Flexibility or adaptability to change
The flexibility of an instrument is of important value as a policy evaluation criteria that account for uncertainty when evaluating the effectiveness of a policy in the future. Policies are affected by social changes as well as market forces. As such, taking hold of the instrument likely to be affected and evaluating the variety of scenarios that might develop in the event that an undesirable outcome is achieved allows policymakers to evaluate the limits of their policies and how likely implementing the policy might affect the users and people subjected to such a policy in the future. Perman et al. (2011) identify that evaluation criteria are important in making a choice over the effectiveness of a policy given limited choices to consider whether a policy will work. Under uncertain environment, the EPA “might need to learn adaptively by trial-and-error methods, and to change the rates or levels at which instruments are applied as new information arrives. Other things being equal, the more flexible an instrument is, the better” (Perman et al., 2011, 235). Command and control regulations are some of the more sorts after instruments, unlike the price-based incentive instrument such as tax or subsidy. Flexibility with regard to command and control approaches a policy and evaluates whether it’s empirically valid by outlining some of the changes that can be made at the top from time to time and how they might affect the stakeholders in the market. Perman et al. (2011) outline that flexibility can also be approached from the perspective of the price changes and quantity changes that are affected by new information. Overall, depending on the researchers’ circumstances to control an empirical experiment, flexibility is tested to be relatively stretched among various instruments defining a policy.
The Renewable Fuel Standard (RFS) is a policy that was adopted in 2005 as part of the broader Energy Policy Acts of 2005. It aimed to address high energy prices and regulate the quality of the increased import of oil into the United States. The market conditions were the main determinant of whether the RFS would pass or fail. Weitzman (1974) identifies that ” When quantities are employed as planning instruments, the basic operating rules from the center take the form of quotas, targets, or commands to produce a certain level of output. With prices as instruments, the rules specify either explicitly or implicitly that profits are to be maximized at the given parametric price” (477). The RFS mandated that fuel in the US market should contain a certain predefined number of biofuel, an amount that would increase gradually every year. At the start, congress okayed 4 billion gallons of the renewable field into the US gas supply, which later increased to 7.5 in 2012. Some of the control measures that the program adopted included a specification that all entities supplying the US gasoline system must be able to meet targets set by the EPA or trade credits with companies that produced more renewable fuels than they were required to produce. This effectively instituted a regime that reinstated quotas on the number of renewable fuel producers that would be able to produce and supply the US market. Bushnell and Lade (2016) identify that RFS was continually amended to establish more aggressive biofuel mandates of 25% of renewable fuel as of 2022. The policy, in essence, was a market-based regulation aimed at defining the types of vehicles on the road, reducing fuel prices, and reducing emissions.
With regard to the price changes, research has outlined as follows, for the policy to pass, there was a great need for consumers to purchase more biofuels, as such effectively pronouncing quantity changes. Prices at the same time were subsidized. Bushnell and Lade (2016) identify that with the specification of quotas and subsidies from government empirical research in 450 stations saw fuel variant E85, with higher blends of ethanol (owing to higher renewable fuel levels) passed retail prices and greatly adopted by many consumers. They were fairly lower to produce for refiners and biofuel producers, which implied cost-saving measures for consumers in general. Bushnell and Lade (2016) research estimated retail margin was valued at 0.29$ per gallon. This was, on average lower across the board and easier for all producers and consumers to afford. The move was also effective as lower biofuel prices increased the prices of selling diesel and gasoline (Bushnell and Lade, 2016). Babcock (2013) specifies that gasoline prices of production pre subsidies increased from $2.80 per gallon to $4.00 in the 2000s. This led to a greater shift of retailers and wholesalers to adopt the blend and reduced the use of pure fossil fuel in exchange for renewable fuels. Flexibility in prices, thanks to an increased subsidy from the government through a mandate by EPA that sought to push gasoline prices and quantity changes, especially around the blend that made up the gasoline, created a great opportunity to measure the effectiveness of the RFS policy.
ii. Costs under uncertainty: What are the efficiency losses from use of incorrect information
The costs associated with uncertainty (Costs under uncertainty) measures the pollution abatement function. Perman (2011) identifies that regulators have to incur costs: those associated with processing information, implementation, monitoring, and enforcing these pollution control programs as a means of testing their viability. RFS policy had to be supported by a variety of subsidies in order for there to be an uptake. Babcock (2013) identifies the amount of ethanol that needs to be consumed as E10 (10% ethanol) is approx. 13 billion gallons since the US consumed 132 billion gallons a year in 2000. Bushnell and Lade (2016) identified that the US, as of 2013, had approved up to the E85 renewable option. This translates to huge costs in setting up production units across the US. Babcock (2013a) identifies that according to the EPA in 2010, “the cost of enabling 2,500 gas stations to sell E85 ranges from $85 million to more than $300 million.” This did not account for costs in production and higher investment costs of infrastructure, e.g., installing new tanks and pumps. Babcock (2013a) identifies that this cost could be greater than 3 to 1; across the nation, the conversion cost from gasoline to hybrid fuel was $30,000 per station and $130,000 to exchange new tanks and dispensers. Overall, the policy identified that in the long run, oil companies would have achieved net gains. Babcock (2013a) points out that with subsidies offered as incentives for the fuel uptake for the majority of consumers, oil companies made a net gain of 1.7 billion dollars. This effectively makes the RFS a very appropriate policy for the US market when reviewed under flexibility and costs associated with uncertainty evaluation criteria.
Question #4
The article Soaking up the Sun: Battery Investment, Renewable Energy, and the Market Equilibrium by Butters, A. et al. (2020) was the most compelling as it identifies the innovations that have been made around battery technology. This is a key trend that is slowly being unlocked, and its potential is only now being discovered and adopted into bigger and better technology. But the article also provides an analysis of how market trends around renewable technology are leading to an increase in battery prices. Butter et al. (2020) identify a sharper increase in ion battery prices as solar power is adopted by many users, pointing out a greater disparity in technology development due to lower investment in the sector.
The report by Butter et al. shines a light on the technology’s ability to be adopted to the general energy grid and the importance it would bring. The majority of the users still conceptualize battery on a small scale for home and cars and mainly use it as a storage device. Microgrids can be founded and used to propagate the adaptation of the battery technology, which effectively dictates environmental victories in energy production and conservation. It is effective in the production of electricity and combines various sources, and it is continually reliable. Batteries effectively create alternatives that make the power supply more reliable. They tap into the free renewable energy space free for anyone, utilizing new technologies and a centralized power system. The unequal occurrences in the frequency of renewable energy sources are complemented by diversity in supply. Electricity can be sourced from more than one source, which is also cheaper, meaning that more people can participate in the system and stored it for a longer time.
Household Response to Time-Varying Electricity Prices by Harding, M., and Sexton, to me, was the most compelling paper as it was addressing the dynamic world of electricity pricing and how consumption trends continue to dictate prices and production patterns but fail to offer a suitable solution to be able to address the current gaps. the article identifies the increasingly efficient time varying rates, and how the technology is becoming an important point of reference in the 21st century. The article identifies that consumers dictate production in their consumption trends. In peak hours consumptions increases, and as such, there is a general price hike. The report articulates that consumer habits have generally resulted irrational production capacity which are bad for the environment. The article fails to identify factors that affect consumer increased in consumption, and also does not adequately provide the statistics for pricing hike.
References
Babcock, B.2013. “RFS Compliance Costs and Incentives to Invest in Ethanol Infrastructure” Staff Report 13-SE 108. Center for Agricultural and Rural Development.
Bushnell, J. and G. Lade. 2016. “Fuel Price Impacts of the Renewable Fuel Standard.” Agricultural Policy Review, Fall 2016. Center for Agricultural and Rural Development, Iowa State University. Available at www.card.iastate.edu/ag_policy_review/article/?a=57
Butters, A. et al. (2020). Soaking up the Sun: Battery Investment, Renewable Energy, and the Market Equilibrium. Working Paper [week#5 of the syllabus]
Harding, M., & Sexton, S. (2017). Household Response to Time-Varying Electricity Prices. Annual Review of Resource Economics, 9, 337–359 [week#2 of the syllabus]
Holland, S. P., Mansur, E. T., Muller, N. Z., & Yates, A. J. (2020). Decompositions and policy consequences of an extraordinary decline in air pollution from electricity generation. American Economic Journal: Economic Policy, 12(4), 244-74.
Perman et al. (2011) “Chapter 7: Pollution policy with imperfect information”. Environmental pollution. Pdf.
Shapiro, J. S., & Walker, R. (2020). Is Air Pollution Regulation Too Stringent? In NBER Working Paper Series
Weitzman, M. (1974). Prices vs. Quantities. The Review Of Economic Studies, 41(4), 477. https://doi.org/10.2307/2296698
