II.  Natural Resource Economics

A.  Energy

1.  Energy consumption

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Global Energy Consumption 2013	U.S. Energy Consumption 2014

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2.  Criteria for evaluating energy sources

a.  Price

• Look at average price and variability over time

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b.  Availability

• Renewability, geographic availability, daily and seasonal fluctuation

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c.  Environmental impacts

• Look at impact over the full life-cycle:  extraction, use, waste products, decommissioning of facilities

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d.  Net energy

• Energy available for final consumption / energy required to produce it

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e.  Suitability

• Different types of energy more useful for certain applications

• Use sectors - transportation, industrial, residential and commercial (non-electricity), electricity

U.S., 2015

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3.  Energy trends

• World energy demand has grown rapidly and will continue to grow in future

• Expanded use of all forms of energy

• Most rapid growth in recent years in non-hydro renewables

• Solar and wind still a small share of global energy supplies

• Coal use was the most significant source of meeting increased global energy demand between 2000 and 2015

• Policy choices can impact consumption and supply mix

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4.  Fossil fuels

• Nonrenewable - do not regenerate through ecological processes on a human time scale

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a.  Oil

• High energy density and ease of storage makes it ideal for transportation

• "Peak" oil - limited supplies would lead to increasing prices and reduced consumption

• Unconventional sources (hydraulic fracturing of rock, extraction from tar sands and oil shales) lead to increased supply and falling prices

• Hubbert curve

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• Global oil supply

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• Environmental impacts - exhaust from vehicles, oil spills, pipeline leaks

- Environmental impact of unconventional sources is higher

b.  Natural gas

• Can be burned, also used directly to fuel vehicles

• More abundant than oil globally and in the U.S. - 50 year supply at current levels of demand

• Cleanest of the fossil fuels

- Concern about the environmental impacts of fracking

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c.  Coal

• Burned to generate electricity

• Most abundant fossil fuel - 114 year supply at current levels of demand

• Most environmentally damaging of the fossil fuels

- Particulate matter pollution due to burning

- Emits more carbon dioxide per unit of energy

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5.  Renewable energy sources

• Supplies are unlimited

a.  Availability

• Varies geographically and across time

- Solar - southwestern U.S., northen Africa, Middle East, parts of Australia and South America

- Wind - northern Europe, southern tip of South America, Great Lakes region of U.S.

- Geothermal - Iceland, the Philippines

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b.  Renewable energy infrastructure

• System that supports the use of renewable energy

• Technology for plants / devices already exists, needs to be deployed

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• Upgrades to the electrical grid, new capacity to store and transfer power

• Land, including land in-between wind turbines

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c.  Intermittency

• Availability of renewable energy varies by time

- Wind - depends on wind speed

- Solar - varies by time of day, affect by cloudy weather

• Renewables have low capacity factors compared to fossil fuels

• Problems with supply / demand matching, particularly for electricity

- Output cannot be increased on demand

• Solutions

(1)  Energy diversity - solar strongest in summer, wind strongest in winter

(2)  Storage - batteries, pumped water storage

(3)  Robust national electric grid - move energy from where it is produced to where it is needed

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6.  The economics of alternative energy futures

a.  Cost

• Need to compare relative costs

• Capital costs may vary significantly

Ex. - Nuclear power plant

• Some sources require fuel inputs

Ex. - Coal power plant

• Levelized cost - per-unit cost of energy production, accounting for all fixed and variable costs over a power source's lifetime

• Natural gas cheapest

• Onshore wind, hydroelectric competitive

• Cost of solar and wind expected to fall in future, become less variable

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b.  Subsidies

• Can lower price paid by consumers, raise price received by producers, or reduce cost of production

• Approaches:

(1)  Direct payments

• Per unit payment for producing particular products

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(2)  Favorable loans

• Loans given at below-market interest rates

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(3)  Tax credits and deductions

• Taxes reduced for actions taken, e.g., installing insulation, purchasing fuel-efficient vehicle

• Depletion allowance - tax deduction for investments used to extract natural resources, especially oil and gas

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(4)  Price supports

• Producers of renewable energy may receive guaranteed price

• Feed-in tariffs - guaranteed rate to producers of renewable energy for sales to the national power grid

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(5)  Mandated purchase quotas

• Minimum purchases of some resources required

• Ex. - Gasoline must have a certain percentage of ethanol, governments buy a certain percentage of energy from renewable sources

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• Most subsidies go to fossil fuels, both for electricity generation and for transportation

• Subsidies appropriate if positive externalities exist - fossil fuels usually generate negative externalities

• Price-Anderson Act - limits liability of nuclear power plant operators

• Subsidies for renewable energy large on a per-kilowatt-hour basis

- Wind (7 cents), concentrated solar (29 cents), solar photovoltaic (64 cents)

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c.  Environmental externalities

• Use of some energy sources may generate negative externalities

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• Cost if externalities internalized

• Nuclear externalities - possibility of major accident, long-term storage of wastes

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7.  Policies

a.  Reduce fossil fuel subsidies

• Could lead to higher energy prices and reduced economic growth

• Money save could be invested in renewable alternatives

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b.  Taxes to internalize negative externalities

• Pigouvian taxes, e.g., gas tax

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 c.  Energy research and development

• Try to speed maturation of of renewable energy technologies

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d.  Feed-in tariffs

• Guarantee renewable energy producers access to electricity grids

• Long-term price contracts

• Should be phased out as renewable sources become more competitive

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e.  Subsidies for renewable sources

• Direct payments, tax credits, low-interest loans

• Makes more sense for developing, rather than mature technologies

• Can lead to economies of scale

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f.  Renewable energy targets

• Set goals for the percentage of energy obtained from renewables

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g.  Efficiency improvements and standards

• Energy demand-side management - policies to reduce energy consumption

- Most most cost effective and environmentally beneficial

• Efficiency standards - set minimum standards for efficiency

- Ex. - Fuel standards, buildings, appliances, light bulbs

• High-efficiency products may have higher initial cost, which discourages purchase - high implicit discount rate

Ex. -

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