Economic Analysis of Energy Policy
Climate-friendly Energy Policy: Options for the Near Term
Economic Analysis of Energy Policy
The body of economic work on energy and climate change contains several important themes to be considered in any effort that aims to identify “climate friendly” energy policies. These key themes include:
- Energy use in the U.S. economy is largely a function of the current equipment (or “capital stock”) used to extract, produce, convert, and use energy (e.g., machinery used in longwall coal mining, technology used to explore for and produce oil and natural gas, boilers and turbines used to convert fossil fuel to electric power, and automobiles and trucks used to transport people and goods).
- New energy technologies usually take time to develop, mature, and find broad acceptance in the market.
- The market penetration of improved equipment reflects economic behavior, not just technological potential.
- Energy or fuel prices can play a substantial role in energy use and emissions outcomes, apart from long-run technology choices.
- To the extent that policy actions alter the market supply or demand of specific fuels or energy types, such policies can change energy prices. As a consequence, future energy use decisions would be based on a new set of prices, which may affect the expected level and cost of eventual emissions reductions.
- Expectations regarding future prices, technologies, and policies can play a large role in shaping current investment decisions. Thus, the form and direction of policy enacted in the near term can encourage market participants to alter longer-term decisions even before regulatory compliance deadlines or other milestones occur.
- It is critical to assess the impact of today’s energy policy choices in terms of the future cost of pursuing future GHG reduction policies.