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Energy Policy
Robert P. Murphy
Mises University 2014
OUTLINE
I. Energy Supplies
I. “Market Failure”
I. Fuel Economy Standards
I. “Social Cost of Carbon”
Labor-Time Needed for Energy
Source: Energy, the Master Resource
Paradox? Oil Reserves INCREASE Over Time
World Crude Oil, Billions bbls, Proved Reserves
Source: Energy, the Master Resource
Will We Run Out of Oil?
Based on Year 2000 Consumption Rates
Source: Energy, the Master Resource
Plenty of Fossil Fuels, If Needed
Years of Consumption as of 2003
Source: Energy, the Master Resource
Production Up, Pollution Down
Emissions of EPA’s 6 Criteria Air Pollutants
Source: Energy, the Master Resource
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?
Gov’t Already Subsidizes “Alternatives”
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
“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.
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.
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…
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
Initial Benefits of Global Warming
>0 means
Global
Benefits
SOURCE: Tol (2009) “The Economic Effects of Climate Change” JEP.
 Estimates of SCC Uncertain; Recently Fallen
(Tol’s survey of studies
that use 3% “pure time
preference” rate.)
Upper 90%
Confidence Interval
Mean
Carbon
Benefits
SOURCE: Tol (2011) “The SCC,” ESRI Working Paper #377
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
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)
 Discount Rate Crucial in May 2013
Estimates
Year
Global
GlobalS SCC at
CC at
5%
7%
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