Alan H. Sanstad

`Normal' markets, market imperfections and energy efficiency

Abstract The conventional distinction between ‘economic’ and ‘engineering’ approaches to energy analysis obscures key methodological issues concerning the measurement of the costs and benefits of policies to promote the adoption of energy-efficient technologies. The engineering approach is in fact based upon firm economic foundations: the principle of lifecycle cost minimization that arises directly from the theory of rational investment. Thus, evidence that so-called ‘market barriers’ impede the adoption of cost-effective energy-efficient technologies implies the existence of market failures as defined in the context of microeconomic theory. Problems of imperfect information and bounded rationality on the part of consumers, for example, may lead real world outcomes to deviate from the dictates of efficient resource allocation. A widely held contrary view, that the engineering view lacks economic justification, is based on the fallacy that markets are ‘normally’ efficient.

Technical evidence for assessing the performance of markets affecting energy efficiency

Abstract This paper focuses on the empirical basis for skepticism about the effectiveness of the market mechanism in promoting cost-effective energy-efficiency improvements. We present a framework for evaluating engineering economic evidence on the diffusion of energy-efficiency improvements, and then present a series of examples within this framework that provide evidence for the existence of market imperfections related to energy efficiency. We conclude with a challenge to economists, policy analysts, and technologists to take this empirical evidence seriously and sponsor further collaborative research in this area.

Room for improvement: increasing the value of energy modeling for policy analysis

Abstract There are expanding national discussions on a critical number of energy-related issues ranging from the importance of reducing air pollution and greenhouse gas emissions to enhancing the nation’s energy security and moving towards a competitive electric utility industry. The complex interactions surrounding all of these issues have motivated the development of a relatively large number of energy-economic models to assist policy makers in the framing of appropriate policy directions. But how much do these models really inform the debate? The record of US model-based energy forecasting yields evidence that such models provide biased estimates that tend to reinforce the status quo, inadequately inform policy-makers about new market potential, and serve to constrain the development of innovative policies. This paper reviews some of the reasons for this conclusion and then explores the extent to which energy-economic models may reflect a more dynamic technological diffusion process that encourages new policy development.

Energy Efficiency, Market Failures, and Government Policy

This paper presents a framework for evaluating engineering-economic evidence on the diffusion of energy efficiency improvements. Four examples are evaluated within this framework. The analysis provides evidence of market failures related to energy efficiency. Specific market failures that may impede the adoption of cost-effective energy efficiency are discussed. Two programs that have had a major impact in overcoming these market failures, utility DSM programs and appliance standards, are described.

Contributions of weather and fuel mix to recent declines in US energy and carbon intensity

A recent (1996-2000) acceleration of declines in energy andcarbon intensity in the U.S. remains largely unexplained. This study usesDivisia decomposition and regression to test two candidate explanations -fuel mix and weather. The Divisia method demonstrates that fuel mix doesnot explain the declines in carbon intensity. The fuel mix, both overalland for electricity generation, became slightly more carbon intensiveover the study period (though the slight trend reversed before the end ofthe period). A regression-based correction to the Divisia indices,accounting for variation in heating- and cooling-degree-days, indicatesthat warmer weather accounts for about 30 percent ofthe total declines.This leaves declines of more than 2 percent per year (and an accelerationof more than 1 percent over previous decade) remaining to beexplained.

Estimating bounds on the economy-wide effects of the CEF policy scenarios

Abstract The Scenarios for a Clean Energy Future study relied primarily on “bottom-up” technology-based methods to estimate costs associated with its scenarios. These methods, however, do not allow for calculation of economy-wide or general equilibrium effects of the policies considered. We propose and apply a means of combining the bottom-up estimates with estimates of the costs associated with a carbon charge obtained from computable general equilibrium models. Our approach is based on the concept of production inefficiency: the economy lies within its production frontier with respect to the provision of energy services. The CEF technology policies are interpreted as moving the economy toward its frontier as well as moving the frontier outward, while the carbon charge induces a substitution effect along the frontier. This perspective allows a synthesis of the two sets of calculations.

Robust Analytical and Computational Explorations of Coupled Economic-Climate Models with Carbon-Climate Response

The economics of global climate change is characterized by fundamental uncertainties, including the appropriate reduced forms for climate dynamics, the specification of economic damages resulting from climate change, and mechanisms by which these damages will affect long-run economic growth. Using a dynamic integrated assessment framework, this paper makes several contributions to improving the analysis of these uncertainties. First, we incorporate the cumulative climate response (CCR) function developed by Matthews et al. for representing the basic relationship between anthropogenic carbon emissions and increases in global mean temperature in a manner that is more directly policy relevant than the usual approach based on the equilibrium climate sensitivity. Second, we adapt the tools developed by Hansen, Sargent and others for robustness analysis to address underlying model uncertainty in both economic and climate dynamics. Third, we allow climate change to affect economic growth directly, in addition to its effect on output. We develop and study a simple analytical model that yields insights and results on the key implications of these assumptions, as well as facilitating the interpretation of numerical results from a more general model. Among our findings is that the presence of robustness may result in either a decrease or increase in the optimal carbon tax and energy usage, depending among other factors on societal preferences.

Estimating energy-augmenting technological change in developing country industries

Assumptions regarding the magnitude and direction ofenergy-related technological change have long beenrecognized as criticaldeterminants of the outputs and policy conclusions derived fromintegrated assessment models. Particularly in the case of developingcountries, however, empirical analysis of technological change has laggedbehind simulation modeling. This paper presents estimates of sectoralproductivity trends and energy-augmenting technological change forseveral energy-intensive industries in India and South Korea, and, forcomparison, the United States. The key findings are substantialheterogeneity among both industries and countries, and a number of casesof declining energy efficiency. The results are subject to certaintechnical qualifications both in regards to the methodology and to thedirect comparison to integrated assessment parameterizations.Nevertheless, they highlight the importance of closer attention to theempirical basis for common modeling assumptions.

Contributions of weather and fuel mix to recent declines in U.S. energy and carbon intensity

A recent (1996-2000) acceleration of declines in energy and carbon intensity in the U.S. remains largely unexplained. This study uses Divisia decomposition and regression to test two candidate explanations - fuel mix and weather. The Divisia method demonstrates that fuel mix does not explain the declines in carbon intensity. The fuel mix, both overall and for electricity generation, became slightly more carbon intensive over the study period (though the slight trend reversed before the end of the period). A regression-based correction to the Divisia indices, accounting for variation in heating- and cooling-degree-days, indicates that warmer weather accounts for about 30 percent of the total declines. This leaves declines of more than 2 percent per year (and an acceleration of more than 1 percent over previous decade) remaining to be explained.

Bottom-Up Energy Modeling

Author(s): Sathaye, Jayant; Sanstad, Alan H. | Abstract: Two general approaches have been used for the integrated assessment of energy demand and supply: the so-called bottom-up and top-down approaches. The bottom-up approach focuses on individual technologies for delivering energy services, such as household durable goods and industrial process technologies. For such technologies, the approach attempts to estimate the costs and benefits associated with investments in increased energy efficiency, often in the context of reductions in greenhouse gas (GHG) emission or other environmental impacts. The top-down method assumes a general equilibrium or macroeconomic perspective, wherein costs are defined in terms of losses in economic output, income, or gross domestic product (GDP), typically from the imposition of energy or emission taxes.