Energy Economics

Markets, History and Policy

Roy L. Nersesian

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317511861
• Edition: 1
• Topic: Economía
• Subtopic: Teoría económica

Three quarters of our current electricity usage and transport methods are derived from fossil fuels and yet within two centuries these resources will dry up. Energy Economics covers the role of each fossil and renewable energy source in today's world, providing the information and tools that will enable students to understand the finite nature of fossil fuels and the alternative solutions that are available.

This textbook provides detailed examinations of key energy sources – both fossil fuels and renewables including oil, coal, solar, and wind power – and summarises how the current economics of energy evolved. Subsequent chapters explore issues around policy, technology and the possible future for each type of energy. In addition to this, readers are introduced to controversial topics including fracking and global warming in dedicated chapters on climate change and sustainability.

Each chapter concludes with a series of tasks, providing example problems and projects in order to further explore the proposed issues. An accompanying companion website contains extensive additional material on the history of the major types of fuel as well as technical material relating to oil exploration, the development of solar power and historical environmental legislation.

This textbook is an essential text for those who study energy economics, resource economics or energy policy.

1
Energy Economics and Policy

What Is Energy?

Believe it or not, there is no clear definition of energy. What we understand are the various forms of energy. The most common is heat—we turn on a stove and a kettle of water soon begins to boil. Then we pour the hot water into a cup with a tea bag and we are enjoying a cup of hot tea. If asked “what is energy?” we would respond with “energy made the water hot,” which is not a definition, but an observation. We watch a workman with a jack hammer breaking up cement. We associate the result as an output of energy, but broken cement is still not a definition.

There is potential energy such as a rock perched precariously on top of a cliff or a rocket on a launch pad, where nothing happens until the rock is somehow nudged or the launch key is pressed. Thus energy can be associated with nothing happening. When the rock falls off the cliff, we witness gravitational energy; when the rocket is launched, it is chemical energy. Electrical energy is at work whenever a switch is thrown to turn on an electric appliance. Magnetic energy surrounding the earth diverts harmful solar radiation from striking the planet. Radiant heat is felt by standing in front of a burning fireplace in winter, which is transmitted mainly by conduction via heated air molecules colliding with one another. The sun’s radiant heat is electromagnetic energy, but so too is a portion of a burning fireplace as infrared radiation. Sun’s rays warm the earth, but can also be transformed directly into electrical energy by solar panels. The unequal warming of the earth by the sun creates weather patterns from which we extract wind, current, and wave energy to generate electricity. Gravitational attraction between the moon and earth provides tidal energy. The hydrologic cycle begins with the sun evaporating water that condenses in clouds and eventually falls, nourishing the earth only to evaporate again to complete the cycle. Some rainfall ends up in a reservoir as potential energy until transformed to kinetic energy on its way to the generator turbines to be transformed again to electromagnetic energy and then again to mechanical energy in a food grinder or heat energy in a toaster. Energy associated with sound waves allows us to hear and that associated with light waves allows us to see. The nucleus of an atom contains energy which we have unlocked via nuclear fission—for bombs to destroy mankind and reactors to serve mankind (Chernobyl and Fukushima excepted). Freeing up energy in the atom originated with Einstein’s revelation through E = mc² that mass and energy are equivalent. So what is energy? Perhaps this question should be best left in the hands of the physicists, who, by the way, do not have a clear definition.

Let us just leave the definition in limbo and simply note that energy can take many forms and can be transformed from one form to another. A good example is a roller coaster ride where energy alternates between potential and kinetic energy. Mechanical energy is first expended to move the roller coaster cars to the highest point of the ride that is then potential energy when the cars are almost still. The cars whizzing down the first leg of the ride transforms potential energy into kinetic energy, the energy in the movement (momentum) of the speeding cars. Then kinetic energy is mostly transformed back to potential energy as the cars slow as they approach the next peak, which is lower in height and in potential energy than the first to compensate for energy losses, or increasing entropy. Energy is repeatedly transformed between potential and kinetic energy on a lose-lose basis until the end of the ride. This marks the point where the mechanical energy to move the roller coaster cars to the highest peak has been dissipated in pushing air away from the moving cars and in frictional heating of the wheels and track and in the final stopping of the cars. Entropy is the downhill flow of energy from usefulness to uselessness. The slight warming of the environment and movement of air surrounding the roller coaster is the same as the mechanical energy expended in bringing the roller coaster cars to the highest point of the track. While energy cannot be created or destroyed, the final state of that energy expended to move the roller coaster cars to the initial peak has been reduced to where it is no longer useful. The entropy of the system has increased. These observations are contained in the three laws of thermodynamics:

1. The first law states conservation of energy; energy cannot be created or destroyed.
2. The second law states that the entropy of any isolated system not in thermal equilibrium increases until it is in thermal equilibrium (a cup of hot tea will cool to the ambient temperature of a room).
3. The third law states that the entropy of a system approaches a constant value when the temperature of a system approaches absolute zero.

The transformation of energy to move a roller coaster to the highest point is eventually dissipated into a slight warming of the environment. This dissipated energy cannot be collected and used again, but it has not been destroyed. The second law outlaws perpetual motion machines. The second law can be applied when order disintegrates into disorder. Suppose that a box is filled with layers of differently colored marbles. Entropy increases when the box is picked up and shook, destroying the ordered nature of the layers.

One day the entire universe will reach a state of constant entropy where energy is evenly spread everywhere and can no longer be transferred from a higher to a lower state. It will be a universe whose temperature everywhere will be close to absolute zero. Modern theory of dark matter and dark energy and an accelerating universe suggests that the very atoms in the universe and their sub-atomic components and space itself will be eventually shredded into nothingness. On a brighter note, life can be considered reverse entropy because life consumes a lower level of energy as food and transforms it to a higher level of energy in the form of physical and mental activity. Ultimately though, life is mortal and it’s back to increasing entropy!

Energy and Economics

Human societies before the Industrial Revolution were primarily agrarian, employing 80–90 percent of the people. Life for the common folk was oftentimes brutish, dirty, hard, and, perhaps as a side benefit, mercifully short. For the ruling, merchant, landowning, and priestly classes, life was a bit different. Despite the plight of common folk, great empires flourished. During their heydays, magnificent buildings and monuments, now in ruins, were erected. These empires made remarkable progress in organizing society for internal control and external expansion, establishing a legal foundation to guide human conduct and in fostering arts and sciences. Empires rose and fell in Mesopotamia, Egypt, Persia, Greece, Rome, and Mesoamerica. China is the only extant empire with a beginning before the Common Era. These empires harnessed wind power for sailing vessels to move cargos in domestic and international trade and, along with water power, ground grain. But wind and water power contributed little in the grand scheme of things. From the building of the pyramids to the Colossus of Rhodes, economic activity was constrained by the limits of manual labor with a major assist from animals.

The precursor to the Industrial Revolution was development of the metal and glass industries whose fuel demand leveled the forests of England. Moreover, trees were needed to support a major expansion of the English fleet by Queen Elizabeth to combat the Spanish Armada. The shortage of lumber, particularly fully mature trees for ship masts, spurred the exploitation of newly discovered forested lands in North America. The energy crisis for fueling the metal and glass making was eventually solved not by importing wood from North America or Scandinavia but by the discovery of coal lying on the surface near Newcastle—actually a rediscovery as coal was burned during Roman times. Coal lying on the ground was gathered up, and when depleted, holes were dug into the exposed coal seams; then tunneling, which when extended far enough became mines. The downward tilt of the coal seams eventually put the miners below sea level, and flooding threatened to terminate the birth of fossil fuels. The intellectual capital of England was dedicated to solving this one problem since a return to wood was out of the question. The invention of the Newcomen steam engine, which burned coal to produce steam to operate a water pump, marks the beginning of the Industrial Revolution.

What differentiates our civilization compared to previous civilizations is our dependence on energy and the marked improvement of the standard of living of not just the rich but the common folk. The standard of living of various peoples on this planet can be directly related to their per capita energy consumption. It is no surprise that the higher standard of living in the US compared to a subsistence existence endured by about one-third of the world’s population can be seen by the difference in per capita energy consumption. Indeed the war on poverty led by the United Nations Development Programme has an objective, among others, to make electricity accessible to 1.4 billion people not connected to an electricity grid and another billion with limited access to unreliable electricity supplies. About three billion people rely on biomass to meet their basic needs, a condition that can be improved by upgrading to fossil and renewable energy sources. Universal access to electricity is considered transformational in the quality of life for billions of people by lighting schools and health clinics and homes, pumping water for irrigation and sanitation, and powering communications and light manufacturing.

Energy and the Environment

Pollution takes many forms—from the air we breathe to the water we drink, to the food we eat, to the garbage dump down the street or dumped in the street. The more we consume material goods, our judge of economic success, the greater the degree of pollution plaguing the planet. Huge landfills or open, infested garbage dumps surround metropolitan centers. In some parts of the world, people are dying from eating fish and vegetables and drinking water contaminated with dangerous levels of toxicity. According to the Environmental Protection Agency, the average American produces 4.3 pounds of waste per day, of which 54 percent ends up in landfills, 34 percent recycled or composted, and 12 percent burned at combustion facilities.¹ Waste is big business; so is reducing waste, particularly in manufacturing goods, because waste detracts from profitability. Recycling and converting waste to something useful over throwing it away is not only socially responsible but a money maker by transforming a cost to a revenue stream. One of the focuses of green manufacturing is the reduction of emissions. Cutting emissions can be easily done by increasing fuel efficiency. General Electric’s advertising of green locomotives and green jet engines is based on reduced emissions from greater fuel economy. But greater fuel economy also cuts operating costs for railroads and airlines, increasing their profitability. “Green” in General Electric’s products translates to “green” in the corporate bottom line.

Air Pollution

The common air pollutants are ozone, particulate matter, carbon monoxide, nitrogen and sulfur oxides, and lead. Other airborne pollutants include ground level ozone, aerosols and propellants, asbestos, chlorofluorocarbons and hydrochlorofluorocarbons, mercury, radiation and radon, and volatile organic compounds. Sources of air pollution are from burning fossil fuels (coal, natural gas, and oil) and biomass for cooking and heating; burning crop residues and garbage including used tires and batteries; emissions from motor vehicles, steel mills and metal smelters, pulp and paper mills, and chemical and cement plants; insecticides, herbicides, dust from fertilizers, and other agricultural activities; and mining operations. Much, but not all, pollution is associated with energy consumption.²

Greenhouse Gas Emissions

Greenhouse gas (GHG) emissions have been legally classified as pollutants. Some may object, citing that the principal component of GHG emissions, carbon dioxide, is vital for life. Without carbon dioxide, plants die and the planet becomes frigid because of the role of carbon dioxide in retaining heat in the atmosphere. Both would decimate life as we know it—thus carbon dioxide is not a pollutant in the same sense as sulfur and nitrous oxides. Nevertheless, the concentration of carbon dioxide in the atmosphere is increasing. It is estimated that one-third of anthropogenic (mankind-related) carbon dioxide added to the atmosphere is not being absorbed by plants, earth, and oceans. That one-third cumulative buildup in the earth’s atmosphere can account for the incremental growth in the concentration of atmospheric carbon dioxide. Hence carbon dioxide is deemed by governments, but not entirely by everybody, as being responsible for global warming—now called climate change from growing awareness of the significant divergence between earth’s temperature and the predicted output of global warming models. Anthropogenic carbon dioxide emissions are 57 percent from burning fossil fuels, 17 percent from burning biomass and deforestation, and 3 percent from other activities for a total of three-quarters of GHG emissions. Another 14 percent of GHG emissions is methane, which is about 25 times more effective than carbon dioxide as a heat retention gas. Anthropogenic methane sources are natural gas leaks from oil and gas operations and methane generated by agricultural and waste disposal activities (natural gas also seeps “naturally” from the earth into the atmosphere). The remaining 9 percent of GHG emissions is mainly nitrous oxides from agricultural activities.³ It is clear that energy consumption should include not just the economic benefit of our well-being but also the environmental consequences on air we breathe, water we drink, and food we eat.

Energy and Policy

Public policy guides governments in determining an objective in pursuit of the common good of society. It is not for the common good of society to exhaust a principal energy source in a very short period of time. The consequences threaten civilization itself. Public policy provides the framework upon which laws and regulations are drafted to allocate resources and guide behavior in pursuit of a social objective. The statement of purpose of the Center of Global Energy Policy at the School of International and Public Affairs at Columbia University is an example of defining the role of public policy with regard to energy.⁴

In just a few years, the global hydrocarbon outlook has rapidly shifted from scarcity to abundance as a result of new technologies… These changes have significant economic, geopolitical, security, and environmental implications that demand independent, balanced, data-driven analysis.

At the same time, the cost of clean energy technologies continues to fall, and there...