2. Economics of Energy and Market Failures

Question 1

Primary energy

Answer 1

Energy that is available in nature, not derivative or converted forms. Cannot be produced; must exist within or be constantly delivered to the energy system from outside. Available primary energy sources include:

Question 2

Primary energy production

Answer 2

All energy come from primary energy, so it is possible to bound the system’s total energy requirements by looking at the total primary energy production across all energy types. Today 80% comes from fossil fuels

Question 3

Secondary energy carriers

Answer 3

derivatives of primary energy that carry energy through the energy system

Question 4

Total final consumption

Answer 4

Only a small fraction of the primary energy supply; has been transformed, purified, moved,directed, and distributed to exactly where the customer finds it desirable. Despite the losses, the value to the end customer should have increased dramatically. More than 70% of primary energy is lost by the time it reaches total final consumption

Question 5

Final energy service

Answer 5

After a consumer receives total final consumption of energy, up to 90% can be lost at final energy service e.g. toaster oven, cold beer, transported people

Question 6

Feedback loops

Answer 6

Mechanism (rule or information flow or signal) that allows a change in a stock to affect a flow into or out of that same stock. A closed change of causal connections from a stock, through a set of decisions and actions dependent on a level of a stock, and back again through a flow to change the stock

Question 7

Stabilizing loops

Answer 7

a Sustaining Loop or Goal-Seeking Loops, or negative feedback loops that exhibit properties of stability or equilibrium e.g. self-regulating thermostat. Opposes or reversed whatever direction of change is imposed in the system

Question 8

Reinforcing loops

Answer 8

Runaway Loops or Reinforcing Loops, or positive feedback loops which cause a system that is out of balance to go further in that direction. e.g. avalanche. Known as vicious or virtuous cycles

Question 9

System purpose

Answer 9

In aggregate, the system has an outcome or system purpose. System purposes need not be human purposes and are not necessarily those intended by any single actor within the system.

Question 10

Reference scenario

Answer 10

Scenarios are the same kind of modeling exercise that simply establishes a relationship suggesting if the input variables are true, then the output parameters should be what the model suggest. It is a formulation of the work that suggests a model is sound, but the input assumptions are either uncertain or are presented for illustrative purposes. By calling something a forecast, it asserts that both the model and the input assumptions are right, and therefore the output is expected to approximate future reality. A REFERENCE scenario is the baseline scenario that other scenarios can be compared against.

Question 11

Dose-response curve

Answer 11

Changes in behavior from a current path represent an entire class of non-linearities in system dynamics. One framework for the examination of these non-linearities comes out of medical field which tries to understand the amount of treatment or medicine provided to patient (dose) and what kind of reaction (response). More often than not, increasing the dose creates a nonlinear response in the patient. These non-linear responses can even change direction, with small doses creating one effect and substantially larger doses reversing that.

Question 12

Cartel

Answer 12

an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition.; oligopoly

Question 13

Social cost of carbon

Answer 13

EPA and other federal agencies use the social cost of carbon (SCC) to estimate the climate benefits of rulemakings. The SCC is an estimate of the economic damages associated with a small increase in carbon dioxide (CO2) emissions, conventionally one metric ton, in a given year. This dollar figure also represents the value of damages avoided for a small emission reduction (i.e. the benefit of a CO2 reduction).

Question 14

Market failure

Answer 14

In economics, market failure is a situation in which the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off. (The outcome is not Pareto optimal.) Market failures can be viewed as scenarios where individuals’ pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point of view

Question 15

Myopia

Answer 15

Subjectivity of time causes people to behave differently in their determination of value across time. The discount rate applied to valuations in the future varies. Temporal myopia is when individuals place far too much important on things that are happening in the present or in the near future, as compared to those in the distant future. We can see people’s imputed discount rates, or the rate that they are implicitly willing to pay, by looking at the choices that they will make between two alternatives presented both in the present and the future. Results in higher discount rate than would be observed by rational agent.

Question 16

Non-linearities

Answer 16

A relationship between two elements in a system where the cause does not produce a proportional (straight line effect)

Question 17

Stock

Answer 17

An accumulation of material or information that has built up in a system over time. It is the memory of the history of changing flows within the system. Stock can be increased by decreasing its outflow rate or increasing its inflow rate. They act as delays of buffers or shock absorbers in the system

Question 18

Flows

Answer 18

Material or information that enters or leaves a stock over a period of time

Question 19

Public Good

Answer 19

Items that can be produced relatively cheaply, or already exist, but are very difficult to prevent users from enjoying or participating in, technically referred to in economics as the inability to exclude. Commonly owned resources = commons

Question 20

Externality (positive and negative)

Answer 20

effects that are felt by others outside of the parties to the transaction. Negative externality: e.g. pollution, will typically include excess consumption by customers who observe this relatively lower price: more example: over-absorption of resources, pushing off costs to the future, or misallocation of risks to secondary or tertiary parties to a transaction. Positive externalities: can result from activities that is paid for by one person and is freely transferred to others for their benefit e.g. education, invention. Externalities cause a loss of efficiency in the overall system.

Question 21

Expectations

Answer 21

a possible method (policy mechanism) to alter the overall system: Expectations: government signaling priorities, social objectives, and future pathways can change people’s expectations of the future. Small shifts in priorities can cause a meaningful migration of resources, efforts and risk perception

Question 22

Uncertainty

Answer 22

another possible method (policy mechanism) to alter the overall system. Governments can affect uncertainty, which feeds back in the cost of capital and expectations, and it is often done in the positive direction (i.e. reducing uncertainty) by the provision of insurance, guarantees, or fixed payment obligations by the government to some stakeholders and market participants

Question 23

Administrative burden

Answer 23

Interventions should be low burden. many initiatives are measured by how much of the resource that is being applied goes to meet the intended goal of the policy and how much is used to administer the program. minimizing administrative burden is a reasonable goal, but may be in conflict with impact or urgency if rapid deployment is deemed necessary

Question 24

Unintended consequences

Answer 24

No matter what law or regulation is proposed, they almost always are accompanied by unintended consequences, or unexpected effects on market behavior. These are often deleterious, and if they are severe enough may give rise to the need for counterbalancing legislation to correct for these policy distortions.

Question 25

Market Distortion

Answer 25

externalities create market distortions by allowing producers to escape the full costs (or recovering the full benefits) of their actions

Question 26

Market intervention

Answer 26

Market interventions are done within the context of market participants trying to affect outcomes of the markets in which they operate. Can include simple business transactions, investments, or other more coordinated attempts by the market to improve its own function.

Question 27

Natural Monopoly

Answer 27

an industry or service for which it is only economically efficient to have a single provider. In these industries, a single provider continues to achieve cost improvements through scale, which results in a falling average cost. Adding a second provider would only raise the average cost for everybody and reduce overall system efficiency. These types of industries are sometimes referred to as decreasing cost industries.