The International Energy Workshop 2012

I attended the International Energy Workshop 2012 conference in Cape Town last week, presenting my paper on the possibility of an economy whose price levels respond to energy scarcity in such a way as to disincentivise the use of marginal energy resources and alternatives (and conditions for this to be true).

This conference consisted of a mixture of effectively three disciplines:

• The smallest set of attendees (it seemed to me) were engineering academics. Despite their small number, this group were well represented amongst the keynote speakers. Prof Filip Johnsson from Chalmers University in Sweden spoke on progress (not much!) of Carbon Capture & Storage deployment, and made the point that even if CCS is not ultimately needed for energy infrastructure, with current technology something like CCS will be needed for industrial CO2 emissions from e.g. iron, steel and cement industries, since these are process emissions rather than emissions associated with the energy that these sectors use. Prof Alexander Glaser of Princeton spoke on propects for nuclear (there will be no large scale early expansion, especially after Fukushima), with some focus on small modular reactors which could cut costs and mitigate proliferation and safety concerns. He did not think there were any short term imperatives to develop fast breeder technologies, and he did not mention thorium or fusion.  

• A major group both amongst the keynote speakers and the speakers at the parallel sessions were the energy modelling community. This work, as far as I understand it, takes energy demand and policy constraints exogenously, and uses large computational models (e.g. OSeMOSYS) of the energy sector to generate the optimum energy supply. These models are used in scenario analysis for reports for e.g. Rio+20 (Prof Mark Howells), IRENA (Dr Asami Miketa), IEA-ETSAP (Dr Uwe Remme), among others. A typical example of this type of work was Energy, economic and environmental implications of unconventional gas - Gabrial Anandarajah of UCL Energy Institute, which asked how the availability of cheap unconventional gas affects energy scenarios under various policies.

• Others, including me, are economists who work on energy or climate change issues. Amongst the keynote speakers, Prof Tom Rutherford of Wisconsin talked about one of his favourite energy economics papers: Hogan & Manne (1977) 'Energy-Economy Interactions: The fable of the elephant and the rabbit'. This paper makes the point that energy demand may be inelastic and so the contribution of energy to aggregate production cannot be determined from its current factor share: as availability falls to zero, the share of income to this factor of production may tend to 100%. Highlights for me from this group (other than my own paper of course!) amongst the parallel sessions were:

• A Consumer-Producer Model for Induced Technological Progress - Bob van der Zwann: This presentation was a good summary of theories of the learning curve, and how it can be decomposed. This has obvious applications to renewable energy given the large cost reductions that have been seen in solar: how much of these large cost reductions are due to learning-by-doing and how much are due to economies of scale and other factors?

• Funding low-carbon investments in the absence of a carbon tax - Julie Rozenberg: The idea is that if climate mitigation investments are a cost to this generation and a benefit to future generations (I don't think I accept this premise - it's possible that we, or our parents, are the richest generation - but taking it as given...) then an appropriate way to fund these investments is issuing certificates (creating money) and tightening monetary policy such that overall consumption for the current generation is unaffected. The certificates function as an investment subsidy for green technology whilst higher interest rates penalise other investments. The productive capacity of the future generation is adversely affected at the expense of the low carbon infrastructure. Therefore the future generation benefits from the climate change mitigation at the expense of its own consumption. This is quite a neat idea and a side effect would be that in present circumstances, with monetary policy at the ZLB, we get climate mitigation for free using otherwise unemployed resources.

• A multi-phase model of optimal transition to global climate stabilization - Adriaan van Zon: This is an endogenous growth and optimal investment model that derives optimal stabilisation paths given a climate threshold. I especially liked this because its approach is consistent with the approach I advocate in my paper 'A balance of questions: what can we ask of climate change economics'.

• Overlapping generation extension of DICE-2007 model - Andrey Polbin: The dispute between Nordhaus and Stern centred on the use of parameters that produced real interest rates consistent with those we observe (Nordhaus) or using ethically determined parameters (Stern). Using an OLG model allows agents to make consumption-savings decisions using their high private time preferences, but policymakers can set climate policy by maximising a weighted sum of the utilities of all generations where the weights use a very low, ethically determined, rate of time preference. We end up with a result that can match the observed interest rates and but is intermediate between Stern and Nordhaus in the level of optimal climate mitigation.

• When starting with the most expensive option makes sense - Adrien Vogt-Schilb: Reading off the optimal carbon price from a Marginal Abatement Cost Curve can be sub-optimal in that it may not take into account the time to deploy the various technologies. The current real-world example of this issue is the widespread advocacy for using gas as a low carbon "bridging technology" that will allow intermediate targets to be met, but which could lock us into carbon emitting infrastructure and prevent long term targets from being reached. The social planner's solution may be to invest in difficult and expensive mitigation technologies first, whilst saving some cheap and quick projects for later. However, any price signal that causes the decentralised economy to implement the difficult and expensive mitigation technologies from the outset, will mean that the quick and cheap technologies are also deployed immediately (therefore, it's not clear what the decentralised policy is that could implement the social planner's solution).

• Demand for gasoline is more inelastic than commonly thought - Tomas Havranek: This was a meta analysis of gasoline price elasticities which controls for publication bias. It produces a short run elasticity of 0.1 and a long run elasticity of 0.3. This compares with a previous study which did not control for publication bias which found 0.3 and 0.8 respectively. These results seem consistent with those reported by James Hamilton (blog & paper).

• Imperfect cartelization in OPEC - Samuel Okullo: This presentation described an ingenous model of OPEC where the relationship between the OPEC members could vary between a perfect cartel (where they act as a single supplier) and Cournot oligopolistic competitors. Given their available resources, and the external competition that they face, the optimal strategy of OPEC members is intermediate between a perfect cartel and a competive oligopoly. The model predicts that, in this optimum, Saudi Arabia sticks to its OPEC quota whereas other members overproduce - as is seen in the data.

Finally, here's a picture: