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Energy economics

Discipline that includes topics related to supply and use of energy in societies

  • 6 min read
  • 5 chapters

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Interdisciplinary scientist Vaclav Smil has asserted that "every economic activity is fundamentally nothing but a conversion of one kind of energy to another, and monies are just a convenient (and often rather unrepresentative) proxy for valuing the energy flows."

History

Energy related issues have been actively present in economic literature since the 1973 oil crisis, but have their roots much further back in the history. As early as 1865, W.S. Jevons expressed his concern about the eventual depletion of coal resources in his book The Coal Question. One of the best known early attempts to work on the economics of exhaustible resources (incl. fossil fuel) was made by H. Hotelling, who derived a price path for non-renewable resources, known as Hotelling's rule.

Development of energy economics theory over the last two centuries can be attributed to three main economic subjects – the rebound effect, the energy efficiency gap and more recently, 'green nudges'.

Rebound effect studies (1860s to 1930s)

While energy efficiency is improved with new technology, expected energy savings are less-than proportional to the efficiency gains due to behavioural responses. There are three behavioural sub-theories to be considered: the direct rebound effect, which anticipates increased use of the energy service that was improved; the indirect rebound effect, which considers an increased income effect created by savings then allowing for increased energy consumption, and; the economy-wide effect, which results from an increase in energy prices due to the newly developed technology improvements.

Energy efficiency gap studies (1980s to 1990s)

Suboptimal investment in improvement of energy efficiency resulting from market failures/barriers prevents the optimal use of energy. From an economical standpoint, a rational decision-maker with perfect information will optimally choose between the trade-off of initial investment and energy costs. However, due to uncertainties such as environmental externalities, the optimal potential energy efficiency is not always able to be achieved, thus creating an energy efficiency gap.

Green nudges (1990s to Current)

While the energy efficiency gap considers economical investments, it does not consider behavioural anomalies in energy consumers. Growing concerns surrounding climate change and other environmental impacts have led to what economists would describe as irrational behaviours being exhibited by energy consumers. A contribution to this has been government interventions, coined "green nudges’ by Thaler and Sustein (2008), such as feedback on energy bills. Now that it is realised people do not behave rationally, research into energy economics is more focused on behaviours and impacting decision-making to close the energy efficiency gap.

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