Energy Economics and Policy Spring 2013 ENV/ENERGY 635

Syllabus as of 2/27/2013. Will be updated as course progresses.

Nicholas School of the Environment 1.5 credits Duke University

Time Location T,TH 3:05–4:20 pm Energy Hub, Gross Hall 103

Instructor Teaching Assistant Professor Richard Newell David Kaczan [email protected] [email protected] Office hours: T 4:20-5:30pm Office hours: W 1-3pm in Gross Hall 100B in Gross Hall (Energy Hub Faculty Suite) Office: LSRC A311 Assistant: Michelle Jones ([email protected]; 613-1305)

Course Description and Prerequisites

This course examines the economics of markets and policies for various energy supply sources (such as petroleum, coal, natural gas, electricity, renewables, nuclear), energy demand and efficiency, and their interactions with each other and with the rest of the economy and environment. We will explore rationales for why markets for energy and energy-using technologies have historically been subject to extensive government intervention. We will analyze the effects of a variety of government policy responses, including energy price regulation, traditional and market-based environmental regulation, and policy motivated by concerns over energy security. The objectives of the course are to increase your comprehension of the economic behavior of energy and environmental markets and policies and to develop your ability to apply the tools of economic analysis to energy and environmental policy issues.

Prerequisites. Introductory microeconomics (ECON 101 Economic Principles or equivalent), applied regression analysis (ENV 710 Applied Data Analysis, ECON 208D Intro. to Econometrics, or equivalent), and college-level calculus.

Textbook and Readings Readings are indicated in class schedule below, and will include journal articles and book chapters drawn from the academic literature, policy-oriented publications, and governmental reports. Readings will be available on the internet or via Sakai. The following textbook is on reserve at the library: Viscusi, W. Kip, Joseph E. Harrington and John M. Vernon. 2005. Economics of Regulation and Antitrust, 4th Edition. Cambridge: MIT Press. Read Today in Energy on a daily basis: www.eia.gov/todayinenergy/. Parts of the following publications show up several places on the syllabus: Resources for the Future. 2005. Navigating Energy Choices in the 21st Century. Resources 156:7-35. Available at: http://www.rff.org/rff/Documents/RFF_Resources_156.pdf. Resources for the Future. 2007. America’s Oil Addiction: Tensions and Tradeoffs. Resources 163:6-29. Available at: http://www.rff.org/rff/Documents/RFF-Resources-163.pdf.

1 Syllabus as of 2/27/2013. Will be updated as course progresses.

Resources for the Future. 2007. Assessing U.S. Climate Policy Options. Washington, DC: Resources for the Future. The following regular reports from U.S. and International agencies are good information sources: U.S. Energy Information Administration (EIA). 2012. Annual Energy Outlook 2012 with Projections to 2035. Washington, DC: EIA. http://www.eia.gov/forecasts/aeo/ (Also available on Sakai/Readings 1.) EIA. 2011. International Energy Outlook 2011. Washington, DC: EIA. http://www.eia.gov/forecasts/ieo/ (Also available on Sakai/Readings 1.) EIA. Monthly. Short-Term Energy Outlook. Washington, DC: EIA. http://www.eia.gov/forecasts/steo/ EIA NEMS Model Documentation: http://www.eia.gov/forecasts/aeo/appendixe.cfm#nems EIA. 2012. Annual Energy Review 2011. Washington, DC: EIA. http://www.eia.gov/totalenergy/data/annual/index.cfm (Also available on Sakai/Readings 1.) International Energy Agency (IEA). 2012. World Energy Outlook 2012. Paris: IEA/OECD. http://www.iea.org/weo/ (Also available on Sakai/Readings 1.)

Sakai

Readings, class announcements, schedule changes and grades will all be posted to the course Sakai site (https://sakai.duke.edu/portal). Anyone having trouble working with the site should seek help from their fellow students, or contact Information Technology.

Course Assignments

Written assignments should be presented in a format appropriate to the assignment. Unless otherwise instructed, use 8.5”x11” paper, Times Roman 12 pt font, single-spaced text, double- space between paragraphs, 1” margins, page numbers, with sub-headers to help the reader. Assignments cannot be hand-written. Assignments are available on Sakai

The Simulation Analysis and Econometric Paper should be prepared independently. Students may discuss generic approaches to conducting the analysis and spreadsheet simulation, but may not directly share programming or their written report.

Simulation Analysis and Report. As a policy analyst at the U.S. Department of Energy, you will conduct a quantitative analysis to evaluate the expected net benefits of the U.S. Strategic Petroleum Reserve. You will employ Excel to conduct your analysis and will report your methods and results in a brief report. Report length: 3-5 pages of text, plus tables and figures. See assignment description for more detail.

Econometric Report. As a consultant to a U.S. government agency, you will prepare an econometric report for agency staff. You will use energy, environmental, and economic data to develop a statistical model relevant to a contemporary energy and environmental policy issue (to be announced in class). You will undertake a regression analysis (or other appropriate statistical approach) and, based on this econometric work, you will write a brief report describing your

2 Syllabus as of 2/27/2013. Will be updated as course progresses.

research question, conceptual model, empirical approach, data, results, and implications. Use of STATA is strongly encouraged. Report length: 5-10 pages of text, plus tables, figures, and appendices. See assignment description for more detail.

Grading

Each assignment will be evaluated using a number grade (0 - 100) and your overall number grade will be determined using the following weights:

Simulation Analysis: 50% Econometrics Paper: 50% Total: 100%

Your number grade will be translated into a letter grade of A, A-, B+, B, B-, C+, C, C-, or F.

Class Participation. Class participation is not optional. Students are expected to prepare for class by reading the assigned reading prior to the class for which they are listed, and to participate in class sessions.

Policy on Late Assignments. All assignments are due at the beginning of class on the posted due date unless otherwise indicated. Late assignments will be marked down by 10 points for each day (or part thereof) late. Assignments that are still incomplete after 7 days after the due date receive zero credit. It is your responsibility to ensure that your assignments are completed on time. If you hand in an assignment late, it is your responsibility to get it to the Grader or Teaching Assistant. If you are ill or have a family emergency that prevents you from being able to complete the assignment on time, please submit the web-based short-term illness form prior to the class in which the assignment is due. The short-term illness form can be found at: www.aas.duke.edu/trinity/t-reqs/illness/. You are governed by the Nicholas School Honor Code in completing this form (see below). If you do not complete this form before class, the standard late policy will apply.

Nicholas School Honor Code and the Duke Community Standard

All activities of Nicholas School students, including those in this course, are governed by the Duke Community Standard, which states:

“Duke University is a community dedicated to scholarship, leadership, and service and to the principles of honesty, fairness, respect, and accountability. Citizens of this community commit to reflect upon and uphold these principles in all academic and nonacademic endeavors, and to protect and promote a culture of integrity.

To uphold the Duke Community Standard:  I will not lie, cheat, or steal in my academic endeavors;  I will conduct myself responsibly in all my endeavors; and  I will act if the Standard is compromised.” Please add the following affirmation to the end of all assignments and sign your name beside it: “I have adhered to the Duke Community Standard in completing this assignment.”

3 Syllabus as of 2/27/2013. Will be updated as course progresses.

Course Topics, Readings, and Assignments Schedule (will be updated as course progresses)

*Required readings are indicated with an asterisk* and should be completed before the class on which they are listed. Other readings offer supplementary material and/or an alternative presentation of similar information. Readings are available on Sakai unless indicated otherwise.

No Date Topics, readings, and assignments Variable For those students seeking an introduction to STATA statistical software, please attend a STATA Review session through Duke Libraries: http://library.duke.edu/data/news/index.html . Information from past review sessions is located here: (Slides and Sample Data) 1 T, 1/15 Class Overview and Review of Welfare Economics *Dahl, Carol A. 2004. Chapter 1 (Introduction, pp. 1-8) and Chapter 2 (Energy Lessons from the Past for the Future, pp 9-37) in International Energy Markets: Understanding Pricing, Policies, and Profit. Tulsa, OK: Pennwell Press. *U.S. Energy Information Administration (EIA). 2012. Annual Energy Outlook 2012 with Projections to 2035. Executive Summary. Washington, DC: EIA. http://www.eia.gov/forecasts/aeo/ *Newell, Richard G. and Stuart Iler. 2012. The Global Energy Outlook. Duke University. *Review http://www.eia.gov/totalenergy/ and http://www.eia.gov/totalenergy/data/annual/perspectives.cfm EIA. 2012. Annual Energy Review 2011. Washington, DC: EIA. http://www.eia.gov/totalenergy/data/annual/index.cfm International Energy Agency (IEA). 2012. World Energy Outlook 2012. Executive Summary. Paris: IEA/OECD. http://www.iea.org/weo/ 2 TH, 1/17 Overview of Energy Supply, Demand, and Coal *Dahl, Carol A. 2004. Chapter 3 (Perfect Competition and the Coal Industry, pp. 39-64) in International Energy Markets: Understanding Pricing, Policies, and Profit. Tulsa, OK: Pennwell Press. *IEA. 2011. World Energy Outlook 2011. Part C Outlook for Coal Markets: IEA/OECD. http://www.iea.org/weo/ *Review World Coal Institute. 2005. The Coal Resource. London: World Coal Institute. http://www.worldcoal.org/assets_cm/files/PDF/thecoalresource.pdf *Review EIA coal website. http://www.eia.gov/coal/ Viscusi, et al. Efficiency and Technical Progress. Chapter 4, pp. 79-82. EIA. 2006. Coal Production in the United States–An Historical Overview. http://www.eia.doe.gov/cneaf/coal/page/coal_production_review.pdf IEA. 2012. Coal Medium-Term Market Report 2012. Paris: IEA. Simulation analysis and report assigned: available on Sakai

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3 T, 1/22 Introduction to SPR, Simulation Analysis, and Benefit-Cost Analysis *Review simulation assignment and associated readings/templates *OMB. Guidelines for Regulatory Impact Analysis http://www.whitehouse.gov/sites/default/files/omb/inforeg/regpol/circu lar-a-4_regulatory-impact-analysis-a-primer.pdf Viscusi, et al. The Making of a Regulation. Chapter 2, pp. 13-52. U.S. Environmental Protection Agency. 2010. Guidelines for Preparing Economic Analyses. Note: Finished coal material from prior class 4 TH, 1/24 Price Controls, Taxes, and Subsidies *Dahl, Carol A. 2004. Chapter 3 (Perfect Competition and the Coal Industry, pp. 65-79) in International Energy Markets: Understanding Pricing, Policies, and Profit. Tulsa, OK: Pennwell Press. *Koplow, D. 2004. Subsidies to Energy Industries. Encyclopedia of Energy 5:749-764. *United Nations Environment Programme. 2008. Reforming Energy Subsidies. Paris: OECD. http://www.unep.org/pdf/pressreleases/reforming_energy_subsidies.pdf EIA. 2011. Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010. http://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf Subsidyscope website: http://subsidyscope.org/energy/ Global Subsidies Initiative website: http://www.globalsubsidies.org/en Viscusi, et al. Introduction to Economic Regulation. Chapter 10, pp. 357- 378. 5 T, 1/29 Petroleum Markets *Viscusi, et al. Economic Regulation of Energy: Crude Oil and Natural Gas. Chapter 18, pp. 641-670. *Newell, Richard G. 2006.What’s the Big Deal About Oil? How We Can Get Oil Policy Right. Resources 163:6-29. *RFF. 2006. Oil Policy Strategies: Assessing the Tradeoffs. Resources 163:29. National Petroleum Council. 2011. Prudent Development: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources. See: http://www.npc.org/ Note: Finished subsidies material from prior class

5 Syllabus as of 2/27/2013. Will be updated as course progresses.

6 TH, 1/31 Petroleum Markets (cont.) and Energy Security *Levi, Michael A. 2010. Energy Security: An Agenda for Research. Washington, DC: Council on Foreign Relations *Parry, Ian W.H. and J.W. Anderson. 2005. Petroleum: Energy Independence is Unrealistic. Resources 156:11-15. *Brown, Stephen A. and Huntington, Hillard G. 2010. Reassessing the Oil Security Premium. Discussion Paper 10-05. Washington, DC: Resources for the Future. (http://www.rff.org/RFF/Documents/RFF- DP-10-05.pdf) Kotchen, Matthew and N.E. Burger. 2007. Should We Drill in the Arctic National Wildlife Refuge? An Economic Perspective. Energy Policy 35:4720-4729. 7 T, 2/5 Natural Gas Markets and Regulation *Viscusi, et al. Economic Regulation of Energy: Crude Oil and Natural Gas. Chapter 18, pp. 671-687. *Rogers, Howard. 2011. Shale gas—the unfolding story. Oxford Rev Econ Policy 27 (1): 117-143. Secretary of Energy Advisory Board. 2011. The SEAB Shale Gas Production Subcommittee. Ninety-Day Report. August 18, 2011 8 TH, 2/7 Electricity Markets Guest Lecturer: Dalia Patino-Echeverri *Viscusi, et al. Natural Monopoly Regulation and Electric Power. Chapter 12, pp. 430-464.

Simulation analysis/report due: post report PDF and Excel spreadsheet to Sakai before class AND hand in printed copy at beginning of class. 9 T, 2/12 Electricity Regulation and Restructuring EIA. 2000. The Restructuring of the Electric Power Industry: A Capsule of Issues and Events. Washington, DC: EIA. EIA. 2000. The Changing Structure of the Electric Power Industry 2000: An Update. Washington, DC: EIA. Viscusi, et al. Natural Monopoly Regulation and Electric Power. Chapter 12, pp. 430-464. Note: Finished material on natural gas exports, price spreads, electricity LMP

Econometrics paper assigned: available on Sakai 10 TH, 2/14 Introduction to Econometric Project and STATA 11 T, 2/19 Continue Introduction to Econometric Project and STATA Climate Change Economics and Policy *Goulder, Lawrence and William Pizer. 2005. The Economics of Climate Change. The New Palgrave Dictionary of Economics, Second Edition.

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*Toman, Michael. 2003. Economic Analysis and the Formulation of U.S. Climate Policy. RFF Discussion Paper 02-59. Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866. Interagency Working Group on Social Cost of Carbon, United States Government. 12 TH, 2/21 Climate Change Economics and Policy (cont.) Guest lecturer: Professor William Pizer, Sanford School of Public Policy *Parry, I.W.H. and W.A. Pizer. 2007. Emissions Trading versus CO2 Taxes versus Standards. Issue Brief 5 in Assessing U.S. Climate Policy Options. Washington, DC: Resources for the Future. *Stavins, Robert N. 2007. A U.S. Cap-and-Trade System to Address Global Climate Change. Washington, DC: The Brookings Institution. *Metcalf, Gilbert E. 2007. A Proposal for a U.S. Carbon Tax Swap. Washington, DC: The Brookings Institution. 13 T, 2/26 Economics of Energy Technology Innovation and Deployment *R.G. Newell, A.B. Jaffe and R.N. Stavins. 2005. A Tale of Two Market Failures: Technology and Environmental Policy. Ecological Economics, 54:164-174 *Newell, R.G. 2007. Climate Technology Research, Development, and Demonstration: Funding Sources, Institutions, and Instruments. Issue Brief 9 in Assessing U.S. Climate Policy Options. Washington, DC: Resources for the Future. *Newell, R.G. 2007. Climate Technology Deployment Policy. Issue Brief 10 in Assessing U.S. Climate Policy Options. Washington, DC: Resources for the Future. * Gillingham, K., R.G. Newell, and K. Palmer, Energy efficiency economics and policy, Annual Review of Resource Economics, vol. 1 (2009), pp. 597-619. Pizer, William A. 2006. The Economics of Improving Fuel Economy. Resources 163:21-25. Fischer, C. Winston Harrington, and Ian Parry. 2007. Should fuel economy standards be tightened? The Energy Journal 28(4):1-29.

Extra: Alternative/Renewable Markets and Policy Darmstadter, Joel and Karen Palmer. 2005. Renewable Sources of Electricity: Safe Bet or Tilting at Windmills? Resources 156:24-27. Kopp, Raymond J. 2006. Replacing Oil: Alternative Fuels and Technologies. Resources 163:21-25. Palmer, Karen and Dallas Burtraw. 2005 Cost-Effectiveness of Renewable Electricity Policies. RFF Discussion Paper 05-01. Washington, DC: Resources for the Future. Newell, Richard G. 2005. The Hydrogen Economy: Laying the Groundwork. Resources 156:20-23. TH, 3/7 Econometric report due by 11:55 pm. Post PDF of report to Sakai and hand in printed copy to teaching assistant’s mailbox in LSRC.

7 Syllabus as of 2/27/2013. Will be updated as course progresses.

8 Syllabus as of 2/27/2013. Will be updated as course progresses.

Other Background Reading (Material that is presumed to be covered in prior courses)

Optimal Resource Allocation over Time Tietenberg, Tom. 2006. Chapter 5 (Sustainable Development, pp. 88-102), Chapter 7 (Allocation of Depletable Resources, pp. 128-149), and Appendix to Chapter 2 (pp. 32) in Environmental and Natural Resource Economics. Seventh Edition. Boston: Pearson. Economics of Pollution Control Policy: Externalities and Public Goods Fullerton, D. and Robert N. Stavins. 1998. How Economists see the Environment. Nature 395:433-434. Tietenberg, Tom. 2006. Property Rights, Externalities, and Environmental Problems. Chapter 4 (pp. 62-87) in Environmental and Natural Resource Economics. Seventh Edition. Boston: Pearson. Viscusi, et al. Environmental Regulation. Chapter 21, pp. 745-787. Economics of Pollution Control Policy: Alternative Policy Instruments Tietenberg, Tom. 2006. Economics of Pollution Control. Chapter 15 (pp. 338-369) in Environmental and Natural Resource Economics. Seventh Edition. Boston: Pearson. Tietenberg, Tom. Economic Instruments for Environmental Regulation. Oxford Review of Economic Policy 6(1):17-33. Stavins. Robert N. 1998. What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading. Journal of Economic Perspectives 12(3): 69-88. Stavins. Robert N. 2003.Experience with Market-Based Environmental Policy Instruments. In Handbook of Environmental Economics, Volume I, eds. Karl-Göran Mäler and Jeffrey Vincent, Chapter 9, pp. 355-435. Amsterdam: Elsevier Science.