Energy & Economics — an Exploratory Exposition


For years, carbon emissions and climate change have simply been discarded from the study of economic efficiency as an externality. The latest IPCC report on the dreadful progress countries all over the world have made with regards to their commitments shows that our approach needs a radical change. The environmental damage that industrial and business activity causes in general needs to be considered explicitly as a cost, and moreover, a market failure.

In this global battle against climate change, it cannot be discounted that developed countries have a distinct technological edge over developing countries, who are in a much more inefficient, backward state of dependence on fossil fuels for their energy needs. To put it simply, the lower stage of their economic development correlates with the specific phase of the energy transition cycle they are in.

Energy Economics is the field of economics that studies the market forces that influences greenhouse gas emissions. This includes how fiscal policies such as energy tax, price regulation/ deregulation, energy efficiency and policies for controlling emission, carbon taxes and efficiency standards can drive reductions in greenhouse gas emissions. It uses fundamental metrics of economic analysis to assess how firms and companies are motivated by different economic policies to use and rely on different energy sources, depending upon market structures and regulatory structures, as well as distributional and environmental consequences. Some of its focus is on:

  1. The economic principles and characteristics of various, interrelated energy markets
  2. Studying the role of market and regulatory structure, environmental and economic distributional impacts.
  3. Engaging with the policy options and market mechanisms to drive more sustainable and equitable energy access
  4. Predicting efforts of various policy outcomes on markets, as well as on the environment and social systems
  5. Exploring economic and socio-political dimensions of international commitments to carbon reduction

The relationship between technological/economic development and the climate has always been tenuous. Economics have maintained great optimism about the natural corrective that market forces provide; even though economic development is the very process that sets in motion an exploitation of the natural resources for man’s benefit, the belief is that technological advancement would correct this historical tide. However, energy economics highlights technology and emerging sources of energy as unexplained but vital elements of energy markets. Unchecked development leads to overproduction and a depletion of supply, which will eventually become prohibitive and start a journey toward extinction.

Ultimately, a prioritization of the short-term is what has led us here. There needs to be greater regulation of energy markets while also creating incentives for a faster shift towards renewable energy. Sustainability is another name for correcting inefficiencies, and whichever terminologies or approaches one uses, energy economists are engaging in social engineering over year at a time.