Environmental Engineering Reference
In-Depth Information
country change over time through the development of new inventions and tech-
niques for production and they are embedded into the functional form of the pro-
duction relationship.
This chapter focuses on the economics of energy and climate policy and the
complexities confronting the regulation needed in the energy sector. The com-
plexities are due to many factors. The basic one is that energy and electricity exert
their in
uence over all economic sectors and citizens. Even though most of our
analysis will be conducted from a microeconomic perspective, we consider that
some remarks regarding the
principles that govern energy and
climate policy are also needed. Thus, we start by clarifying two key concepts in the
economics of production that are often confused in this debate: reproducibility and
the distinction between primary and intermediate inputs. With regard to repro-
ducibility, it must be noted that some inputs to production are nonreproducible,
while others can be manufactured within the economic production system. Capital
and labor are reproducible factors of production, while energy is a nonreproducible
factor of production. Although most economists continue to dismiss the ideas
spelled out explicitly in the
“
macroeconomic
”
report of the Club of Rome
Meadows et al. [
21
] and even ecologists have largely shifted their attention away
from exhaustibility of resources to focus on various threats to the biosphere, the
question over the need to shift the energy paradigm from a nonrenewable (oil) era to
a renewable (solar) era is still present in the energy policy debate. In fact, one of the
justi
“
Limits to Growth
”
cations of the concern of many developed countries about energy security is
related to the fear that the growing demand for imports of oil and gas by developing
countries, especially China and India, will lead to greater worldwide dependence on
and competition for a scarce resource [
7
].
With regard to the primary/intermediate nature of factors of production, primary
factors are inputs that exist at the beginning of the period under consideration and
are not directly used up in production, while intermediate inputs are those created
during the production period under consideration and are used up entirely in pro-
duction. Economists usually think of capital, labor, and land as the primary factors
of production, while resources such as fuels are intermediate inputs. This explains
the mainstream growth theory focus on the primary inputs, and in particular, capital
and labor, and a lesser and somewhat indirect role of energy in the theory of
production and growth. More recently some authors claim that
energy is actually a
much more important factor of production than its small cost share may indicate
“
”
and that
a future scenario of shrinking reserves of fossil fuels and an increasingly
stringent climate policy, with associated rising energy prices, has very negative
implications for economic growth worldwide
“
[
3
].
Another distinctive feature of energy as compared to capital and labor is the
environmental impact associated to its use. Global mean temperature has increased
over the past 100 years. There is new and stronger evidence that most of the observed
warming over the past 50 years is attributable to greenhouse gas (GHG) emissions
from human activities, in particular to emissions of CO
2
(the most important GHG)
from burning fossil fuels and land-use changes, and other GHGs from industry,
transport, waste management, and agriculture. Industrialized countries rely on a
”
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