Naive Energy Markets

Monday, May 9, 2016 - 10:30am - 11:30am
Keller 3-180
David Spence (The University of Texas at Austin)
Ideological and partisan divisions dominate the field of energy law, a body of regulation that encompasses two basic challenges: (i) the problem of ensuring well-functioning energy markets, and fair energy prices, and (ii) the problem of managing the many and varied externalities associated with the production and delivery of energy. Economic thought has exerted tremendous sway over policy responses to these two challenges, as energy market regulation increasingly embraces competition, and the logic and elegance of markets. At the same time, policymakers have sought to green energy markets through environmental and clean energy mandates. These two forces are in tension. Advocates of market solutions decry remaining economic regulation as “central planning” or “socialism,” and environmental regulation using the now ubiquitous “war on” language, as illustrated by the phrase “EPA’s war on coal.” The modern, scientific version of welfare economics distorts our perception of the relationships between regulation and markets, in ways that traditional (classical) political economy did not. First, neoclassical economic models have difficulty fully accommodating social and emotional drivers of individual preferences that do not fit neatly into economic logic, or that otherwise make problems mathematically intractable; these drivers bear directly on the question of when governments should intervene in markets, and exist within a kind of blind spot in modern welfare economics. Second, while behavioral scientists have been working to understand that blind spot, their work still fights for acceptance within the discipline of economics, and it is overlooked by politicians who use economic models selectively and instrumentally, cherry-picking the economics literature to influence policy in the “government versus markets” debate. The result is that energy markets often do not and cannot resemble the idealized markets of economic theory and free marketeers’ dreams. The economist’s goal of allocative efficiency misses notions of fairness and risk management that are vitally important to voters and policymakers. As a consequence, freer energy markets struggle with the problem of attracting sufficient private investment to ensure a reliable, reasonably priced energy supply, and the problem of managing (pricing, and allocating geographically) the externalities of those energy facilities. The disconnect between real and idealized markets explains why regulators continue to intervene in even the most deregulated and competitive American energy markets, in order to ensure a fair price of energy and to restrict the shifting of external costs from producers to society.
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