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Unformatted text preview: 139 Reflections—The Economics of Renewable Energy in the United States Geoffrey Heal ∗ Introduction Renewable energy has become the energy du jour in the United States. In his inaugural address, President Obama promised to “ . . . harness the sun and the winds and the soil to fuel our cars and run our factories.” The U.S. Department of Energy (DOE) asserts that 10 percent of U.S. electricity should come from renewables by 2012 and 25 percent by 2025. 1 These aims are supported by the Renewable Portfolio Standards (RPS) of 28 states, which require that between 15 and 20 percent of all electricity be from renewable sources by 2020–2030. For those with a historical bent, there is a real sense of d´ej`a vu here: three centuries ago, we used nothing but renewables, with a fully sustainable energy system consisting of wind power (windmills), hydropower (water mills), and biofuels (wood stoves and animal power). Now we are trying to return to the past, with the addition of a few new sources such as solar and geothermal. But in the interim our population has increased by a factor of ten and our economic activity by several orders of magnitude. One might think that the current goals for renewable energy are based on a detailed analysis of the prospects for a rollout of renewable energy, and that there is a comprehensive literature on the economics of renewable energy. Sadly, this is not the case: there is a literature containing some notable contributions, but nothing remotely in keeping with the emphasis on renewables in policy circles. So this article is both a reflection on the literature we have now and a call for a literature that we need to have. I begin with some background and a review of the economic factors that are relevant to understanding renewable energy. I then examine each of the renewable technologies, studying their economic characteristics and the role that they can be expected to play in the U.S. energy system over the next few decades. ∗ Columbia Business School; e-mail: [email protected] I am grateful to Rob Stavins, Suzy Leonard, and students in my class “Current Developments in Energy Markets” for valuable comments and insights. 1 http://www.whitehouse.gov/agenda/energy_and_environment. Review of Environmental Economics and Policy , volume 4, issue 1, winter 2010, pp. 139–154 doi:10.1093/reep/rep018 Advance Access publication on December 14, 2009 C The Author 2009. Published by Oxford University Press on behalf of the Association of Environmental and Resource Economists. All rights reserved. For permissions, please email: [email protected] 140 G. Heal Background The first discussion of renewables in the economics literature was in the post-1973 oil shock era, when we rediscovered and refined Hotelling’s work on resource depletion. We invented the phrase “backstop technology,” a technology that would eventually replace exhaustible resources with an energy source continuing forever. Partha Dasgupta and I used the idearesources with an energy source continuing forever....
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This note was uploaded on 11/12/2010 for the course ECON M134 taught by Professor Bresnock during the Spring '08 term at UCLA.
- Spring '08