Climate Impacts on Energy Markets: An Outsider's Perspective

Oct 21, 2009 | Peter Nelson

Climate Impacts on Energy Markets

In a paper that he acknowledges is counterintuitive and written from “an outsider perspective,” RFF Senior Fellow Timothy J. Brennan considers how future energy markets will be shaped by climate change—and flouts some conventional thinking in the process. “Aspects of how climate and conservation issues are presented that seem completely natural to the environmental and energy policy community can look peculiar from the perspective of an economist who studies markets and market failure more generally,” Brennan writes.

In “The Challenges of Climate for Energy Markets,” Brennan notes that he brings the discipline of an industrial organization economist to the climate debate. Such a background, he says, uses not only the “stereotypical focus on the efficiency of markets, the likelihood of market failure, and the effects of methods to regulate prices and organization structure. It also means that one can take advantage of outsider status to challenge some of the often-implicit presumptions in the climate and energy efficiency policy conversation,” which he illustrates with a four-question quiz that illuminates some of the peculiar uses of language one can find in climate change and energy efficiency policy.

Brennan then examines in detail six major areas of climate policy, including cap-and-trade versus a carbon tax, energy efficiency, and mitigation versus adaptation. He follows this with a discussion of several issues affecting not just how we deal with climate, but also our understanding of the severity of the problem. “Climate policy,” Brennan notes, “invokes not just economics but also ethical questions regarding the standing of future generations and the reduction of environmental benefits to willingness-to-pay.”

Planners in the public and private sectors need to be aware not only of the economic policy challenges, he says, but also arguments that may influence the intensity of the climate policies with which they have to cope.

excerpts from the paper: 

“Suppose that human generations were non-overlapping, like garden flowers. Each generation is born at the same time, lives for 80 years, and dies. There is no direct reproductive link between individuals in one generation and those in the next. In such a world, one might expect persons in each generation to treat climate or other environmental resources as theirs alone to use—in effect, have a very high discount rate.


“But nothing about that discount rate is ethically justified, since no generation has preferential ethical standing. Were all persons behind John Rawls’s ‘veil of ignorance,’ not knowing in which generation they would live, they would adopt institutions that gave each equal standing in claims for resources, balancing exhaustion of some resources against increased knowledge or production of others. Politically and economically, private attitudes regarding the future will affect the intensity of efforts to address climate change and other issues. A recent survey of U.S. policy concerns found that climate change ranks 20th out of 20 concerns presented to U.S. residents. Such attitudes tell us a great deal about whether climate policies will be adopted but little about whether they should be.”    Timothy J. Brennan
Senior Fellow

“Climate policy presents numerous challenges within the economics paradigm to consumers, businesses, and regulators. Understanding how those policies play out may require an appreciation of norms and standpoints outside the familiar boundaries of economic thinking.”