Ep. 41, Stanford Conference on Environmental and Energy Economics

[00:00:00] Speaker 1: Greetings from Stanford University. I'm Bill Barnett, professor at the Stanford Doors School of Sustainability and the Stanford Graduate School of Business. And I'm Charlotte Kramer, a current senior here at Stanford. And we have with us here today Professor Hunt Alcott from the Stanford Doors School of Sustainability. And Hunt, you just ran a conference last month on energy, the environment, and economics. It's often talked about as the triple E fest among economists. And we'd love to hear about what went on at the conference. Charlotte, why don't you get us [00:00:44] Speaker 2: going? Yeah, super open-ended question. If you look back at this conference and maybe even at your department as a whole, is there one unifying problem that you think every environmental and energy [00:00:56] Hunt Alcott: economist is working on in some degree right now? Broadly, we are asking how we can design environmental policy to be more economically efficient and more equitable. And by economically efficient, I mean basically how do we get more bang for our buck, more environmental benefit per dollar or euro or UN of social costs that goes into the environmental improvement. And when I say equitable, that could mean many different things to different people. But basically, are we making sure that the most disadvantaged folks are not facing the brunt of environmental problem? And of course, there's a [00:01:40] Speaker 2: tension between those two things being the most efficient and being equitable, or would you say no? [00:01:47] Hunt Alcott: There sometimes is a tension and sometimes actually the two things go hand in hand. So I can give you an example. There's a recent nice paper by Janet Curry and co-authors published in one of the leading economics journals that looks at the improvements in air quality, in particular, fine particulate matter concentrations in the United States over the last 20 years. And the main driver of particulate matter concentration reductions was non-attainment standards. Basically, county level maximum air pollution that we allow that is dictated under the Clean Air Act amendments. And that basically said that the dirtiest counties had to clean up the fastest. And who lived in the dirtiest counties? It turned out to be the most disadvantaged. Folks on average. And so when we cleaned up the dirtiest places, which was something that is economically efficient to do because we have a sense that fine particulates are very harmful and so it was worth it to do so. That also had a bigger benefit for more disadvantaged folks in the US. [00:02:55] Speaker 1: You know, it's interesting. I'm hearing that your response there and thinking back to, you know, what we've seen over the years among people who are concerned with the environment. Charlotte's point that there's kind of an antagonism between efficiency and equity that gets brought up so much. Would you say that the example you brought up is more the rule or the exception? [00:03:19] Hunt Alcott: I don't know. I don't know that we have data at large scale to answer that specific question. What I think we do know is it's generally true that more disadvantaged folks live in more polluted areas. So I think that's a fact. And then if we think that over time, as, you know, countries demand more environmental quality, that that's getting cleaned up. I think that that would broadly suggest that the cleanup of pollution is going to be particularly good for the disadvantaged folks who fare the brunt of it. Oh, all right. [00:03:57] Speaker 2: What then do you think is the roadblock to getting clean energy and clean living conditions to everyone everywhere? Because you would think that since the dawn of civilization, we've been trying to be efficient, not necessarily equitable. But if those two things are possible together, then why is the world not equitable? [00:04:18] Hunt Alcott: Well, there's, I think it's a great question. There's, there's a lot to that. Let me take the first part of it, which was, you know, what are the barriers to getting more clean energy out there? I think there are several. One is that, you know, historically, wind and solar and other kinds of clean energy were more costly to install. And that has changed. But the energy system is something that moves particularly slowly because the investments we make now are going to be in the ground for, you know, 50 or maybe 100 years. The power plants that we have in the ground now already were built in some cases 50 or more years ago. And so the electric power industry is something that changes just very, very slowly relative to other industries. When I, you know, first started working professionally in the power industry, it was 2002. I was just out of college. Actually, I was a Stanford undergraduate master's student. And I went to work for a consulting company that was doing energy market modeling and we were basically doing simulations of what would happen if there was more stringent climate policy imposed in the US and what would happen, you know, if the local air pollution policies that prevent acid rain, for example, and smog were changed in different ways. And, you know, we had models of the power sector and what power plants were in the ground. And those models are still broadly what you would use today. And actually, most of the specific power plants that we modeled had been in the ground for at that time 40 years, and most of them, as measured by generating capacity are still in the ground now. So it's just it's an industry that moves very, very slowly. And that means that as we're making decisions now, we want to make sure that we're incentivizing the right kind of capacity going forward. So I think that's one issue just things move slowly. The second issue is, I think there are just big political constraints to implementing more efficient and effective environmental policies. With any policy issue, there are many sides and many angles. And I think especially in the US, we have been, you know, slow to get to consensus on what type of climate policy we want to have and how fast we want to move. [00:06:40] Speaker 2: Do you think the dawn of artificial intelligence is going to have a major impact on the energy industry at all? [00:06:47] Hunt Alcott: Yes. Electricity demand is growing because data centers are sucking up a lot of power. You know, this is another example of how the industry moves slowly. I mean, this is an industry that, you know, grew at 2% per year for a while. Demand grew at 1% per year. Demand basically stopped growing for a little bit. And now we're back on this path of meeting of having higher demand mostly because of AI, mostly because of data centers. And so that's one impact. I think another set of impacts is just on the efficiency with which we can supply electricity. I don't know if you want to call that AI, but basically, you know, improvements in how we optimize things are going to allow us to be more efficient in electricity supply in, I think, in various ways, including how we use transmission lines and how we allow us as electricity consumers on the demand side to respond more to changes minute to minute in system conditions. [00:07:51] Speaker 1: You know, I've always wondered the following question. I have no idea, Hunt, whether you and your colleagues have worked on this, but it grows out of your answer to Charlotte there. You know, when we decompose the components that go into the increases in carbon dioxide, We worry about the increases in carbon dioxide, as done in the KIA identity, we worry about the energy intensity of wealth, which is how I'm sort of seeing your comment on AI generating a great, great deal of demand for power in data centers. But we also have then the question of what's happening to the carbon intensity of energy and presumably AI could be used to improve the carbon footprint of humanity if it was applied in that direction. And I don't, you know, net net, I would hope that AI could actually be net beneficial to humanity when it comes to sustainability in terms of making us both more energy efficient and more carbon efficient for a given unit of energy. But I don't know. Do we have research on that? [00:09:06] Hunt Alcott: Uh, I'm not sure that we do. So I think, you know, broadly what's happening is as economies grow, they become a little more service and they become more service intensive over time. And that generally means that energy per, you know, unit of happiness or energy per unit of GDP goes down over time. But the real source of pollution reductions is going to be because we get more energy from less carbon intensive sources over time. The main driver of that in the U.S. so far has been just switching from coal to natural gas because we've gotten so good at fracking. Natural gas prices are very low. We've got a lot of that now. And then the main driver of that going forward over the next 30 years is going to be more coal to gas switching and then, you know, increasingly more and more zero carbon sources. I see. So I think that's the big picture of the identity in terms of, you know, how AI will change that. You know, I think we can. So AI is going to is going to just increase energy demand. And then, you know, we can think about like what technologies even expanding outside of AI are going to make the energy system better and less carbon intensive. I think there's a lot of discussion right now about electricity transmission and that's some of the, you know, related to some of the work that my group is doing. If we can utilize the same transmission lines more efficiently and some of that's a technological solution and some of that's a market design solution, then we can have that we can better utilize renewables and we won't have to build as many new natural gas plants. And then, you know, and then, you know, coming back to the demand side, a big, a big thing that we need to do as electricity as an electricity system is to figure out how when electricity is scarce, it's the middle of the summer, people have their air conditioners on or everybody's charging their EVs at the same time or whatever it is. And then, of course, what we're going to do is how can we get certain consumers to use less called demand response in order to reduce the number of new power plants that we have to build if we're just satisfying demand by increasing the supply and getting more demand response is again partially a market design issue like a policy issue in a sense, but also a partially a technology issue. Some part of that enabled by AI very interesting. [00:11:37] Speaker 2: What would you say are the areas of research in your field that you expect to have the most meaningful impact in the near future? Like where can we expect the good news to come from? What kind of good news can we look forward to? [00:11:50] Hunt Alcott: Well, broadly, broadly, I don't know if the news is going to be good, but broadly in environmental economics, there are a couple of classes of research. The first type of research we call non-market valuation. It's basically putting a dollar value on the environment. And that's important because we want to figure out how much and how fast to reduce pollution. We want to trade that off against the costs of pollution reductions. And so estimating, for example, what's called the social cost of carbon is maybe the key part of that strain of research. And there are folks at Stanford who do a fantastic job specializing in that. A second area is what you might call policy evaluation. Once we know the social cost of carbon and other dollar values of environmental services, what are overall the net benefits and costs of environmental policies such as renewable energy supports or carbon taxes or anything else? And so in both of those areas, there's just a tremendous amount of research. And we saw research in both of those areas at the conference that we hosted last month. [00:13:02] Speaker 1: So this conference was awesome and you had a wide variety of work, but your group in particular is super active. Maybe we could hear a little bit more about what's going on in your group. Absolutely. [00:13:16] Hunt Alcott: You know, when we try to think about what research areas to push on, we have basically been following the money in the sense of looking at where are the global investments in decarbonization happening. And a lot of that is in two areas. One is transportation and the other is electric power systems. On the electric power system stuff, I think we talked a little bit about some of the issues that are alive there. Our group is working on figuring out how to use transmission more efficiently and effectively. One of the big issues for decarbonization is figuring out how we get the wind and the sun, which are not necessarily in the cities. How do you get that power to the places where people actually live? And so it's well understood that we need more transmission lines. Something that I think is a little underappreciated is that we already have a lot of transmission lines that are underutilized relative to their technical capacity. And so some of the work we're doing is thinking about that. We have some other work on electricity market design that is kind of similarly at a very granular level. On transportation, our group is doing work on what are at this point retrospective evaluations of the electric vehicle tax credits that the Biden administration had put forward. And thinking of there, there were two new things in the Inflation Reduction Act electric vehicle tax credits relative to what previous administrations have done. The first is that there are these trade restrictions trying to onshore the manufacturing of EVs. And the second is there were subsidies for used electric vehicles that lower income folks buy, as well as price caps and income limits, all of which are designed to make the EV subsidies more equitable. Because the initial concern that the administration has, well, if you just subsidize new electric cars, those are mostly bought by rich people. And so you're handing money to rich people. And so we have papers then looking at the trade aspects and the equity aspects of the electric vehicle tax credits. What we're working on now is forward looking, thinking about what would be the effects of offering Chinese electric vehicles in the US. So why is this interesting? In the Soviet Union, it was kind of an understood thing that there were consumer products that you couldn't buy. You couldn't buy Western refrigerators and washing machines and cars and other things. In the modern history of the US, there is one consumer product that we are basically not allowed to buy because of high tariffs. And that's Chinese electric cars. And you might wonder, is that a good thing because we're allowing our auto industry to survive a little bit more? Or is that a bad thing because we're slowing down the energy transition? And so we're working on some analyses, unpacking that question. [00:16:22] Speaker 1: That's super interesting. Can I push a little on that second point? I can imagine it's a bad thing because by allowing or that it would be a good thing to allow the purchase of Chinese electric vehicles, because that would raise the bar in competition with the American manufacturers, which we know in terms of industry dynamics over time can improve an industry's performance, either by reallocation of resources and the adaptation of existing firms or by the birth and death of companies, which is part of the creative destructive process. [00:16:59] Hunt Alcott: I think history and in particular looking at, you know, some protected sectors in the Soviet world suggest that, and in Latin America too, I think can often suggest that protectionism and going too far in protecting your domestic industries is a recipe for them to be unproductive over time. However, I think there are also examples, maybe looking closer to Asia, where industrial policy and protecting infant industries seems to have worked out better over the median term. And so I do think this is an open question. [00:17:41] Speaker 1: Sure, sure. Now, of course, protecting GM and protecting an infant industry are two different things. But we could imagine thinking of the American electric vehicle manufacturers as infants in some ways in terms of that finding. Well, Hunt, thanks so much for coming in to our recording today. And so on behalf of Charlotte Kramer, Professor Hunt Alcott, and myself, Bill Barnett, to you listeners, until next time. The Stanford Initiative on Business and Environmental Sustainability podcast series is sponsored by the Stanford Graduate School of Business and the Stanford Doors School of Sustainability. Music by Charged Particles. That's Caleb Hutzler. Mike Rock. And John Krosnick. Kaochnik.