The Economics of Energy
A major challenge in tackling the energy and climate crises is figuring out what policies are effective in the real world. MIT’s Christopher Knittel tackles this by applying empirical science- and engineering-informed economic research. “I look to see how consumers and firms react to changes in energy prices and what that means for the costs and benefits of environmental policies,” Knittel said.
Last year Knittel was named to the first energy chair at MIT: the William Barton Rogers Professor of Energy Economics at the MIT Sloan School of Management. The MIT Energy Initiative (MITEI) has launched a program to create several endowed faculty chairs in order to expand the Institute’s already substantial commitment to energy research and education.
Knittel’s recent attention-getting research includes a paper that examines technological progress in the automobile industry from 1980 to 2006. Knittel found that fuel economy increased by 12 percent, horsepower doubled, and weight increased by 30 percent. So nearly all of the technological progress in the industry has gone into weight and horsepower, said Knittel. “That’s not surprising given that gasoline prices were so cheap from the late ‘80s on,” he said.
Knittel’s analysis allowed him to answer a key question: What would have happened had the industry’s technological progress gone into fuel economy instead. The answer: it would have been 60 percent higher than 1980 levels rather than 12 percent higher. “So that tells us that had policies been in place that incentivized consumers and firms to care more about fuel economy, the [policies] would’ve had a big impact,” said Knittel.
Cap and trade, the market-based approach to curbing greenhouse gas emissions, also was examined under Knittel’s microscope. Knittel assessed the impact of cap-and-trade policies on local pollution and found that raising fuel prices drives many of the dirtiest cars off the road. The result is a co-benefit: reduced greenhouse gas emissions and reduced local pollution. “In some cases, even if you ignore the greenhouse gas benefits from this policy, the local pollution benefits are larger than the cost to consumers,” Knittel said.
He also compared fuel-side policies — renewable fuel quotas and subsidies — to cap and trade to determine which approach is more cost effective in reducing greenhouse gas emissions. “These other policies are anywhere between three and five times more expensive than a cap-and-trade program,” he said.
This raises the question of how these policies are enacted. The answer is that a few communities gain substantially, but the overall costs are spread across the population. “These other policies are bad on average but the typical consumer doesn’t lose that much, so there’s no real natural group that’s going to oppose [them],” Knittel said. “In contrast, they produce a few huge winners, so there is a natural group of supporters.”
Economists studying energy policy have to have access to experts in science and engineering, Knittel said. “Interdisciplinary work is encouraged at MIT. It’s fostered here. I can’t think of a better place to be.”