Evaluating the Risks of Alternative Energy Policies: A Case Study of Industrial Energy
Brown, Marilyn A.
Kim, Yeong Jae
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Numerous studies have shown the potential for U.S. manufacturing to cut its energy costs by installing more efficient equipment that offer competitive payback periods, but the realization of this potential is hindered by numerous obstacles. This paper evaluates seven federal policy options aimed at revitalizing U.S. manufacturing by improving its energy economics while also achieving environmental and energy reliability goals. Traditionally, policy analysts have examined the cost-effectiveness of energy policies using deterministic assumptions. When risk factors are introduced, they are typically examined using sensitivity analysis to focused on alternative assumptions about budgets, policy design, energy prices, and other such variables. In this paper we also explicitly model the stochastic nature of several key risk factors including future energy prices, damages from climate change, and the cost of criteria pollutants. Using these two approaches, each policy is “stress tested” to evaluate the likely range of private and social returns on investment. Overall we conclude that the societal cost-effectiveness of policies is generally more sensitive to alternative assumptions about damages from criteria pollutants and climate change compared with energy prices; however, risks also vary across policies based partly on the technologies they target.