Energy use and the environment : The effects of environmental quality standards on the supply, demand, and price of fossil energy

A normative economic model is developed in this study for analyzing the effects of changes in (1) resource availabilities, (2) resource prices, (3) operating environment (e.g., energy and environmental policy), and (4) patterns of energy demand, on the supply, demand, and price of fossil energy resources. The model is developed by interfacing (1) a normative economic model of oil and natural gas supply, and (2) an econometric demand model for the important fossil fuels and electricity, through a linear programming model of the energy conversion industries. This interface utilizes the economic theories of resource allocation and valuation, and of competitive markets and economic equilibrium. The model is used to evaluate the effects of currently announced limitations on waste discharges to the water and air by industrial sources on the supply, demand, and price of fossil energy resources. Four cases representing different levels of restrictions on waste discharges to the water and air are evaluated for 1985. The overall results indicate that: 1. If oil and natural gas prices are allowed to reflect the value of oil and natural gas as substitutes for air emission control equipment, supply and demand equilibrium could be achieved at any level of environmental quality standards likely to be imposed by 1985 at prices similar to those being paid today for "new" oil and deregulated (intra-state) natural gas. 2. Sufficient adjustment can be made at these prices by both energy producers and consumers in the long run to allow virtually zero growth in oil consumption, a reduced growth rate in total energy consumption, and the elimination of oil imports. 3. Strict environmental restrictions do not increase total fossil energy use. The relatively large increase imputed on the value (price) of clean fuel counteracts any increased energy requirements for operating control equipment. 4. Air emission restrictions increase energy price and industrial natural gas and electricity use, water consumption, and solid waste discharges more than restrictions on waste discharges to the water 5. Restrictions on waste discharges to the water increase industrial production costs and capital requirements more then restrictions on air emissions.