Uncertainty—an argument for more stringent energy conservation

Paul P. Craig, Mark D. Levine and James Mass

Energy, 1980, vol. 5, issue 10, 1073-1083

Abstract: Most energy conservation analyses assume various future paths for energy prices and other parameters and then proceed to calculate the optimal value of conservation investment under the specified assumptions. Sensitivity analysis is used to examine the amount which the calculations change as parameters are varied. In fact, the future is not known with certainty, and it is desirable to include uncertainty explicitly in the analysis. This paper approaches the uncertainty problem in a simple way but one which provides considerable insight. We assume that future energy price growth is characterized by a probability distribution, and calculate the optimal investment strategy for conservation investment given this uncertainty. The results are striking. Introduction of uncertainty leads to the conclusion that more conservation investment is desirable than would be made without uncertainty. The conclusion stems, in essence, from the observation that the upside risk to the consumer resulting from unexpectedly high energy prices is larger than the downside savings which would result from unexpectedly low energy prices. The policy conclusion is straightforward: All else being equal, if you think that future energy prices are uncertain, it pays off (for both the individual and the nation) to err on the side of “too much” rather than “too little” conservation.

Date: 1980
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/0360544280900304
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:5:y:1980:i:10:p:1073-1083

DOI: 10.1016/0360-5442(80)90030-4

Access Statistics for this article

Energy is currently edited by Henrik Lund and Mark J. Kaiser

More articles in Energy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().