Improving Prediction of Energy Futures: Most Energy-Economic Models Do Not Provide Policymakers with the Information They Need to Make Sound Decisions

Article excerpt

When federal lawmakers pass--or do not pass--legislation related to the production and use of energy, their actions ripple across society. Their decisions affect not only the mix of fuels, the price of power, and the spread of pollution, but also federal deficits, corporate fortunes, and even national security. Thus, policymakers need to have in hand the best possible projections about the future demand, supply, and cost of various energy options. Unfortunately, a growing disconnect exists between politicians and the economists who develop those projections.

Various government agencies, as well as an array of universities, private consulting firms, and interest groups, have developed energy-economic models, some more sophisticated than others. Yet lawmakers increasingly feel that these models fail to answer, or even properly evaluate, their questions about the most effective means to achieve policy goals. Economists, meanwhile, complain that politicians do not ask clear questions of the models.

Part of the communication conflict results from the different natures of modelers and politicians: Whereas economists seek quantifiable measures and mathematical certainty, lawmakers deal with anecdotes, dueling stakeholders, and the human chaos of politics. But more fundamentally, a new relationship must develop between policymakers and modelers. Lawmakers need economists to help highlight the actions that would best achieve elected officials' policy goals, such as the reduction of greenhouse gases to certain levels. Rather than offering only unsolicited advice on the benefits or shortcomings of particular policies, modelers need to provide policymakers with observations on the most effective legislative and regulatory steps to obtain policy objectives.

Critical but troubled

The energy-economic models that policymakers use are critical, because government policies clearly have an impact on the energy market. The development of electricity-generating technologies, for instance, will differ if Congress approves the Bush administration's Clear Skies initiative rather than stricter pollution standards. That debate depends, in part, on the interrelated set of issues associated with energy, pollution, and national security, and those issues share complex interactions that energy-economic models can use to help estimate the future results of various policy options.

From a policymaker's perspective, however, the current state of energy-economic modeling is disappointing. Lawmakers frequently see dueling forecasts as little more than lobbying tools for interest groups. Countering the environmentalists' optimistic estimates of energy conservation opportunities, for instance, are downbeat studies promoted by industrialists. Policymakers, moreover, note the inaccuracies of past projections, and they wish economists were more upfront about the limitations of their models, the reality of uncertainties, and the range of possible scenarios. Lawmakers are skeptical of models that assume a static status quo, and they would like better accounting for technological innovations and "externalities," such as pollution, health care, and reliability.

Despite such shortcomings, energy-economic models remain the logical means by which policymakers can plan and prepare for the future. But they must be used wisely. Just as people adjust plans in their daily lives as conditions change, so we must appreciate that energy-economic models are only current best guesses about the future.

Policymakers need to understand the limitations and biases of models, and modelers need to admit that energy projections have not been particularly accurate. During the 1960s, energy-economic models tended to underestimate future energy growth. Projections made in the 1970s, in contrast, tended to overestimate energy consumption and production. The energy shocks of the 1970s and the resulting reductions of energy consumption in response to higher energy prices slowly forced economists to substantially lower their consumption estimates. …