Driving Down Cost: Energy Economist Christopher Knittel Gives Policymakers a Better Crystal Ball

Mar 02, 2012
Driving Down Cost: Energy Economist Christopher Knittel Gives Policymakers a Better Crystal Ball
Christopher Knittel had big dreams heading into college. Those dreams involved baseball.

Christopher Knittel had big dreams heading into college. Those dreams involved baseball. 

“I entered undergraduate with the hopes of being a professional baseball player,” says Knittel, who was good enough to make the team at California State University-Stanislaus as a second baseman.  But during the season reality sank in. “My hopes were quickly extinguished.”

It didn’t take long for Knittel to step into a new field: economics.

“I took my first undergraduate econ class my freshman year and basically fell in love with it,” says Knittel, the William Barton Rogers Professor of Energy Economics at the MIT Sloan School of Management and a co-director of the Center for Energy and Environmental Policy Research at MIT (an affiliate to the Joint Program).

Knittel has spent most of his career bouncing between the nation’s two coasts. After getting his masters and Ph.D. from the University of California at Davis and Berkeley, respectively, he left California to teach at Boston University’s School of Management. He returned to California a few years later to teach at his alma mater, U.C.-Davis, only to return to Boston in 2011 when given the opportunity to work at MIT.

“It’s hard to tell MIT ‘No,’” says Knittel, who was named the Institute’s first energy faculty chair last year. “I can’t think of a better place to do the work I do because it draws heavily from the hard sciences and engineering. So it’s great to be around world class scientists and engineers. They’ve already helped inform my work.”

A “Car Guy” at Heart

Economics “teaches you how to think,” says Knittel, explaining why he fell in love with the field.

Giving an example from his research, he explains how when doubling fuel economy most would recognize that gasoline consumption would fall. But as an economist, Knittel has learned to go one step further. He finds that as drivers save on gas, they start driving more, and gas consumption climbs back up.

Because policymakers don’t always think through the entire chain of events, Knittel’s work focuses on “informing policymakers to do the right thing.”

This is especially true when it comes to climate policy.

“It’s such a big and important issue,’ Knittel says. “Yet there’s a lot of policies in place that are quite inefficient.” 
Because the transportation sector makes up a third of the nation’s carbon emissions, Knittel has focused much of  his most recent research on cars and trucks—though in a sense, he has been studying cars and trucks most of his life. Knittel’s father was an engineer for Peterbilt, the truck manufacturer, and in high school Knittel rebuilt the engine of his ‘68 Ford Mustang Fastback to double its horsepower.

“I’ve always been a car guy,” Knittel says. “It’s kind of in my blood.”

Some of Knittel’s work looks at, not just the impact of inefficient policies, but why we might have them. One recent study shows that policies like the Renewable Fuel Standard and ethanol subsidies—which most economists agree are inefficient ways to reduce gasoline consumption—create big winners, in particular corn growers and ethanol producers.

“There’s a lot of people losing a little bit of money, and a few people gaining a lot of money,” Knittel says. “So you have a natural group that’s going to promote these policies, but no real natural group that has a strong incentive to fight them.”
What effect do these “big winners” have on Congress? Controlling for party affiliation, Knittel found that congressmen tended to vote on the side of the winners.

“If you’re representing a district that is going to gain from these ethanol subsidies or the Renewable Fuel Standard quite a bit, you’re much more likely to vote against the efficient policies, like a cap-and-trade bill,” Knittel says. 
He found similar results when he looked into the gasoline tax – which economists by and large promote as an efficient way to reduce greenhouse gas emissions and local pollutants. Yet in the U.S., gasoline taxes are much lower than every other developed country in the world. Why is that?

Looking state-by-state at which income groups are most impacted by gasoline taxes, he found rural communities are affected more because people living in these areas tend to need to drive longer distances and own less fuel-efficient cars. 
“So if you think about getting a high gas tax through the Senate, where rural states are disproportionately represented, you can see that it’s going to be very difficult,’ Knittel says. “That’s at least one explanation of why we don’t have the gas taxes that other countries have.”

The Economics of Efficiency

Knittel, along with his MIT colleague Michael Greenstone and two colleagues from the University of California-Berkeley, recently received a sizeable grant from the Sloan Foundation to study energy efficiency in both the electricity and transportation sectors.

With the funding, they started E2e, a center housed within the Center for Energy and Environmental Policy Research at MIT and the UC Energy Institute. Its name captures the spirit of the center’s work: striving to go from using a large amount of energy (“E”) to a small amount (“e”) and to include experts that range from engineers (hard scientists - “E”) to economists (soft scientists -“e”).

Knittel’s motivation for studying energy efficiency lies in the McKinsey Curve – named after the cost curve developed by the McKinsey consulting firm that depicts the abatement of greenhouse gas emissions. The striking feature of the curve is that almost half of it lies below zero. That is, not only do the costs to reduce emissions balance out, but abating emissions actually pays for itself and then some.

“It’s very easy to understate what—not only the costs of investing in energy efficiency are—but also the benefits from investing,” Knittel says. “Our goal is to better understand what the costs and benefits of energy-efficient investment are—where the low hanging fruit is in terms of energy efficiency, as well as how high that fruit is up the tree. The McKinsey curve would suggest the fruit’s already on the ground. We want to prove that ourselves.”

Knittel and his colleagues plan to prove the benefits of energy efficiency by running actual experiments. The first experiment is already underway. The team has research assistants at Ford dealerships educating consumers. Half of the consumers are told how much they would save if they switched from their current vehicle to a more fuel-efficient car, the other half are told about other reasons to buy (the control group). The students then track the consumers to look to see what vehicles they purchased, and if better information about fuel economy actually changes their purchasing habits.

This experiment builds off a study in American Economic Review, where Knittel proved the conventional wisdom about car-buyers is wrong. That wisdom, at least for policymakers, holds that consumers only focus on the first three years or so of the car’s life. If there’s a technology out there—for example, hybrid technology —that doesn’t pay for itself in the first three years, they don’t invest in it. Using transactional data on 80 million sales, Knittel found that consumers are investing the correct amount in fuel economy.

Knittel explains the importance of these results: “A major reasoning behind a lot of policies is that consumers are making mistakes. So if we adopt the policy, the thought is they won’t make as big of a mistake, and that’s a benefit to society. But if consumers aren’t making that mistake—as we find in this case—then there is no benefit.”

Asked if his research proves that more economists should be politicians, Knittel jokes, “Yeah, maybe. Although, we’re often not willing to say the right thing. We tell it as it is, and it’s not always what people want to hear.”