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When millions of homes and thousands of businesses lose access to electricity, it becomes obvious that energy is critical to the economy. We understandably focus on the crisis at hand. However, there is an equally critical but neglected backstory. It is the misperception of how energy relates to the economy over long periods. This misperception influences our lawmakers who make policies that influence the types of energy and other infrastructure in which we invest, including investments to lower carbon emissions. Simply put, more of us need to think about the broader relationship between energy and economic theory. In the aftermath of the most recent blackouts, Texans should ask how economic theories influenced policy choices behind the formation of ERCOT, the Texas electric grid operator. The following sequence is clear: Economics informed policy, policy set the rules and incentives for the ERCOT electricity market, and these policies set the incentives for investment in power generation, including for preparedness to extreme weather.
In short, the sequence is economics to policy to energy. But the real sequence starts with energy. Absolutely no economic activity occurs without energy consumption. The full sequence is from energy to economics to policy, and then back to energy […]