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Network Effects and Environmental Policy

Time and again, we have seen that the phenomena of network effects can further the propagation of an ineffective status quo. In a paper published this summer, MIT professor Christopher R. Knittel examines how network effects contribute to our current “dependence” on the inefficient fuel source that is oil, specifically with regards to transportation.

As of July 2012, a gallon of diesel cost $3.75, while an energy-equivalent amount of liquid natural gas (LNG) cost only $3.35 and an energy-equivalent amount of compressed natural gas (CNG) cost only $2.28. Not only is natural gas a cleaner energy source than oil, but Prof. Knittel also calculates that individual consumer savings on fuel would outweigh the increased costs associated with a vehicle outfitted to run on natural gas. Nonetheless, our transportation system has not seen any substantial increases in the adoption of natural gas.

The problem, as you might imagine, is that no one is willing to shoulder the burden of an infrastructure switch. Purchasing vehicles that can run on natural gas (or hydrogen fuel cells, or anything more efficient than gasoline) is extremely inconvenient for today’s consumers—as of May 2012, the United States had 157,000 gas stations and only 1047 CNS refueling stations. On the other side, more refueling stations for cleaner energy sources will not be constructed until consumers generate sufficient demand. The resulting catch-22 is one of the main reasons our energy policies continue to be less-than-optimal.

 

-Anonymous

 

Sources:

http://wallstreetpit.com/97299-where-our-nations-leaders-should-try-to-take-the-country/

http://www.brookings.edu/~/media/research/files/papers/2012/6/13%20transportation%20knittel/06_transportation_knittel.pdf

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