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Tag Archives: economics

Renewables hit by economic success

A Christmas success story – of sorts

By Dave Elliott

Renewables are getting cheaper, with the costs for some falling dramatically. However, as overall energy prices fall, due in part to the success of renewables, it is not just old fossil and nuclear plants that suffer, becoming stranded assets. Older less efficient renewable projects can also face problems, as has happened, it seems, with some older wind turbines. They need replacing with new better designs – reblading and repowering. But, as energy prices continue to fall, upgrades like this may not yield enough extra income to be worthwhile. This will be a continuing issue as renewables expand and get cheaper: the market value of wind and PV power drops with increasing market penetration and success.

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Macro and Climate Economics: It’s Time to Talk about the “Elephant in the Room”

This blog was written for the Cynthia and George Mitchell Foundation, and originally appeared here: http://www.cgmf.org/blog-entry/213/.

This is the first of a two-part series. Part 2 is: “The most important and misleading assumption in the world.

If we want to maximize our ability to achieve future energy, climate, and economic goals, we must start to use improved economic modeling concepts.  There is a very real tradeoff of the rate at which we address climate change and the amount of economic growth we experience during the transition to a low-carbon economy.

If we ignore this tradeoff, as do most of the economic models, then we risk politicians and citizens revolting against the energy transition midway through.

On September 3, 2016, President Obama and Chinese President Xi Jinping each joined the Paris Climate Change Agreement to support U.S. and Chinese efforts to greenhouse gas emissions (GHGs) limits for their respective country. This is an important signal to the world that the presidents of the two largest economies and GHG emitters are cooperating on a truly global environmental matter, and it provides two leaps toward obtaining enough global commitments to set the Paris Agreement in motion.

The economic outcomes from models used to inform policymakers like Presidents Obama and Xi, however, are so fundamentally flawed that they are delusional.

The projections for climate and economy interactions during a transition to low-carbon economy are performed using Integrated Assessment Models (IAMs) that link earth systems models to human activities via economic models. Several of these IAMs inform the Intergovernmental Panel on Climate Change (IPCC), and the IPCC reports in turn inform policy makers.

The earth systems part of the IAMs project changes to climate from increased concentration of greenhouse gases in the atmosphere, land use changes, and other biophysical factors.  The economic part of the IAMs characterizes human responses to the climate and the changes in energy technologies that are needed to limit global GHG emissions.

For example, the latest IPCC report, the Fifth Assessment Report (AR5), projects a range of baseline (e.g., no GHG mitigation) scenarios in which the world economy is between 300 and and 800 percent larger in the year 2100 as compared to 2010.

The AR5 report goes on to indicate the modeled decline in economic growth under various levels of GHG mitigation. That is to say, the economic modeling assumes there are additional investments, beyond business as usual, needed to reduce GHG emissions.  Because these investments are in addition to those made in the baseline scenario, they cost more money and the economy will grow less.

The report indicates that if countries invest enough to reduce GHG emissions over time to stay below a policy target of a 2oC temperature increase by 2100 (e.g., CO2, eq. concentrations < 450 ppm), then the decline in the size of the economy is typically less than 5 percent, or possibly up to 11 percent.  This economic result coincides with a GHG emissions trajectory that essentially reaches zero net GHG emissions worldwide by 2100.

Think about that result: Zero net emissions by 2100 and, instead of the economy being 300 to 800 percent larger without mitigation, it is “only” 280 to 750 percent larger with full mitigation.  Apparently we’ll be much richer in the future no matter if we mitigate GHG emissions or not, and there is no reported possibility of a smaller economy.

This type of result is delusional, and doesn’t pass the smell test.

Humans have not lived with zero net annual GHG emissions since before the start of agriculture.  The results from the models also indicate the economy always grows no matter the level of climate mitigation or economic damages from increased temperatures.

The reason that models appear to output that economic growth always occurs is because they actually input that growth always occurs.  Economic growth is an assumption put into the models.

This assumption in macroeconomic models is the so-called elephant in the room that, unfortunately, almost no one talks about or seeks to improve. 

The models do answer one (not very useful) question: “If the economy grows this much, what types of energy investments can I make?”  Instead, the models should answer a much more relevant question: “If I make these energy investments, what happens to the economy?”

The energy economic models, including those used by United States government agencies, effectively assume the economy always returns to some “trend” of the past several decades—the trend of growth, the trend of employment, the trend of technological innovation.  They extrapolate the past economy into a future low-carbon economy in a way that is guesswork at best, and a belief system at worst.

We have experience in witnessing disasters of extrapolation.

The space shuttle Challenger exploded because the launch was pressured to occur during cold temperatures that were outside of the tested range of the sealing O-rings of the solid rocket boosters.  The conditions for launch were outside of the test statistics for the O-rings.

The firm Long Term Capital Management (LTCM), run by Nobel Prize economists, declared bankruptcy due to economic conditions that were thought to be practically impossible to occur.  The conditions of the economy ventured outside of the test statistics of the LTCM models.

The Great Recession surprised former Federal Reserve chairman Alan Greenspan, known as “the Wizard.”  He later testified to Congress that there was a “flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.”

Greenspan extrapolated nearly thirty years of economic growth and debt accumulation as being indefinitely possible. The conditions of the economy ventured outside of the statistics with which Greenspan was familiar.

The state of our world and economy today continues to reside outside of historical statistical realm. Quite simply, we need macroeconomic approaches that can think beyond historical data and statistics.

How do we fix the flaw in macroeconomic models used for assessment of climate change?  Part two of this two-part series will explain that there is research pointing to methods for improved modeling of what is termed “total factor productivity,” and, in effect, economic growth as a function of the energy system many seek to transform.

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Reactions to climate uncertainty

By Dave Elliott

Renewable energy has benefited from concerns about climate change. But in some countries there are doubts about whether climate impacts will be severe and in some there are no significant climate policies. Contrarian views may be in a minority in most places, but much has been made of the apparent slowdown in average global temperature rises in recent years. Indeed some sceptics claim that this refutes all the climate models, with some pointing to a 17-year or more period when the running average did not indicate a rise. So it’s claimed we don’t need to rush ahead with renewables. (more…)

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More green jobs – or better jobs?

By Dave Elliott

Green sector employment accounts for as many as 3.4 million jobs in the EU, or 1.7% of all paid employment, more than car manufacturing or pharmaceuticals. Will that expand?

A new UKERC report, “Low Carbon Jobs”, asks if policy-driven expansion of green energy actually creates jobs, taking account both of jobs created and jobs displaced, particularly when the policies in question require subsidies that are paid for through consumer bills or taxes. www.ukerc.ac.uk/support/Low+Carbon+Jobs

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The cost of energy

By Dave Elliott

In its report Deploying Renewables, the International Energy Agency says that “a portfolio of renewable energy technologies is becoming cost-competitive in an increasingly broad range of circumstances, in some cases providing investment opportunities without the need for specific economic support”. It includes established hydro, geothermal and bioenergy technologies in the list. It adds that “cost reductions in critical technologies, such as wind and solar, are set to continue”.

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Changing trend in energy and food-expenditure trends signify future realities

By Carey King

With the talk in the United States all abuzz about the presidential election this year, President Obama (and advisors) and Mitt Romney (and advisors) have to act as
though they know the solution to lowering unemployment and raising economic growth rates. It is hard for anyone running for an election to admit that they might be powerless to affect some energy and economic realities. In this post, I discuss the trend in the figure below: US monthly personal-consumption expenditures (PCE) for food and energy goods and services as a percentage of total household expenditures.I think it is completely possible that the stop in the declining trend of PCE for food and energy that stopped in the early 2000s is indicative of the new reality facing the United States energy and overall economic (and debt) situation.

US PCE Energy and Food.jpg
Figure 1. Personal-consumption expenditures of US households expressed as a percentage of total expenditures. Data are from the US Bureau of Economic Analysis Table 2.8.5.

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The press talk is getting oilier, the world stays the same oiliness

By Carey King

As a self-proclaimed energy dork, it’s somewhat exciting to see so much discussion of oil and gasoline (and petrol!) in the news recently. The discussions range from indicating that The Limits to Growth is still basically correct(http://www.smithsonianmag.com/science-nature/Looking-Back-on-the-Limits-of-Growth.html) to how technology is trumping all limits to enable the United States to soon be the world’s number one oil producer and start exporting oil within 10 or 20 years. Non-energy adept or interested persons can be confused easily, and unfortunately this is many. Of course, energy ‘experts’ don’t agree.

But the lay or ‘expert’ person can read recent articles from Time magazine (“The truth about oil(http://www.time.com/time/covers/0,16641,20120409,00.html),” cover article April 9, 2012) and The Economist (“Keeping it to themselves that are good for thinking about the situation relating to higher oil prices: increased demand from developing and exporting nations, and a lack of any practical increase in gross global oil extraction the last 5-7 years.

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New article on energy quality shows the influence of ‘net energy’ on economic growth

Recently I had a new article published in Environmental Research Letters, the journal associated with environmentalresearchweb. The title of the letter is “Energy intensity ratios as net energy measures of United States energy production and expenditures”. In this letter I explore the Energy Intensity Ratio (EIR) as a proxy measure for energy return on energy invested (EROI). In calculating the EIR by dividing the energy intensity of a fuel (Btu/$) by the energy intensity (total energy consumption/GDP) of the overall US economy, I can track the relative cost of energy over time. In this way, the price of energy is scaled to the energy efficiency of the economy. Essentially, high EIR values mean that energy is cheap and is not constraining the economy. Low EIR values mean that energy is expensive, and if the value becomes low enough, can constrain economic growth because too much economic activity is spent obtaining and purchasing energy instead of other activities.

A major benefit of this EIR approach is that it uses readily available data: energy prices, energy consumption totals, and gross domestic product (although GNP would also provide additional insight). Thus, this method connects economists (who believe in an efficient market that price includes all information) and those of the energy analysis community that work to calculate EROI from core energy and materials data. The analysis shows that EIR is an effective proxy measure for EROI as they follow the same trends over time.

Often people interpret the steady decline of the economy’s energy intensity as an indicator that the economy is becoming more decoupled from energy consumption. However, as my paper shows, this is a misleading view. What matters more is whether or not obtaining energy also takes less energy inputs over time. As seen in the figure, during the 1970s the EIRs for oil, natural gas, and coal all dropped for over a decade (due to the Arab Oil Embargos raising oil prices) that economic growth was negative for 38 out of 96 months (40% of the time) from November 1973 to November 1982 (also see www.nber.org/cycles/cyclesmain.html). It took a decade for the US to effectively break from the stagnant economy by investing in energy efficiency (vehicle fuel standards, appliance efficiency, etc), new energy resources and technologies (Western subbituminous coal, enhanced oil recovery), and largely removing oil from electricity generation.

A parallel scenario exists for the last ten years in that again the EIRs of coal, natural gas, and oil all dropped significantly to the levels not seen since the early 1980s. And also, at the end of this drop in energy quality was a prolonged economic recession (18 months from December 2007 to June 2009) from which the economy has not fully recovered. US unemployment has been above 9.5% for an unprecedented amount of time since the Great Depression.

Image: http://environmentalresearchweb.org/blog/assets_c/2010/11/EIRPlot_RecessionMatching-1828.html

The conclusion from this analysis is that three decades after the oil crises of the 1970s, today we are essentially at the same point we were with respect to EROI and EIR as in 1980. In other words, for all of our technological advances in the last three decades – including computers, information technology, horizontal drilling and unconventional oil and gas development, and energy efficient appliances – we are just treading water with respect to energy quality. The US economy broke free from the energy chains of the 1970s by using energy more efficiently, and that will be the key to new economic growth. Unfortunately, these efficiency investments can take another decade to pay off. Although not widely cited as the reason by most economists and “experts” on news shows, low EIR and EROI energy supplies are the major reason why economists do not see near term economic growth being as large as in the past.

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Current economic difficulties are not the fault of single decisions or decision-makers; it’s energy, stupid!

The current conundrum discussed in the news and the public is between (1) Western government spending to keep stimulating their economies after the decade-long period of overspending and (2) savings to prevent future collapse of governments under their own debt burden. Unfortunately, energy resource availability is rarely a part of the discussion, and pundits never point to it as a core driver. This is quite unfortunate.

There is no one consensus on the “economic growth” issue among mainstream economists as the proper choice, or series of choices, is quite unclear. There appears to be no good path, only a choice between bad paths. Ecological or biophysical economic arguments have historically been quickly dismissed as invalid, yet no other economic theories are based upon anything tangible. We hear of the need to “consumer confidence” as if that is a tangible and meaningful reason to invest. Irrational exuberance, or extreme confidence, is exactly what pushed us to two boom-bust cycles (dot-com and now housing) over the last two decades. Confidence only takes you so far, and at some point you need something tangible upon which to base economic theory. That tangible good is essentially natural resources, primarily energy, and the technologies that convert those resources to consumer products and services.

Because increasing consumption of natural and energy resources are the key driver of economic growth, if you do not increase their consumption, you do not grow. Yes, more efficient energy production and conversion systems (power plants, vehicles, mining, etc.) also induce economic growth, but the past only indicates the higher efficiency begets higher total consumption – due to Jevon’s Paradox. However, when fossil resource availability does decline due to depletion, we’ll be happy for higher efficiency services even when total consumption decreases.

Adding or switching to energy resources and technologies, where they exist, takes decades. Translation: this is longer than election cycles. Thus, a US president that implements energy efficiency or conservation policies will generally not reap the rewards or drawbacks of those policies. The next President, or perhaps a second one down the line, will be dealing with those problems. Since 2000, the United States has consumed roughly the same total amount of primary energy, about 100 quadrillion Btus per year. There has never been a time in US history at which total energy consumption was stagnant for this long. Much of the reason for the stagnation in energy consumption was offshoring of energy-intensive industries to developing countries, and thus there are less and less non-skilled jobs available after each economic downturn. The US economy restructured based upon increasing energy prices during the last decade, and companies traded cheap energy in the form of the muscle of Chinese, for more expensive energy, in the form of natural gas and petroleum.

Thus, major structural changes in the US economy have occurred over the last decade, and no policy can reverse these trends in less than another decade. The reason that economists, and even Federal Reserve Chairman Ben Bernake are calling the economic future “unusually uncertain” is that the US has never encountered the situation at which we now reside. Energy consumption is flat. World oil production is at a plateau. We have shipped jobs to China and borrow their profits to feed our consumption habit. Unemployment is high.

Policy can’t ship more jobs to China because hindering employment even further is a political death nail. Policy can promote offshore oil and renewable energy technologies, but those resources and technologies have lower energy return on energy invested (EROI) than the resources we have used in the past. Lower EROI means more of the economy must focus on energy production itself rather than producing other more discretionary economic goods. And a change in transportation mode (electric cars, electric and/or high speed trains) will take decades, and these changes can work, but they may never be as economically as productive as burning petroleum at $20/BBL to $60/BBL.

So the reason that economists see a “sluggish” or “low-growth” economy in the foreseeable future is due to energy. From 2000-2008, we pretended that high rates of GDP growth could occur without increasing energy consumption. Increasing prosperity of the developing world has strained energy resources to the point that we must adjust to a future with energy consumption that is both lower and from new resources and technologies. These technologies and resources, even without considering altering them to prevent greenhouse gas emissions, are less productive. So if you put these concepts together, you end up with the result that we must (1) invest in new energy technologies that (2) employ more people per output (kWh, liter of fuel, etc.) and produce (3) lower net energy than historical coal, natural gas, and oil (even future coal, oil, and natural gas are less productive) such that (4) the energy sector grows as a proportion of the economy and (5) by definition the rest of the economy must shrink. Either this reality we become true, or the scientists working on fusion will pull a rabbit out of hat. No tax policy of a President will do much to significantly alter this equation. Only energy consumers can wait to see if we do or do not pull off sufficient technology solutions, and adjust their habits accordingly.

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Energy for complexity: big government vs big business – it doesn’t really matter which you hate

The economic struggles since mid-2008 are bringing out factions that highlight both the uncertainty of the future together with ignorance of how the past has led us to where we are today. In the US, we have the conservative “Tea Party” movement of the right that is complaining about excessive government spending and the liberal “anti-banking” faction on the left that is fed up with the fat cats on Wall Street skimming too much off the top. Both sides are correct in coming to grips with the fact that large organizations and bureaucracies (e.g. government and banks) are having a harder time coping with the current economic and social problems of today.

What has unfortunately been quite absent from most of the political discussions about how to get the economy “back on track” is the true role of energy resources and technologies. With all of the talk in the United States about the need to “connect the dots” for the “War on Terrorism”, what we really need to do is accept the way the energy and economic dots are connected in our modern industrial society.

By taking the following factors into account and enhancing our knowledge of how we can and cannot affect these indicators, we will “connect the dots” on our future as well as possible:

  • (1) Jevon’s Paradox states that increased efficiency in the use of resources (in this case energy resources) through the use of technology and structural change increases total resource consumption.
  • (a) Policy point: if we target increasing efficiency, we can expect to only delay environmental problems.
  • (2) The energy return on energy invested (EROI) for the combination of energy resources, renewable and fossil, together with technology that converts those resources into services dictates the level of complexity attainable by society.
  • (a) Policy point: society seems to have reached a level of complexity in the last 1–3 decades such that:
  • (3) The EROI of energy services has been extremely high with the use of fossil fuels, and EROI will eventually come to a value such that it is equal for fossil and renewable resources. That time of EROI equality will mark a turning point in human civilization.
  • (4) The human species has now grown in size that it is capable of affecting the environment on a global scale as opposed to only very localized impacts before the industrial revolution.

The connecting of the dots goes as follows:

  • (1) Humans organized into agrarian societies, and this was beneficial because it raised the EROI from farming, where the energy produced in this case was that energy embodied in food, not primary energy for operating machinery. The invention of tools and use of beasts of burden (horses, oxen, etc.) also enhanced human EROI (i.e. the amount of human energy required to grow food for human consumption).
  • (2) The discovery of fossil fuels and subsequent technological change to enable further exploitation of fossil fuels led to the industrial revolution and the capabilities of production and economy in our present industrialized society.
  • (3) Resource constraints via any combination of technical, physical, economic, and political factors act as a driver to increase efficiency in the use of energy resources, but there are thermodynamic limits.
  • (a) For example, the Arab oil embargoes of the 1970s drove up the price of oil which in turn drove the US and Europe to increase fuel efficiency of vehicles to get the same service (move passenger and cargo from point A to point B) with less fuel, or energy. Subsequently, energy efficiency increased since the 1970s but the rate of consumption of energy changed from exponential growth to linear growth, and economic growth also slowed compared to the previous post World War II rates for the US.
  • (4) Today the rate of technological change in terms of increased energy efficiency and high EROI has not increased at the same rate as needed to enable economic growth equal to the pre-2000 years and subsequently the top of the economic food chain has decided to hoard recent profits at the expense of distributing those profits to the middle and lower classes. This is evidenced by the increased income gap between the top and the bottom.
  • (5) The inherently lower EROI of renewable resources will not enable the same level of economic production and societal complexity as provided by higher EROI fossil fuels. This is because renewable technologies are based upon current flows of energy (e.g. sunlight, wind, waves), as compared to fossil fuels which are based upon stocks of energy stored over hundreds of millions of years.

To contemplate the final point above, consider that Earth stored the renewable energy of the Sun (in the form of biomass) on the order of 100 million years, and now we are consuming this energy on the order of hundreds of years. What humans learn and choose to practice during this century will dictate the type of societies that are even possible after peak fossil-fuel production.

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