by Carey King
If you care to understand how the “energy part” of our economy feeds back and shapes the “non-energy part” of the economy, then this blog is for you.
Essentially every energy analyst and energy economist should understand the results of this paper. Its findings have important implications for economic modeling as they help explain how fundamental shifts in resources costs relate to economic structure and economic growth.
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.
By Dave Elliott
In a post-Xmas pre-new year Scrooge-type austerity mood, I worry about the money we are wasting on energy. If you look at Sankey diagrams of energy flows from primary resources to final end use, you will see that for many countries around half the raw energy input is wasted in the conversion process, most of it being rejected into the atmosphere as heat, for example from steam-based fossil and nuclear generation systems.
By Dave Elliott
Is the truth out there? An extended Xmas Whimsy
It’s usual for there to be a spread of viewpoints on most issues, and it’s always worth looking at a range views, including ‘outlier’ ones! On that, this is fun: www.xonitek.com/press-room/company-news/the-stone-age-didnt-end-because-they-ran-out-of-stones/
However at times you can get weary of obsessive time wasters and yearn for clarity! Sadly that may not be easy to achieve.
Since Russia has taken over the Crimea region of Ukraine, there have been several news articles written regarding the supposed ability of the United States (U.S.) to use our oil and/or natural gas as some sort of geopolitical weapon. This weapon would somehow hurt Vladimir Putin (not Russian citizens) and probably help the Europeans and Ukrainians that buy natural gas from Russia. I link here a recent Bloomberg article (March 25, 2014) that is an example of an article that does not ask the most relevant questions on this topic. By not asking relevant questions and not using relevant data, the public is not being properly informed.
By Dave Elliott
The European Commission (EC) has been negotiating new EU energy and climate targets for post-2020. There was a lot of lobbying. The UK, along with the Czech Republic, was strongly opposed to the EU setting a new renewable energy target for 2030, favouring an overall 50% by 2030 reduction target for greenhouse gas (GHG) emissions instead. That it said would leave it up to each country to decide on how to achieve it optimally.
Christmas cheer: my end of year (not so) jolly
by Dave Elliott
It’s been a year when energy issue hit the front pages more than usual. The political battle over energy has heated up with National Grid warning that the risk of electricity blackouts would be at the highest level for six years and even greater in subsequent years because of lack of investment in new power plants. But it said, although the plant ‘margin’ of just 5% was the lowest since 2007, supplies should be sufficient to see the UK through to spring. (more…)
by Carey W King
The discussion of the death of peak oil has ramped up along with the increased hydraulic fracturing and horizontal drilling into tight sands and formations across North Dakota and Texas. In fact, even people that think peak oil will correlate to significant problems for society shy away from the term. But just as it is becoming more difficult to define what “oil” is in energy databases (it is now popular to report “liquids” that have vastly different life cycles and energy densities), the definition of “peak oil” seems to be in the context of the penholder (or typist). Since I’m writing this blog, I of course get to define it for myself here, in what is a simple manner:
Peak oil is the concept that someday the rate of oil production for a country, region, or the world will reach a value that will never be exceeded
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.