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
The June 2015 Energy and Climate Change report by the International Energy Agency (IEA) has an ambitious ‘Bridge Scenario’ in which the adoption of efficiency measures reduces energy-related global greenhouse gas emissions by 49% by 2030: http://www.iea.org/publications/freepublications/publication/weo-2015-special-report-energy-climate-change.html Does saving energy save carbon, as is usually argued? (more…)
By Dave Elliott
‘Distributing Power: A transition to a civic energy future’, a report on research by the EPSRC-funded Realising Transition Pathways Research Consortium of 9 UK universities, argues that up to 50% of electricity demand in the UK could be met by distributed and low carbon sources by 2050. The report assesses the technological feasibility of a move from the current traditional business models of the ‘Big Six’ energy providers to a model where greater ownership is met by devolved governments, municipalities, co-ops and communities. And it looks in details at what types of governance, ownership and control a distributed future would need. (more…)
By Dave Elliott
It is claimed that a transition to green energy would create a lot of employment. As I noted in my previous post, there are methodological difficulties facing those trying to make realistic estimates, but economists do produce estimates of employment creation for various investments and the net job impacts. (more…)
By Dave Elliott
It is claimed that a transition to a green energy system would create a lot of employment, and possibly better employment and job security – sustainable green jobs. If true, that claim offers a powerful political argument for the change at a time when employment is threatened by recession and by new patterns of global economic competition. But is that really what is on offer? (more…)
By Dave Elliott
The International Energy Agency (IEA) has released a new report “the Power of Transformation”, which concludes that the integration of large amounts of renewable energy can be achieved by any country at only a small increase on whole system costs, compared with the current fossil-fuel-heavy electricity systems. The IEA used present-day costs for solar PV and wind, which are likely to continue to fall, with wind and PV being set to provide the bulk of the generating capacity in transformed electricity systems. (more…)
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.
Waxman-Markey, a bill “to create clean energy jobs, achieve energy independence, reduce global warming pollution and transition to a clean energy economy” is voted on by end of this week in the House.” A lot of attention has highlighted the global warming parts of the bill, and rightly so. In the current draft, the emission reduction target is 17% reduction from 2005 levels by 2020. This is not more than 4% reduction by 1990 level and may be not enough to persuade China, Europe and other world regions to get tougher on their own targets. Also, potentially ineffective offsets can be purchased, hence avoiding emission reduction at the smokestack.
However, the bill is surprisingly comprehensive in addressing also large-scale clean energy deployment, sustainable transportation, smart grid advances and transmission issues. All these measures support a transition to a clean energy economy, as the bill claims.
In particular, Waxman-Markey holds quite some promise, as it
- aims to invest $190 billion into renewable energies
- provides grants for transmission infrastructure and requires coordination of electricity transmission planning with the goal of building out the grid to facilitate deployment of renewables (i.e., brings the wind energy of the Mid-West to urban centers)
- asks regional electric grid planning to take into account all significant demand-side and supply-side options, including energy efficiency, distributed generation, renewable energy and zero-carbon electricity generation technologies, smart-grid technologies and practices, demand response, electricity storage, voltage regulation technologies, and even more detailed measures. (Thanks to Cathy Kunckel for pointing this out.)
And this transition is actually the bottom line. Make it more lucrative to invest in renewable energies than in coal plans, more attractive to move into mixed-use neighborhoods with high-quality public transit than relying on gas-guzzling monsters in ex-urbia. If the bill heads into this directions, it will be a huge success for avoiding disastrous human-made climate change. Currently, utilities have expertise in operating coal plants and know this market. However, when coal plants get a little bit more expensive to operate and renewable energies get a little cheaper to deploy, utilities start to reconsider their investment decisions. And one point the market may switch over to new technologies, like wind, geothermal and concentrated solar power. The current gradual change can accelerate to a switch in the way our energy economy operates. If that happens, weak targets in emission reductions can much more easily be strengthened; the system dynamics have changed and there is less strong interest anymore in coal plants.
One of the emergent technologies is wind. It is mature by now, the market is well developed, and in many locations in the US, wind is cost competitive to conventional sources of energy. With more policy attention on the grid infrastructure, a wave of investment into wind energy within the next years can be expected. For example, a study published in PNAS points out that US wind resources, particularly in the central plain states, could supply 16 times more energy than the current total US demand.