LOW CARBON AND ECONOMIC GROWTH This report is part of a group of documents focused on the compatibility of carbon emis- sion reductions and economic growth with a specific emph- asis on the situation of emer- ging economies. Our research arrives at the conclusion that growth in the industrial age is tightly linked to the availability of cheap and highly versatile energy sources. A shift to a different paradigm will likely reduce the potential to grow for most economies, but parti- cularly for aspiring industrial Low Carbon and societies (like China). The re- port is structured as follows: • Executive summary Economic Growth – • Core report with al- ternative (energy-focused) macroeconomic models Key Challenges • Topical Q&A supplements on a number of key issues related to low carbon • 2-4 page country sum- Institute for maries on a number of emerging economies Integrated Economic Research iier research economics explained Table of Contents Introduction .............................................................................. 3 1. A different macroeconomic theory .................................... 4 1.1. The main macroeconomic view ................................................... 4 1.2. An alternative view ..................................................................... 5 1.3. It is all about energy ................................................................... 5 1.4. Biophysical and ecological economics ......................................... 6 1.5. Energy and GDP - a stronger connection than expected .............. 8 1.6. An energy-based explanation of productivity gains ...................... 9 1.7. Human labour and fossil fuel costs compared ........................... 15 1.8. The role of technology .............................................................. 18 1.9. The overall trend for energy and resource cost .......................... 19 1.10. What energy efficiency accomplishes ........................................ 19 1.11. Globalization – a quest for lower energy cost ............................ 20 1.12. Conceptual Summary ............................................................... 22 1.13. The effects of growing energy cost on productivity ................... 24 2. Consequences for low-carbon efforts .............................. 26 2.1. Energy cost requirements in industrial processes ....................... 26 2.2. China - the main source of low cost energy .............................. 29 2.3. Why renewable energy likely will remain too expensive ............. 31 2.4. Why fossil fuels are cheaper ..................................................... 33 2.5. Specific issues for emerging economies ..................................... 35 2.6. Conclusions .............................................................................. 36 Authors: Hannes Kunz, Rembrandt Koppelaar, Tim 3. Low carbon in emerging economies ................................ 37 Raettig, Stephen Balogh 3.1. Types of economies .................................................................. 37 © IIER 2011, All rights reserved. The materials contained in this report may be copied or 3.2. Sector-specific energy use and carbon-intensity ......................... 38 referenced provided that ALL copies retain a reference 3.3. Finding feasible applications ..................................................... 39 to IIER and this report. No material may be modified, 3.4. The special role of electricity ..................................................... 41 edited or taken out of context such that its use creates 3.5. Low-carbon technologies .......................................................... 43 a false or misleading statement or impression regarding 3.6. Criteria for low-carbon technologies ......................................... 44 the positions, statements or actions of IIER. The production of this report has been funded by the Appendix A – Review of Low-Carbon Literature ...................... 44 UK Department for International Development (DFID). The findings, views and recommendations contained in Appendix B – Electrical Grid Review ........................................ 45 the research are those of IIER and do not necessarily re- present the views of the funders. Appendix C – Low Carbon Technologies ................................. 55 Contact:Institute for Integrated Economic Research P.O. Box 506, CH-8706 Meilen Switzerland About IIER ............................................................................... 60 Web: www.iier.ch,Email: [email protected] The main macroeconomic view Introduction This report questions one of the key mal3), are cost-prohibitive4, or pro- that the rural poor – the majority of underlying assumptions of most plans duce only lower quality energy5, a the population in developing nations, to reduce carbon emissions: that it is reality we don’t expect to change and 70% of those living on less than possible to grow or maintain eco- anytime soon. In a future where fossil $1.25 per day6, can benefit from nomic output while at the same time fuels are no longer available at low significant life and wealth improve- reducing the anthropogenic produc- cost, either due to extraction limits or ments, while greenhouse gas emis- tion of greenhouse gases.1 In this because they include the cost of ex- sions stay the same or even shrink. document, we will demonstrate our ternalities (such as a carbon tax or se- The lives of billions of people living in findings that the generally desired questration efforts), we cannot envi- dense urban centres could also be developmental path to urbanization sage how the current growth model positively affected by some of these and industrialization is very unlikely of advanced economies can continue, approaches, but because their unless it can be based on large quan- let alone support emerging eco- incomes and therefore their well- tities of low-cost and high-quality nomies to reach a comparable level. being are linked to industrial pro- energy. This contradicts the current cesses, it appears that meaningful Given this likely inability to grow in a push for greenhouse gas reductions, growth will be more difficult to carbon-neutral way, we suggest a as the only (seemingly) unlimited achieve in large urban areas without very different development path for energy sources with the right proper- increased fossil energy consumption the future which would allow im- ties are fossil fuels like coal, natural and thus carbon emission growth. provements in the quality of life, gas and (until recent price increases) health, and wealth for a large portion In this report, we introduce the con- oil. These fossil fuels have been at the of the population: the introduction cepts and data supporting this point core of economic development and of simple, mostly non-industrial re- of view, and suggest a few areas growth, but only as long as they were newable and sustainable techno- where improvements seem possible. not burdened with the cost of their logies. If done properly, we expect This report is divided into three parts: externalities: pollution, climate change, and depletion. In compari- • Review and refocusing of relevant son, renewable sources are either not http://www.eia.doe.gov/oiaf/ieo/electricity.html macroeconomic theory Accessed January 31, 2011. • scalable or geographically limited 3 See “Barriers”. IEA (2010). Renewable Introduction to high linkage bet- 2 Energy Essentials: Geothermal. Available from (such as hydropower and geother- ween energy (cost) and wealth http://www.iea.org/papers/2010/Geothermal_E • Low-carbon development poten- ssentials.pdf Accessed January 31, 2011. 4 See both 2005 and 2010 versions of IEA/NEA: tial, with a focus on emerging Projected Costs of Generating Electricity. economies 1 Economic output here refers to the commonly http://www.iea.org/publications/free_new_Desc used measurement of Gross Domestic Product,. .asp?PUBS_ID=2207 2 Hydropower development is limited in OECD 5 For example, solar hot water heaters have countries and limited by precipitation. EIA brief payback periods, are relatively inexpensive 6UN-IFAD (2011).Rural Poverty Report (2010).International Energy Outlook Electricity. to install, but only provide lower quality heat 2011.http://www.ifad.org/rpr2011/report/e/pri Available from energy. nt_rpr2011.pdf Accessed January 31, 2011. Low carbon and economic growth 3 The main macroeconomic view 1. A different macroeconomic theory 1.1. The main macroeconomic view • Population growth (labour are typically explained. The impli- 11 Most macroeconomic planning mo- availability) cations of these differences on dels operate under the assumption Our analysis generally supports the economic systems are significant. that “economic growth”, i.e. adding view that these key components are Our economic success over the past more real (inflation-corrected) output useful in describing past growth. 200 years has been remarkable, pro- 7 every year can continue indefinitely . However, while the ingredients of tra- viding steady growth in most This might be interrupted by reces- ditional models are in line with our societies, despite a rapidly growing sions and other distortions, but those findings, our approach sees them human population. Not only were do not alter the long-term trend. This only as derivatives of a broader re- there six times more humans in the view remains largely unchallenged source- and energy-based view. In year 2000 compared to 1820, but with the exception of some small this paper we aim to demonstrate