20 Dec 10 Eddie's Blog Global

Lord Stern’s speech

Lord Stern’s speech in Shanghai was significant for several reasons. It continued the theme he outlined in his extort report on the subject of committing a sustained percentage of GDP to reducing CO2 emissions. He quantified what China had to do in terms of tonnage of CO2 that it had to reduce on the glide path to zero emissions by 2050.

It seems to me that the problem he described is in fact more stark than he assumed. He pointed out that China would double its GDP in ten years implying a growth of 7%p.a. In actuality China has been growing at closer to 15% and this would imply a doubling of its GDP in five years. At the state of China’s level of income per head this would mean a four-fold increase in energy consumption in as little as five years. Incredible as this sounds it is probably closer to the truth than any other estimate. Some five years ago China commissioned 104,000 MWs of new generating plant. A new Germany is added to world demand for energy every year from China alone. When one considers that India, Brazil and Indonesia are growing at a similar rate the stress that this will place on the world sources of energy can begin to be imagined.

So just for clarity sake it is no harm to review options for the world’s economy given this acceleration in the demand for primary energy.

To begin with the simplest and most obvious observation:

Energy efficiency drives will achieve very little. The rebound effect is real and ongoing. If the world were to double the efficiency of every appliance and the price of energy did not change then simply everyone would buy more appliances or would heat their houses further. In countless experiments the rebound effect has been observed. The poor families will heat four rooms instead of two while the rich families will buy more appliances. We have seen incredible improvements in appliance efficiencies over the past thirty years yet there is still growth in electricity demand (outside of deep recessions).

People respond to price signals. In industry we observe a slightly different effect. The business that embraces energy efficiency can make cheaper product. It wins the competitiveness race. The less efficient business goes under. The successful business sells more to everybody.

One thing that would help would be for the world to stop subsidising energy. I read recent that Mr. Chavez, President of Venezuela sells a litre of fuel for 5 cents. What a wasteful stupid thing to do. This self styled socialist subsidises not the poor but the rich. He foregoes revenues from an oil thirsty world, revenues he could use to build houses, clear slums, educate the people etc. He is not alone. Most developing nations subsidise fuel.

The US doesn’t subsidise, neither does it address the scarcity issue. If the US were to have the same fuel efficiency in their cars as the EU, they would meet their Kyoto obligations.

The energy facts in this world call for a lot more to be done than taxing fuel or increasing efficiency.

With many European countries and the US in economic difficulties, oil stands at $90/barrel and coal trades at more than $100/ton.

What will happen when the economy reverts to “normal”? Oil will be at $150/barrel and coal at $200/ton.

If any scenario were better designed to cause the world economy to crash once more then I cannot think of it. Before this current, financially driven crash, the last three recessions were caused by oil price hikes.

This set of world circumstances points to the direction in which a solution can be found.

We are on a once off transition to sustainability and the first and greatest crisis to be dealt with is the energy crisis.

What this comes down to is that we have to live currently. Not digging up that which took twenty million years to bury or cheating our children out of their heritage. We lease this environment, this biosphere from our grandchildren and we have to stop fouling the nest.

What does it mean to live currently? It means in the first instance relying on the energy sources to hand, the wind, the sun and other basic forces of nature. We know that Northern Europe, the US, China and South America has enough wind power to completely power them. We know that Africa, southern Europe and the rest of the world have enough sun to supply all energy needs.

Without great breakthroughs in technology we can live currently as far as energy is concerned.

What the thinking person finds irritating is the gigantic emphasis on further energy technology breakthroughs. Nuclear fusion, the hydrogen economy fuel cells, carbon capture and storage, thorium extraction from sea water etc. are all in the class of the magic bullet, the dues ex machina. It is like saying that man who isn’t in the room will solve all our problems.

It is not as if we have to get the whole species evacuated to Saturn by 2020.

By and large we have the wind turbines, the photovoltaic solar converters, the DC grids and the cabling to power this planet. We have, in Europe found the way to deploy these technologies by incentivizing businesses and utilities to get on with the job.

What we lack is leadership. Those of us in the developed world seem to lack the confidence to help the emerging nations to grow their economies sustainably.

One of the reasons why this is so seems to me to be about not having a macroeconomic or microeconomic vocabulary or language to describe what has to be done. If you can’t name you can’t know it. It is a fact that whatever political economy is taught, the underpinning ideas of free fuel (wind and sun) of price risk mitigation (due to using a fixed price fuel) of paying an environmental rent for use of the biosphere are all left unsaid.

So what could and should we be saying to the emerging world.

We could say that we will work openly with you to solve our energy crisis on a global scale. We could, begin to transfer technology and know-how to allow the developing economies to begin to become sustainable. We should transfer sufficient cash resources to the developing world to get their markets functioning efficiently. They would then buy more of our products and create the virtuous circle of increasing trade.

We could say that for every MW of wind and solar installed you create three to four jobs.

We could say that the illusion of cheapness resulting from using fossils applies only in recessionary times. As soon as the economy begins to grow the price escalates and a recessionary cycle is initiated.

We could accelerate trade with emerging nations who embraced energy sustainability. We could and should have a world trade agreement which reduces trade barriers to zero. Developing nations ought to be let feed the world; by and large they have more heat and enough water to do this.

We could accelerate our movement in the developed world into cities where scale could be turned into a more rapid and cheaper movement to sustainability. We would have more use of public transport, more efficient public services.

More on this anon.