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Forestry Program Globalization and Economic Growth: Energy and Environmental Constraints Sten Nilsson Deputy Director and Leader, Forestry Program IIASA,

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Presentation on theme: "Forestry Program Globalization and Economic Growth: Energy and Environmental Constraints Sten Nilsson Deputy Director and Leader, Forestry Program IIASA,"— Presentation transcript:

1 Forestry Program Globalization and Economic Growth: Energy and Environmental Constraints Sten Nilsson Deputy Director and Leader, Forestry Program IIASA, Laxenburg, Austria Seminar on the Globalization Challenges for Europe, 17 August 2006 Helsinki, Finland

2 Forestry Program S. Nilsson, 1980 Energy Development ― Strategic Economic Choices, IEA

3 Forestry Program Globalization Integration of economic activities via markets Economic globalization Economic growth through transmission of new technologies and policy changes

4 Forestry Program Problem High energy costs will hamper overall economic growth Globalization will drive environmental constraints, which in turn will hamper economic growth

5 Forestry Program Economic Growth Sheer Growth → prerequisite for economic growth to be reconcilable with sustainable development

6 Forestry Program Environmental Development Globalization will cause gaps between ecosystem service supply and demand This will cause increased environmental constraints Assumed to slow down economic growth

7 Forestry Program Energy Development Crude Oil Price History from 1861–2006 Source: M. Ströck, 2006, Released under the GFDL

8 Forestry Program Energy Development World Primary Energy Demand (IEA, 2005) Total 16.3 billion toe 50% more than today 81% of supply as fossil fuels 73% of the increase in developing countries

9 Forestry Program Energy Development Global Oil Consumption (conventional and unconventional reserves and resources) Source: Riahi and Keppo (2006)

10 Forestry Program Energy Development Global Natural Gas Consumption (conventional and unconventional reserves and resources) Source: Riahi and Keppo (2006)

11 Forestry Program Energy Development

12 Forestry Program High Energy Prices Why ? Rent seeking by oil companies and energy providers Liberalization inefficient In Europe:  Power system bound to fall short due to aging generation and transmission equipment  Physical constraints not removed  No institutional redesign  International trade driven by tariffs and taxes and not economic efficiency Taxes Lack of long-term energy policies

13 Forestry Program Empirical Relations Between Environment and Economic Growth Mixed bag  Increased economic growth goes along with improved environmental qualities  Improved environment causes decreased economic growth  Environmental Kuznets Curve Yes and No Neoclassic growth models  Environmental constraints reduce economic growth Adaptive economic endogenous growth models  Environmental constraints improve environmental quality and increase economic growth

14 Forestry Program Empirical Relations Energy and Economic Growth Summary of Causality Studies Between Consumption Energy and Long-term Economic Development RegionResultReference Pakistan Total energy use does not affect economic growth; but electricity and petroleum use impact economic growth substantially. Siddique (2004) South Korea Energy conservation feasible without compromising with long-term economic growth.Oh & Lee (2004) 19 African Countries Only 4 countries demonstrated a positive relation between energy consumption and economic growth. For 4 countries there was a negative impact on economic growth by increased energy consumption; for the other 11 countries no relation could be identified. Wolde-Rufael (2005) Australia No adverse impact on economic growth by introducing electricity conservation.Narayan & Smyth (2005) 11 Industrialized Countries Energy conservation would reduce economic growth in USA, Canada, Belgium, Netherlands, and Switzerland; but not in the UK, Germany, Sweden, France, Italy and Japan. Lee (2006) 17 African Countries For 6 countries conservation of electricity can be made without jeopardizing economic growth; for 6 countries electricity conservation would harm economic growth. Wolde-Rufael (2006) 4 Asian Developing Countries Energy conservation would have limited adverse effect on economic growth in Indonesia and India but would impact the economic growth in Thailand and the Philippines. Asafu-Adjaye (2000) China Insufficient energy supply will substantially curb economic growth.Han et al. (2004) New Zealand and Australia Energy conservation will not have significant impact on economic growth in these 2 countries. The same is the case for Indonesia and India but there would be impacts in Thailand and the Philippines. Fatai et al. (2004) Turkey Electricity consumption substantially impacts the rate of economic growth.Attinay & Karagol (2005) India Different models tested and conflicting results; but energy seems to act as an engine for economic growth in the short-run but in the long-run the causality goes from economic growth to energy consumption. Paul & Bhattacharya (2004) Taiwan Energy acts as an engine for economic growth.Lee & Chang (2005) Singapore Oil-price shocks had only marginal impact on economic growth.Chang & Weng (2003)

15 Forestry Program Empirical Relations Energy and Economic Growth Summary of Analysis of Impact of Energy Prices on Economic Growth by Endogenous Economic Models and Econometrics RegionResultReference USAOil-price stocks contribute to duration and depth of economic recessions but do not cause recessions Hamilton (1983) Industrialized Countries No impacts on the aggregate economic performanceBohi (1989) 7 OECD Countries Relatively large negative impact on economic output but insignificant response to price declines Mork (1994) USAEnergy price shocks no significant impact on economic growthGardner & Joutz (1996) OECD/partly world Oil price stocks caused some economic disruptions but the overall economic growth over past 30 years has been sustained Birol & Keppler (2000) Industrialized Countries Continuously rising real energy prices tend to slow down economic growthVan Zon & Yetkiner (2003) USAEnergy conservation greater negative economic impact than earlier anticipatedKaufmann (2004) WorldRecent energy price increases have slowed down the world GDP by 0.5% in the short term IEA (2004) USA (individual states) Increased oil prices have small impact on state economies and reduction of oil taxes would have negative effect on a state’s overall economy Decker & Wohar (2005) 44 Developed Countries Rising energy prices having no long-term negative economic impact. In some cases they have a positive impact on economic growth. Bretschger (2006) WorldOil price stocks have a marked but relatively short-lived economic negative impact (Huge error bands) IMF (2006) US/Canada/ Japan Economies have thresholds for increased energy prices. Below threshold no economic impact. Above threshold negative economic impact. Huang et al. (2005)

16 Forestry Program Conclusions Developing economies more sensitive to increased energy prices than developed economies Threshold value for sensitivity to energy prices which varies depending on development stage of economy Increased energy prices will cause short-term economic disruptions but hardly any long-term negative impacts on economic growth

17 Forestry Program Climate and Economies The cost of abatement of emissions is substantially lower than the cost of future climate change Studies on the relation between CO 2 emissions and economy Depending on the structure and development of the economy countries have different abilities to absorb the impacts on the economy of reduced CO 2 emissions. Some countries can do it without negative economic impacts and others will suffer substantially

18 Forestry Program What Can Governments Do? Environment  R&D for environmentally friendly technologies and products Energy  Most of the adjustments to take place in the private sector  Establish competitive energy markets  Develop long-term energy strategies  Stimulate new energy technologies  Let world energy prices pass through completely to domestic energy prices  Keep energy taxes and inflation under control


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