1. 1 The Economics of Sustainable Development (2014) Lecture 3 World Energy Scenarios: main issues and policy options Alessandro Vercelli University of Siena Based upon: -Greenhouse gas emissions and the energy system: are current trends sustainable? (with S. Borghesi), International Journal of Global Energy Issues, Special issue on “Energy Efficiency, Environmental Performance and Sustainability”, 2009, vol.32, 1-2, pp.160-174.

2. 2 Sustainable development and the energy system The existing energy system is a crucial obstacle to sustainability: A) SCARCITY: conventional fossil fuels Environmental { B) POLLUTION: concentration of greenhouse gases - inequality in per capita energy consumption Social { - poverty: 1.4 Bln without electricity in 2030 → trapped in poverty -security: concentration of reserves Economic { -cost inflation: triggered the crisis → stagflation?

3. 3 Structure of the presentation 2 parts: 1st Part: The current world energy scenario: two views The current scenario is reconstructed on the basis of the main energy series for the last 30 years; their projections to the next 20-30 years are discussed conventional (mainstream) interpretations based on 2 points of view { critical 2nd Part: Policy implications of energy scenarios Different interpretations of the current world energy scenario lead to different policy strategies that will be critically examined

4. 4 A) CONVENTIONAL POINT OF VIEW market Optimism { market-led technological progress reserves of fossil fuels sufficient (1/2 c.) 1. No physical scarcity of energy { the tank of earth spaceship is still full Sheik Yamani (OPEC) “stone age didn’t end because stones were exhausted and oil age will not end because the oil is exhausted” bronze and iron → better instruments { alternative energy sources

5. 5 The paradox of “proven” reserves

6. 6 Conventional point of view (continues) local economic scarcity { temporary Price tensions are not excluded { → dealt with by the market → optimistic interpretation also of the recent upward jump of prices: -less than in the 1970s -temporary policy factors (IRAQ, IRAN, Russia) Recent increase { ↑ demand: South and East Asia, wars, etc. ↑ liquidity (Japan, Greenspan…)

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8. 8 Conventional point of view (continues) 2. market-led technological progress: is believed always to find timely solutions to the emerging problems - ↓ energy intensity: E/Y - prompt shift towards alternative energy sources as soon as structural shortages of fossil fuels will emerge

9. 9 Energy intensity Fig. 2: energy intensity by region toe 1000$ GDP ($1995 PPP) source: IEA (2004)

10. 10 Secular patterns of energy intensity Fig 4: energy intensity in selected countries source: Colombo (1992)

11. 11 Energy intensity in China Taking account -of the secular pattern of energy intensity in the other countries -and of the stage of development reached by China (as represented by its per capita income) one could expect China to be still climbing the increasing part of the curve On the contrary, in the period 1980-2000 China managed to quadruple income doubling the consumption of energy so that the energy intensity was cut by half remarkable achievement that is planned to continue in the next 20 years energy efficiency is still low as compared to industrialised countries (60% of the world average and 1/5th of the OECD countries) However { convergence is due to increase energy consumption and pollution at a rate much higher than that of income because ↑↑↑E= ↑↑E/P x ↑P

12. 12 Conventional point of view (continues) ↓ energy intensity 3. Pollution { ↓ carbon content: shift from carbon to oil to gas, shift from fossil fuels to non-fossil fuels, more efficient production and consumption → automatic stabilization based on market prices

13. 13 Policy implications of the conventional view according to this view, in principle, there is no need of interventionist energy policies because the market and market-driven technological progress will always solve the emerging problems of course this presupposes a well-functioning competitive market: to reach this goal it is considered sufficient the privatization and liberalization of the energy market in a few industrialized countries (including EU) it is maintained that we need also policy measures meant to internalize the external costs of fossil fuels (through policy instruments such as carbon tax, emission permits, etc.) comparing them with those of alternative energy options

14. 14 Critique to the conventional point of view 1 The transition to a sustainable system is too slow: renewable sources are expected to grow very little Justification: the cost of production of KWH is still inferior in the case of fossil fuels, but this assertion is questionable; we should take account also of: - vulnerability -External costs of fossil fuels {- health: 10.000 casualties only for coal - pollution → global warming -Economic and political risks: concentration in the Middle East -scale economies in fossil fuels sector -Distortions of market-led investment { -infrastructures concerning fossil fuels -fall of energy investment since ’90s -Distortion of public incentives still concentrated on fossil fuels (in EU > 70%)

15. 15 Critique to the conventional point of view 2 Powerful private interests slow down the transition to a sustainable model of production, distribution and consumption of energy: -OPEC and other producers -Multinational corporations -Superpowers who invested in the existing energy policies → want to exploit their assets: oil, natural gas, coal Inertia also in other countries: huge fiscal income that is difficult to substitute -centralized Renewable energy sources are not easily { -exploitable for profits

16. 16 B) Critical point of view 1 The current model of production, distribution and consumption of energy is highly vulnerable: -physical scarcity of fossil fuels has to be taken very seriously and cannot be assessed separately from their economic scarcity (Hubbert curve) -territorial concentration of production of fossil fuels (2/3 oil reserves in the Middle East) -centralization of transport infrastructures (gas pipes, oil tankers) -oligopolistic market: limited number of very powerful multinational corporations

17. 17 Critical point of view 2 1. The problem of scarcity of fossil fuels is not strictly physical but derives from the interaction of physical scarcity and economic constraints The data on “proven” reserves are inflated: multinationals (Shell: January 2004 ↓ 20%) “creative” geological accounting { ↑ production quotas producing countries { ↑ credit conditions peak theory (“peak oil”) has been introduced by the famous oil geologist Marion King Hubbert in 1956 in a paper presented at the American Petroleum Institute that introduced the Hubbert curve

18. 18 Hubbert’s curve Hubbert peak theory (“peak oil”) Marion King Hubbert: geophysicist at the Shell laboratories in Houston In 1956, he presented an article “Nuclear Energy and Fossil Fuels” at a meeting of the American Petroleum Institute in San Antonio -1970: peak in the US Forecasts { -2000: global peak Bell-shaped curve: describes the annual production of oil as a function of time

19. 19 Hubbert’s Peak From the 1956 article Hubbert drew the graph by hand and integrated the areas by counting the little squares He opted for the higher estimate culminating in the 1970s

20. 20 Physical scarcity: Hubbert curve bell-shaped curve that describes production per year of oil in function of time -1970: peak of USA oil production forecasts in 1956 { -2000: peak of world oil production -actual peak in USA: 1971 actual outcomes { -not yet?, however the oil shocks of the 1970s and the world recession of the 1980s have postponed the peak In any case the production of oil is already declining in 33 of the 48 biggest producing countries

21. 21 Are we beyond the oil peak?

22. 22 Hubbert curve of discoveries of new reserves and of oil production source: Ivanhoe, 2005

23. 23 Discoveries and production

24. 24 Estimates of the oil peak

25. 25 Recent forecasts of Hubbert’s followers Prof. Kenneth Deffeys, author of “Hubbert’s Peak” e “Beyond oil-the view from Hubbert Peak” maintains that the peak has been overcome on December 16 of 2005 Prof. Colin Campbell founder of ASPO (Association for the Study of Peak Oil & Gas) maintained that the peak has been overcome before the 2010 Also natural gas is close to the peak at the world level and beyond the peak in many countries: USA 2003, UK 2000, world 2010-2020 2004: world consumption 30 MLD of barrels; new reserves discovered: 8 MLD

26. 26 Hirsch Report 2004 The peak is near: not later than in about 2020: -Decline of production in 33 of the 48 main producing countries -Peak of discoveries overcome in 1962 -Most forecasts of the oil peak between 2010 and 2020 Start immediately a systematic program of mitigation to avoid a devastating structural scarcity of fossil fuels -a preventive strategy able to avoid the energy crisis requires at least 20 years of continuous efforts -10 years could be enough to avoid the most catastrophic consequences but would not avoid a 10 years crisis after the peak -if ex post we will understand that the mitigation strategy started too early the negative consequences would be limited

27. 27 After the peak ↑ demand Shortage of oil: {→ increasing gap ↓supply situation different from the past: structural shortage for irreversible geological reasons not only for transient economic or political reasons Serious risks: -strong and persistent cost inflation with heavy consequences on: transports, fertilizers, plastics, etc. -reduction of purchasing power of families: ↓ life standards

28. 28 Critiques to the Hubbert curve Fallacy of composition: extension to the aggregate level of a pattern that is valid for each single oil field Frequent revisions of peak forecasts: however what matters is whether we are approaching a peak The world supply is not rigid: the increasing price of oil mobilizes new investment and makes convenient new productive processes: -shale oil (via fracking) -deeper oil fields -tar sands -hydrocarbons trapped in polar ice -Syngas via liquefaction of coal (South Africa: 50%) -energy savings (as in the 1970s) -substitution with alternative energy sources (renewable energy, ethanol, nuclear, etc.)

29. 29 Critical point of view 3 2. In the energy field the myth of the omnipotence of competitive markets is particularly questionable: the allocation of resources is controlled not by the “invisible hand” of the market but by quite visible hands (multinational companies, OPEC countries and most powerful industrialized countries) that act in their own private interest the current trends are inconsistent with sustainable development: the projections of current trends to the next 30 years show (IEA): - global energy demand is expected to grow at 1.7 % per year while the supply is not easily increased - according to some projections, fossil fuels are expected to increase their share in global supply and international trade (↑ dependence and insecurity)

30. 30 Critical point of view 4 3. The technical progress has been channeled towards the reduction of cost of production and transport of fossil fuels -in 2001 73% of EU energy subsidies towards fossil fuels -R&D in the energy sector declined significantly since 1990 4. The global energy intensity is expected to decrease at a rate of 1.2 % but this is not enough to reduce CO 2 emissions that will increase at the rate of 1.8% per year (IEA) These trends are inconsistent with sustainability: -1.4 MLD without electricity in 2030 → poverty and inequality Social { -2/5 of population: traditional biomass that is polluting and inefficient -strong inequality in per capita energy consumption environmental: strong increase in the concentration of CO 2

31. 31 CO 2 Emissions Total CO 2 world emissions by income Source: elaborations from World Bank data (World Bank, 2004)

32. 32 Situazione attuale (Stern Review, 2006; IPCC, 2007) Fatti principali: Flusso annuo di GHGs: attuale 42 GtCO 2 -e massimo assorbimento da parte della biosfera 5 GtCO 2 -e Stock (concentrazione nell’atmosfera) ↑ attuale 430 ppm (parti per milione) valore medio prima della rivoluzione industriale: 280 ppm sta aumentando al ritmo di 2.3 ppm all’anno → livello doppio di concentrazione entro pochi decenni →↑ 2 - 4,5°C (stima più attendibile 3°C) Temperatura media globale ↑ 0,74 gradi Celsius negli ultimi cento anni → ↑ 2 – 4 °C best estimates prima della fine del secolo (Stern) Causa fondamentale emissioni antropogeniche di GHGs (IPCC: p > 90%) (il contributo delle variazioni nell’intensità delle radiazioni solari: < 1/12°)

33. 33 CONSEGUENZE DEL RISCALDAMENTO GLOBALE Scioglimento dei ghiacciai e del permafrost → ↑ innalzamento del livello del mare Inondazione zone costiere → migrazioni di massa ↑ Variabilità climatica: uragani, tifoni, siccità, esondazioni, ecc. Acidificazione degli oceani →↑ riduzione del patrimonio ittico Declino della produttività della terra Collasso delle foreste tropicali

34. 34 The decomposition approach The rate of reduction of the deterioration rate is insufficient: IPAT approach (Holdren and Ehrlich, 1974): Impact Population Affluence Technology ( 1 )I = P(Y/P)(I/Y) = Pyi I : impact P : world population Y : total income y = Y/P : per capita income i = I/Y : impact intensity ( 2 )I* = P* + y* + i* Unfortunately: P* > 0, y* > 0, i* i* and thus I* > 0

35. 35 A version of the Kaya identity This approach may be applied specifically to the energy sector (Kaya, 1990): we may start from the following identity: ( 2 ) G = P(Y/P)(E/Y)(F/E)(G/F) = Pyefg G : GHGs emissions P : world population Y : total income y = Y/P : per capita income E : energy consumption e = E/Y : energy intensity F : fossil fuels consumption f = F/E : share of fossil fuels in energy consumption g = G/F : intensity of GHGs emissions per unit of fossil fuel consumed Taking the derivative of the logarithm of each variable we obtain ( 3 ) G* = P* + y* + e* + f* + g* where the asterisk indicates the rate of growth of the variable

36. 36 G-Sustainability condition From the: ( 3 ) G* = P* + y* + e* + f* + g* We may derive conditions of G-sustainability A weak condition is that GHGs emissions do not increase through time ( 4 )G* = P* + y* + e* + f* + g*  0 this is insufficient to avoid global warming: current emissions are 42 GtCO 2 -e per year while the biosphere may absorb only 5 GtCO 2 -e per year without ↑ concentration This is, however, the first intermediate goal to be reached and it is not easy: G* = 1.4 (1991-2000); 1.8 (1971-2000); projections (2005-2030) 1.3 - 2.6

37. 37 Source: authors’ elaboration on World Bank, World Development Indicators (2008) Total CO2 world emissions, 1960-2004

38. 38 G-sustainability condition scenario analysis (e.g. SRES, IPCC, 2000) So far decomposition approach { regional analysis (e.g. Raupach et al, 2007) conditions of sustainability We use it for sustainability analysis{ measures of (un-)sustainability Condition of sustainability for per capita income growth y* ( 5 )y*  - (P* + e* + f* + g*) or income growth Y* ( 6 ) Y* ≤ - (e* + f* + g*) Since f* and g* are expected to be stationary Y* may be positive only to the extent that e* is negative → income sustainability gap ( 7 )y* - y*max = Y* - Y*max = Y* + e* + f* + g*

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40. 40 Table 2: expected average annual growth rate of CO2 emissions in the period 2005-2030 Legend: EIA-Reference = EIA (2008) Reference case scenario; EIA-High = EIA (2008) High case scenario; EIA-Low = EIA (2008) Low case scenario; IEA-Reference = IEA (2008) Reference case scenario; POLES = Prospective Outlook on Long-Term Energy Systems (European Commission, 2003); SRES = Special Report on Emission Scenarios (IPCC, 2000). SourceG* EIA-Reference1.7 EIA-High2.1 EIA-Low1.3 IEA-Reference1.6 POLES2.2 SRES A12.2 SRES A22.3 SRES B11.6 SRES B21.3 SRES A1F12.6 SRES A1T2.0

41. 41 Table1: historical trends and future projections WorldG*P*y*e*g*f* 1971-19802.81.92.2-1.10.2-0.4 1981-19901.61.91.3-1.1-0.1-0.4 1991-20001.41.61.8-1.80.2-0.4 1971-20001.81.71.6-1.20.0-0.3 2004-20301.61.03.0-2.4-0.10.1 Source: authors’ elaboration on EIA (2008), British Petroleum (2008) and IEA (2008) data, in the light of ( 4 ) G* = P* + y* + e* + g* + f*  0

42. 42 Comments to table 1 In the light of the identity ( 4 ): G* = P* + y* + e* + f* + g*  0 P* increases though at a decelerating rate y* is now decreasing but policy authorities will try hard to revive its growth In addition, in a BAU scenario, f* and g* are expected to remain stationary So we can stabilize G* only if ↓ e* ≥ ↑ P* + y* = Y* According to projections, ↓ e* (-2.4) insufficient to compensate ↑ Y* (4.0) In other words, we could have G-sustainability iff Y* ≤ 2.4 However this target is considered by governments too low (not only in China and India) although it is much too lax to stabilize climate change

43. 43 Does the EKC apply to the energy system? The decomposition approach clarified how demanding are sustainability conditions for the existing energy system A more optimistic point of view relies on the alleged existence of an energy EKC per capita energy consumption (Schmalensee et al., 1998; Galeotti & Lanza, 1999) EKC { energy intensity (Suri and Chapman, 1998; Focacci, 2003) Strong doubts on its existence and significance (e.g. Borghesi and Vercelli, 2008): Data problems Different indicators provide different results Omission of relevant explanatory variables Cross-country vs. time-series In any case it would not imply G-sustainability: let us focus on energy intensity

44. 44 The EKC in energy intensity Figura 4: Intensità energetica in paesi selezionati Energy intensity in selected countries over time Source: Colombo (1992)

45. 45 Trends of energy intensity Fig. 2: Energy intensity by region (toe per 1000 $ of GDP- $1995 PPP) source: IEA (2004)

46. 46 Energy EKC does not imply sustainability An inverse-U energy intensity relation with time does not imply an energy intensity EKC However, since per capita world income has grown in the past fairly regularly with time we should not be surprised that some authors found evidence of an energy intensity EKC (Sun, 1999); in any case: the existence of an energy EKC does not imply G-sustainabilty: The energy intensity EKC implies only that after the peak Y* > E* but this ≠> y* + e* < 0 and a fortiori it ≠> G* = P* + y* + e* + f* + g*  0 Analogously for the per capita emissions EKC a reduction after the peak of g* p ≠> G*  0 as P* could more than offset the negative growth of g* p

47. 47 EKC in energy intensity after the peak: EKC  y* > 0, e* y* + e* < 0 a fortiori it ≠> G* = P* + y* + e* + f* + g*  0 e = E/Y y = Y/P

48. 48 EKC in carbon intensity EKC  y* > 0; after the peak: g y * < 0 G* = P* + y*+ g y *  0 ? g y = G/Y y = Y/P

49. 49 Decomposition approach and the EKC gp1gp1 gp2gp2 gp3gp3 ED C B A gygy k y g p = yg y → g p * = y* + g y * → G* = P* + y* + g y *

50. 50 Policy implications G* = G* 1 + G* 2 – A* = G* 2 + P* + y* + e* + g* + f* – A* G* : net total emissions of GHGs (net of A*) G 1 :anthropic emissions G 2 :non-anthropic emissions A* :absorption by the biosphere Condition of sustainability: G* = 0  G* 1 = A* – G* 2   We have thus to reduce anthropic emissions to less than 1/8 In addition we have to deplete the excessive concentration of GHGs so that we need to limit emissions to an even lower level

51. 51 Policy implications How to comply with the conditionG* = P* + y* + e* + f* + g*  0 ? demographic growth P is a slow and inertial variable the share of fossil fuels f* does not diminish in BAU scenarios notwithstanding the growing scarcity of oil and natural gas: IEA (2006): share non-FF on world total energy supply from 14% to 19,7% 1973-2004 (from 13.1% to 13.2% if nuclear excluded!!) the carbon intensity g* of fossil fuels does not diminish in the BAU scenario because of the growing share of coal: trend expected to worsen after the peak the energy intensity e* is the only factor diminishing in BAU projections but its negative growth is insufficient In order to reduce G* without undermining y* we have to change the scenarios by forcing the transition to a different energy system: accelerate the negative growth of e*, f* and g* policy strategy { change the model of development

52. 52 The “business as usual” scenario is becoming increasingly unsustainable The BAU scenario is inconsistent with sustainable development: -the gap diminished in the 1970s as a consequence of the oil shocks -this process of adjustment continued in the 1980s at a lower pace and petered out in the 1990s showing signs of inversion in the late 1990s and early 2000s inversion reflected in the projections for 2025 (or 2030) →the gap is much bigger: it is not sufficient to stabilise the emissions at the current level Tentative explanations: -Strong reduction of the price of fossil fuels since the early 1980s until the 2004 -Increasing faith in the omnipotence of markets believed to be able to solve promptly any sort of economic problem including the energetic ones → this new attitude weakened the policies of regulation of markets, including the energy markets However energy is a public good and energy markets are characterised by strong externalities → regulation is necessary

53. 53 Concluding remarks Targets of energy policy: energy policies should aim to reconcile the energy scenario with sustainable development a)Security of supply b)Productive and allocative efficiency c)Equitable distribution of energy facilities d)Environmental protection → sustainable energy development

54. 54 a) Security of supply -This problem is becoming increasingly critical in both EU and China: -EU imports are currently about 50% and are expected to become 70% by 2030 -China became a net oil importer in 1993; the share of imports was in 2002 37% and is expected to increase up to 70% by 2020 -Policy interventions: fossil fuels: ↓carbon → ↓oil → ↓ natural gas energy sources { ↑ renewables -diversification { origin and transport of imported energy sources -decentralisation →↑ renewables: ↑ wind, ↑ solar, ↑ biomass

55. 55 b) Productive and allocative efficiency Strong improvements in the ’70s and in the ’80s in consequence of the sharp increase of oil price following the two oil shocks (contribution of both the market and CAC policy measures) The positive effects peter out in the ’90s in consequence of the price reductions In the ’80s and ’90s significant contribution in both EU and China from economic liberalization and deregulation but the low-cost benefits have been already exploited In both EU and China market-oriented policies did not prevent electricity shortages and black-outs that increased in the last years (strong externalities) In order to accelerate gains in efficiency we have to introduce a system of policy measures that provide incentives to efficiency and disincentives to waste

56. 56 c) Equitable distribution of energy facilities -Access of everyone: in China in 2003 there were about 70 million of rural households (3,5 of population) who did not have access to electricity in order to guarantee the access to electricity in remote areas the extension of the electricity grid would be very expensive, it is much better to establish small plants of generation of renewable energy wherever they are needed -In EU there is a different problem: different price of energy due to the lack of a unified market of energy and to different regulation in order to solve this problem the E. Commission is trying hard to unify the market for energy and homogenize the regulation of the energy sector

57. 57 d) pollution Focus on air pollution that is responsible also for great part of soil and water pollution originated in the energy sector global warming Main problem: emissions of GHGs responsible for { climate variability Main GHGs: CO 2 (carbon dioxide), CH 4 (methane), NO X (nitrogen oxides) main component I focus on the emissions of CO 2 { more difficult to abate: ↑ % The emissions of CO 2 are increasing: world, EU, China They are expected to increase further until the 2035

58. 58 d) pollution (continues) In order to orientate the policy strategy we may refer to the identity: ( 1 ) D* = P* + y* + e* + d* + f* minimal target: stabilization of the the emissions of CO 2 (D* = 0) ↑P* changes very slowly (family planning may help but only in the long period) ↑y* must increase to overcome poverty and increase wealth therefore we need policy interventions that ↓ e* + d* + f* to compensate the increase in per capita income and in population ↓e* through energy savings measures ↓d* + f* by acting on the structure of consumption

59. 59 d) pollution (continues) Main policy instruments to ↓ e* + d* + f*: -energy savings: efficiency of energy-consuming devices (lighting, electric appliances, transport means) through compulsory standards, rules to avoid overheating and overcooling, bio-architecture, etc -Carbon permits (Kyoto Protocol) → shift towards cleaner carbon fuels and from these towards noncarbon fuels -Carbon tax → same effects: control of prices rather than quantities investment in plants and infrastructures that ↑ energy efficiency -Incentives { investment in R&D

60. 60 Policy measures to accelerate the transition to a new energy model In order to guarantee a sustainable development at the global and local level: -energy saving and improved efficiency -CO 2 capture and storage particularly important for countries utilizing coal (in China 87,4 of proven reserves of energy, 66% of energy needs, produces 70% of CO 2, 90% of sulphur dioxide, 67% of nitrogen oxide) -produced from renewables -renewable energy + hydrogen { -to stock renewable Renewable energy makes also a crucial long-term contribution to diversity, decentralized generation, self-sufficiency, and security of energy supply Renewable industry could also create employment (SMEs), promote social and economic cohesion (particularly in remote and rural regions), consolidate a platform for long-term cooperation with developing countries

61. 61 Costs and benefits of energy policy A system of policy measures meant to reconcile the energy sector with sustainable development is estimated to have a cost: 0.45-0.8 of GDP (Stern) However the external and long-term benefits are much higher: ↑ security of supply ↑ productive and allocative efficiency ↓ waste, spills and leakages ↓ pollution → ↓ global warming ↑ health → reconciliation of the energy sector with sustainable development

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