If you're squeezed for information,
that's when you've got to play it dumb
You just say you're out there waiting
for the miracle, for the miracle to come
—Leonard Cohen, Waiting For the Miracle
Humankind has reached a fork in the road. The business-as-usual path implies robust economic growth with a rise in the carbon dioxide emissions that contribute to anthropogenic climate change. The other path, whatever its actual form turns out to be, shuns business-as-usual in an attempt stabilize greenhouse gas levels (mainly carbon dioxide CO2) in the Earth's atmosphere (e.g. at 450 ppmv, parts-per-million-by-volume) to avoid catastrophic warming (e.g. > 2°C). Considered alternatives invariably lay out a vision of the future in which emissions steadily decline while economies continue to grow. Is such a vision realistic? This essay questions standard assumptions underlying this "have your cake and eat it too" view.
1. The Economy/Climate Dilemma
The Energy Information Agency's special October supplement to its monthly Short-Term Outlook projected carbon dioxide (CO2) emissions in the United States in 2009 to fall 5.9% compared to the previous year's levels. The December STEO report revised the figure upward to 6.1%. Based on the EIA data, Reuters' Recession puts U.S. halfway to emissions goal calculated that 2009 U.S. emissions were a whopping 8.9% below 2005 levels.
Obama is expected to pledge next week at a U.N. climate meeting in Copenhagen that the United States will cut output of gases blamed for warming the planet, including carbon dioxide, roughly 17 percent below 2005 levels by 2020.
On Tuesday the Energy Information Administration said in a monthly outlook that U.S. carbon dioxide output in 2009 will fall about 6.1 percent to 5.45 billion tonnes as the recession cuts demand for coal used to generate electricity.
That was about 8.9 percent below the 2005 level of 5.98 billion tonnes, putting the U.S. on track, at least for now, to reach Obama's goal.
The International Energy Agency's 2009 World Energy Outlook estimated that globally, CO2 emissions fell 3% in 2009 compared with the previous year. One might have thought that global warming activists would be jumping for joy, but the news brought no rejoicing. The reason for their reticence was not hard to find. From Reuters again—
"Losing weight by starving is different than shedding pounds through exercise," said Kevin Book, an analyst at ClearView Energy Partners, LLC.
He said as the economy recovers electricity demand should rise, pushing up emissions from that sector. That will require the world's second largest emitter of greenhouse gases after China to move faster to low-carbon sources like renewable energy if Obama's short-term goal is to be met, he said.
While it is debatable how soon prosperity will return to the United States, the corrective to anthropogenic climate change seems abundantly clear: shrink the economy. This solution is both politically and socially unacceptable. It is even unthinkable. This passage from the Nature opinion piece Let the global technology race begin by Isabel Galiana and Christopher Green introduces some key concepts while also hinting at why the assumption of future global economic growth can not be questioned.
To describe the required trade-offs of any climate policy, analysts use the Kaya identity
C = P × (GDP/P) × (E/GDP) × (C/E)
which relates carbon emissions, C, to its four driving factors: population (P); per capita gross domestic product (GDP/P); energy intensity of the economy (E/GDP); and emissions per unit of energy (C/E).
Conventional climate policy considers only the emissions, C, and the political will needed to achieve reductions, but ignores the driving factors. Policy-makers are understandably reluctant to use population or economic growth to reduce greenhouse-gas emissions; hence policy should focus on the technological drivers. A useful way of looking at these is by combining E/GDP and C/E to yield the economy's carbon intensity (C/GDP).
In recent decades, although global GDP has grown at about 3% per year and global carbon intensity has declined by about 1.4% per year, emissions have grown well in excess of 1% per year. In view of this, the proposal by the Group of 8 rich nations (G8) to cut global emissions in half by 2050, consistent with limiting global long-term temperature increase to 2 °C — and to do this without slowing economic development — would require a tripling of the average annual rate of decline in carbon intensity for the next 40 years. This accelerated decline in carbon intensity requires a revolution in energy technology that has not yet started.
[My note: The 1.4% annual decline of global carbon intensity is belied by current data as I explain below.]
It is simply not an option to "use ... economic growth" to reduce greenhouse-gas emissions. Thus, the solution must lie a "revolution in energy technology that has not yet started." The Kaya variable per capita gross domestic product (GDP/P) must and is expected to grow. The option of manipulating this variable is off the table. Similar observations apply to the population variable P, as Galiana and Green note above.
Indeed, the effects of the "Great" recession have been quite severe, underscoring the "reluctance" of policy-makers to put the brakes on economic growth to mitigate climate change. According to the Bureau of Labor Statistics, "official" unemployment is 10% as of this writing, but the broader U6 measure shows that total unemployment and under-employment is 17.3%. Even this number does not reflect all those who have dropped out of the labor force due to the impossibility of finding work. It is no wonder that politicians refuse to tell voters that jobs growth will not be possible now because of the necessity of fending off warming whose worst effects are likely some decades away.
In 2006, primary energy from fossil fuels (oil, natural gas & coal) made up 85% of total energy consumed in the United States (Figure 1).
Figure 1 — The primary energy mix in the United States in 2006, as cited in the National Academy of Sciences report What you need to know about energy (2009).
Wind and solar energy made up 0.4% of primary energy consumption in the United States in 2006. With such a small contribution from so-called "renewable" sources, which make up 7% of the total, and with most of that (5% of the total) coming from resource-constrained supplies of wood to burn and water to dam, the carbon intensity (C/GDP) of the American economy, which has been falling steadily since 1980, is still very high. This EIA data indicates that in 1980, U.S. carbon intensity was 917 metric tons of CO2 per 1 million (chained) 2000 US dollars. By 2007, carbon intensity had dropped to 520 metric tons per million 2000 dollars.
Although the carbon intensity decrease provided reason for optimism to many observers, total CO2 emissions in the United States increased from 4,780.831 million metric tons in 1980 to 6,003.263 in 2007 (EIA data). The overall increase was due to the economic growth that took place during those years, and occurred despite efficiency (energy intensity E/GDP) gains during the period. Our historical inability to constrain emissions growth defines the economy/climate dilemma, not only for the United States but globally as well.
Figure 2 from the IEA's 2009 WEO gives us some sense of just how daunting it will be to support future economic growth while reducing emissions to the levels required in a 450 ppmv scenario.
Figure 2 — Source: IEA's 2009 World Energy Outlook. As the IEA's caption notes, global economic growth (in real terms) is assumed to be 2.7% per year after 2030.
The historic reversal required to both keep the global economy growing and reduce CO2 emissions to the required levels is simply breathtaking. It does not seem possible. If it is not, something has to give. I believe that when push comes to shove, and it has been demonstrated beyond any reasonable doubt that humanity can not grow the economy while reducing the carbon intensity of that growth to the extent required for a 450 scenario, it will not be economic growth which will be sacrificed.
Thus I shall argue here that humanity seems to have backed itself into a corner from which there is no escape.
2. The Radical Hypothesis
In an earlier article The Radical Hypothesis, I explored the plausibility of whether economic growth can continue in the 21st century under conditions where CO2 emissions—a proxy for fossil fuel consumption—are falling (Figure 1).
The world experienced phenomenal economic growth in the 20th century, but history suggests that the concomitant rise in emissions was a necessary condition of that growth. The rule is expressed in (1) & (2).
(1) If the economy is growing, then anthropogenic CO2 emissions are growing
It follows that—
(2) If anthropogenic CO2 emissions are not growing, the economy is in recession
Figure 3 — A conceptual depiction of the Radical Hypothesis.
Economic growth (dotted line) has always been accompanied by growth in CO2 emissions (black line). Emissions are a proxy for fossil fuels consumption. At a future inflection point, emissions begin to decline as economic growth continues. A third alternative, a reduction in the carbon intensity (C/GDP) of economic growth, is also shown (dashed line). In this case, economic and emissions growth are still tightly linked; only the rate (slope) of positive emissions growth has changed. Compare Figure 2 above.
Thus the Radical Hypothesis rejects the requirement that growing emissions from fossil fuels have been a necessary condition for economic growth, and might be stated as in (3).
(3) The economy is growing but anthropogenic CO2 emissions are shrinking
This view contradicts our historical experience as stated in rules (1) & (2) above and illustrated in Figure 4 below.
Figure 4 — CO2 emissions in the United States since 1980 (based on the EIA data cited above) compared with recessions (gray bars). Recessions are defined according to the widely recognized National Bureau of Economic Research business cycle data.
The tendency for emissions to decline during recessions is most pronounced during the severe dual recession in the 1980's and the current "Great" recession. Interestingly, emission declines continued between the recessions in the early 1980s, and started to decline before the short-lived recessions of 1991-1992 and 2001, which implies that economic activity had slowed before the NBER officially recognized this condition. This phenomenon requires more study, but otherwise the historical pattern does not contradict Rule (2)—if anthropogenic CO2 emissions are not growing, the economy is in recession. On longer time scales, the overall historical trend is absolutely clear as shown in Figure 2.
If the Radical Hypothesis is false, meaning rising anthropogenic emissions can not be unlinked from economic growth, what outcome might we expect? There is a very wide range of bad outcomes for future consumption of fossil fuels in the SRES climate scenarios. The worst case is called business-as-usual (BAU), but less carbon-intensive paths are also possible. Outcomes are shown conceptually in Figure 5.
Figure 5 — A truncated range of SRES outcomes if the Radical Hypothesis is false (i.e. there is no inflection point as in Figure 3.) The CO2 emissions curve (black line) illustrates a worst-case business-as-usual scenario for anthropogenic emissions. The dashed line illustrates a less carbon-intensive scenario in which the rate of positive emissions growth declines as in Figure 3 above.
The Radical Hypothesis consensus rests upon assumption (4) (and more humorously, Figure 6). I call (4) the Assumption of Technological Progress (ATP)
(4) Technological progress marches on. Improvements are always sufficient to meet the requirements of economic expansion, or drive that expansion. These improvements include, most importantly, civilization's need for energy to fuel growth. For example, net energy returns on investment (EROI) for currently inefficient processes (e.g. biomass to cellulosic ethanol conversions) do not matter because they are based on current science & technology.
Figure 6 — The Assumption of Technological Progress. Source.
The ATP is ubiquitous. Successful climate mitigation scenarios appeal to it directly, but so do business-as-usual scenarios. Perhaps the only meaningful difference between these cases is the degree of technological progress which is assumed. This is true in so far as the Radical Hypothesis seems to require far greater innovation than business-as-usual, which is itself problematic when we view resource depletion (e.g. for conventional crude oil) through the lens of current science & technology.
In BAU scenarios, the assumption is that technological progress will improve the efficiency of
current Coal-To-Liquids (CTL) technology, or extraction efficiency in other areas (e.g. for tar sands oil, in conventional oil extraction, in biomass to liquids conversions, or in the production of liquid fuels from oil shales).
At the inflection point and “forever" after in the Radical (conventional) view, technological improvements permit the decoupling of economic growth from fossil fuels consumption. For example, wind or solar will replace coal, biofuels or electric vehicles will replace oil, and so on.
Most importantly, if many or all these improvements should fail to materialize, the ATP still guarantees that something will turn up that permits economic growth to continue indefinitely. In so far as the assumption of economic growth is unassailable, it follows that the Assumption of Technological Progress it rests upon also can not be questioned.
I criticized this deeply flawed assumption in The Secretary of Synthetic Biology, where I examined the possibilities for success (unanticipated breakthroughs) in Energy Secretary Steven Chu's quest to create "4th generation" biofuels. Galiana and Green made the Assumption of Technological Progress explicit in their Nature opinion piece—
Can a technology-led approach avoid dangerous climate change? We proposed such a policy as part of the 2009 Copenhagen Consensus on Climate, in which a panel of leading economists ranked 15 policy responses to global warming. Our analyses show that cumulative emissions consistent with minimizing the rise in global temperature (climate stabilization) can be achieved by investing US $100 billion a year for the rest of the century in global energy R&D, testing, demonstration and infrastructure.
It is entirely proper for us to ask exactly how throwing $100 billion a year at the climate mitigation problem amounts to a guarantee, as if by fiat, that the required miracles will occur. As Kenneth Boulding pointed out in 1980—
There is a nonexistence theorem about prediction in this area, in the sense that if we could predict what we are going to know at some time in the future, we would not have to wait, for we would know it now. It is not surprising, therefore, that the great technical changes have never been anticipated, neither the development of oil and gas, nor the automobile, nor the computer.
[My note: This is also quoted in The Secretary of Synthetic Biology cited above.]
This is not to say we will not achieve any important breakthroughs, for some miracles may indeed occur. And the yearly $100 billion should be invested, for otherwise our chances—whatever they are, if they are not zero—will surely be diminished. Beyond this, there is only handwaving.
3. The Technology Paradox
It is not surprising that the Assumption of Technological Progress gives rise to a paradox: if technological progress is guaranteed (i.e. comes "for free"), we need not try very hard to make technological progress happen! This completes the circle of inaction that we witnessed most recently at Copenhagen, where no binding CO2 reduction targets were specified.
So, while the assumption of technological progress (and concomitant economic growth) has fueled hope among those who believe climate mitigation is possible, it has also retarded efforts to actually make progress in addressing the problem.
Dangerous Assumptions, a Nature commentary by climate researchers Roger Pielke Jr., Tom Wigley and Christopher Green, argues that "the technological advances needed to stabilize carbon dioxide emissions may be greater than we think." These researchers point out that much of the technological change required to meet emissions targets is expected to occur spontaneously over time—
Here we show that two thirds or more of all the energy efficiency improvements and decarbonization of energy supply required to stabilize greenhouse gases is already built into the IPCC reference scenarios. This is because the scenarios assume a certain amount of spontaneous technological change and related decarbonization. Thus, the IPCC implicitly assumes that the bulk of the challenge of reducing future emissions will occur in the absence of climate policies. We believe that these assumptions are optimistic at best and unachievable at worst, potentially seriously underestimating the scale of the technological challenge associated with stabilizing greenhouse-gas concentrations...
In the Working Group III report [for the 2007 Fourth Assessment Report (AR4)], the IPCC observes that “there is a significant technological change and diffusion of new and advanced technologies already assumed in the baselines”
But how much is “significant”? The median of the reference scenarios considered by the IPCC AR4 (righthand bar, Fig. 1), requires 2,011 gigatonnes of carbon in cumulative emissions reductions to stabilize atmospheric carbon-dioxide concentrations at around 500 parts per million (the blue and red portions of the AR4 bar). This [median] scenario also assumes that 77% of this reduction (the blue portion) occurs spontaneously, while the remaining 23% (the red portion) would require explicit policies focused on decarbonization. These assumptions are robust across the scenarios used by the IPCC...
[My note: See the article (linked above) to view Figure 1 alluded to in the quoted text.]
To make matters worse, Pielke and the others further point out that the rate of decarbonization is lagging behind that assumed in SRES forecasts (Figure 7).
Figure 7 — Decarbonization discrepancies. Implied rates of carbon- and energy-intensity decline from the 2000 Special Report on Emission Scenarios, showing six illustrative scenarios. The red marker indicates actual observations (2000–2005) based on global economic growth calculated using market exchange rates." From the article: "All scenarios predict decreases in energy intensity, and in most cases carbon intensity, during 2000 to 2010. But in recent years, global energy intensity and carbon intensity have both increased, reversing the trend of previous decades..."
The authors then go on to state the obvious: robust economic growth in emerging markets, especially China, India and the rest of South Asia, is leading to very large emissions increases, and this trend is likely to continue for quite some time. They conclude that—
... the IPCC is playing a risky game in assuming that spontaneous advances in technological innovation will carry most of the burden of achieving future emissions reductions, rather than focusing on creating the conditions for such innovations to occur.
Dangerous assumptions, indeed! The increasingly obvious risks of inaction arise directly from the Assumption of Technological Progress itself. Worst yet, recent emissions trends appear to falsify this assumption, although the climate researchers do not go this far in criticizing current policy—their sole emphasis remains on using technological innovation to reduce carbon intensity. The economic variable in the Kaya Identity remains off the table.
That future economic growth is taken for granted is most evident in the discounting economists apply to investments made now to mitigate climate (or do anything else). I covered this material at length in my original Radical Hypothesis article, so I will be brief here.
Human beings discount the future, whereby “society places a lower value on a future gain or loss than on the same gain or loss occurring now.” And so do economists because—
If people’s preferences count and if people prefer now to the future, those preferences must be integrated into social policy formulation. Time-discounting is thus universal in economic analysis, but it remains, as it always has, controversial.
It seems self-evident that people prefer now to the future. Given this axiom of Human Nature, discounting is based upon the further assumption that future generations will be wealthier than the current generation. You will be hard-pressed to find a climate scenario in which economic growth does not continue, even taking in the worst effects of climate change itself on our future prosperity (e.g. even if Lower Manhattan were a few feet underwater).
The discount rate assumed makes an enormous difference to the "future value" of investments made now to stabilize and subsequently decrease CO2 levels in the atmosphere. In 2005 the British Government asked Sir Nicholas Stern to review the economics of climate change. The end result of Gordon Brown’s request was the Stern Review on the Economics of Climate Change published in late 2006.
Stern used a very low discount rate of 1.4%, based on his assumption that future economic growth would be 1.3%/year. So, one trillion dollars invested now would still be worth $497 billion 50 years from now, a substantial sum. In part, Stern's discount rate was based on his assumption that inaction on climate change will severely damage the world economy.
The economic model used in the Stern Review finds that the damages from business as usual would be expected to reduce GDP by 5% based on market impacts alone, or 11% including a rough estimate for the value of health and environmental effects that do not have market prices (“externalities,” in the jargon of economics). If the sensitivity of climate to CO2 levels turns out to be higher than the baseline estimates, these losses could rise to 7% and more than 14%, respectively... Stern speculates that an adjustment for equity weighting, reflecting the fact that the impacts will fall most heavily on poor countries, could lead to losses valued at 20% of global GDP. These figures are substantially greater than the comparable estimates from most economists.
Representing most economists, Yale's William Nordhaus suggests using a much higher discount rate. Nordhaus assumes that future generations will be much richer than Stern does. Nordhaus' higher discount rate is based on his assumption of a "real return on [human capital] of 6 per cent per year," meaning our trillion dollar present investment will only be worth $50 billion 50 years from now.
Discounting is justified by continuing economic growth, which itself rests upon "spontaneous" technological progress in the future. Our descendants will be much wealthier than we are in large part because they will have much better technology. In the argument among economists, Nordhaus believes that future technology will be much more efficacious than Stern does. For climate, we can imagine that obstacles and inefficiencies associated with carbon capture & sequestration will have been worked out, or technologies will exist that allow us to easily remove CO2 (or any other greenhouse gas) directly out of the atmosphere. Or there will be other breakthroughs we can not imagine given our impoverished knowledge of miracles to come.
In the end, high discount rates applied under standard, incontrovertible economic assumptions about future growth discourage making large technology investments now to stabilize CO2 levels in the atmosphere. The notion that things will simply take care of themselves is thus self-defeating. More importantly, reducing the size of our economy to reduce emissions remains forbidden, despite the fact that technological innovation has failed up to the present to achieve the required decreases in carbon intensity. In so far as every passing year puts us deeper in the climate hole, our flawed reasoning is persuading us to keep on digging.
4. Is Business As Usual Likely In a Peak Oil Scenario?
Carbon intensity is seen as falling in the 21st century for the following reasons:
There is also a less widely acknowledged possibility:
This last consideration describes a "peak oil" scenario in which oil production can not grow sometime in the near to medium term, say by 2015. I do not intend to argue for or against such a scenario here. The interesting question here is whether global GDP can continue to grow in the absence of a growing oil supply. I initially wrote about this question in Is Business As Usual Likely In A Peak Oil Scenario? Some of that material is included below.
The relationship between global economic growth and increased oil demand is straightforward (Figure 8).
Figure 8 — Taken from an IEA overview of their 2009 Medium-Term Oil Market Report (MTOMR). Oil consumption (and thus emissions from oil) follows Rule (2) as specified above—if anthropogenic CO2 emissions are not growing, the economy is in recession. Any historical chart covering the 20th century up to the present would show the same relationship.
In the high growth case, the IEA expects oil demand to rise approximately 1.4% in each year in which global GDP grows between 4 and 5%, so the oil intensity ratio Oil/GDP is approximately 0.31 at present. The IEA's projections for future demand assume that oil intensity will continue to decline following the historical trend described in the 2009 MTOMR.
A "peak oil" scenario would effectively cap oil production rates, implying that the global economy could no longer grow, given its current oil intensity, once demand exceeds supply. In the low growth case, implied oil demand growth would likely remain below a potential ceiling on oil production during the forecast period in Figure 8. The peak of world oil production will presumably cause large crude oil price spikes in the future. Such spikes are called “oil shocks” by economists. Historical experience strongly suggests that oil shocks are a major cause (among other things) of recessions (Figure 9).
Figure 9 — Nominal and inflation-adjusted crude oil prices 1970-2009, taken from Steven Kopits’ Oil: What Price Can America Afford?
Oil shocks precede and are a major cause of recessions. The latest example is the price shock of 2007-2008 in which the oil price rose sharply in 2007 just before the "Great" recession that began in December of that year. Prices continued to rise thereafter, finally hitting a nominal high of $147/barrel in July, 2008. The literature on the connection between oil shocks and recessions is large, and the results connecting such shocks with recessions are robust. Economist James Hamilton of the University of
California (San Diego), who recently testified before Congress, is an expert on the link between oil prices and recessions. Read Hamilton’s Causes and Consequences of the Oil Shock of 2007-08 (2009) and Oil and the Macroeconomy (2005).
Climate researchers almost invariably reject the possibility of a "peak oil" scenario, but should such an event come to pass, they further assume that technological innovation will enable the production of enough unconventional liquids from fossil fuels (e.g. coal-to-liquids, oil shale or oil sands) to "fill the oil emissions gap" shown in Figure 10. Just-in-time substitutes for oil permit business-as-usual to continue, which implies no significant interruption to economic growth.
Figure 10 — A worst case business-as-usual scenario is assumed to be possible even should oil production peak & decline over time. A "peak oil" scenario reduces emissions over time (dashed line) if liquid fuel substitutes are not available to take up the slack. Technological progress "fills the gap" by enabling other sources of liquid fuels.
In the "peak oil" case, historical experience suggests a scenario like the following—
In so far as the historical data suggests that growing anthropogenic emissions are a necessary condition for economic growth, we are not entitled to conclude that business as usual will continue in a "peak oil" scenario.
The SRES outcomes generally assume there are no near-term limits on recoverable fossil fuel resources. This assumption supports BAU scenarios (Figure 11).
Figure 11 — Oil production in two SRES cases and actual (black line), augmented by a "peak oil" scenario (gray line). Even in a relatively "low emissions" scenario such as B1 Image (blue line), oil production continues to rise until about 2040. The A2 ASF scenario more resembles BAU. In this case, oil production reaches a very high peak in the 2020s and declines thereafter. Growth in oil production has fallen short of these SRES forecasts in both cases.
Although a "peak oil" scenario implicitly posits an early limit on (easily) recoverable conventional oil reserves, I do not want to argue about fossil fuel resources here. The real problem arises in the assumption of continuing economic growth under such a scenario. Climate researcher Ken Caldeira’s remarks at the 2008 American Geophysical Union meeting (Scientific American, December 18, 2008) illustrate the problem.
Caldeira reported on recent forecasts of how the climate would respond if the world completely stopped using oil today. In the one case, it is replaced with coal-based liquid fuels and in the other with renewable resources, such as wind, solar, or nuclear power.
The results are clear, Caldeira said. If liquefied coal powered the world’s vehicles … the Earth would warm 2º Celsius (3.6º Fahrenheit) by 2042, three years sooner than if society continued to use oil. If, however, society replaces oil with renewable energy, that 2º C rise would occur in 2056, 11 years later than with oil.
The reality, Caldeira said, is that we will never run out of oil. As it becomes scarcer and more expensive to extract, industry will switch to other fuels for economic reasons. The danger is that coal will likely appear to be the cheapest alternative.
So rather than view peak oil as a climate savior, he said, those scientists, engineers and economists should see the end of oil as a “new challenge” to efforts to cut carbon dioxide emissions.
[My note: An important consideration, which I will not pursue here, is how little bang for the buck we get by replacing oil entirely with renewable sources such as biofuels or wind-driven electric transport instead of liquefied coal—locking in a 2°C temperature rise above pre-industrial levels is delayed only by 11 years! Even replacing oil with liquefied coal conversion makes only a 3 years difference.]
At issue here is Caldeira’s implicit use of a standard economic model in drawing his conclusion that "as [oil] becomes scarcer and more expensive to extract, industry will switch to other fuels for economic reasons." Whether he knows it or not, Caldeira's view echos the Hotelling Rule, which is a fundamental result in The Economic Theory of Non-Renewable Resources (an overview by Neha Khanna). I also briefly reviewed this theory in The Price Is Not Right.
Figure 12 — The Hotelling Rule with backstops, i.e. substitutes for conventional oil (tar sands, biofuels, plug-in hybrids, coal-to-liquids). Harold Hotelling (The Economics of Exhaustible Resources, 1931) defined the classical economic theory of the long-term pricing of non-renewable resources like conventional oil. The theory states that the price of a depleting resource like conventional oil should rise over time at the interest rate because its value (= the marginal extraction cost + the scarcity rent, see Khanna) should increase as the stocks (reserves) are exhausted. As the oil price rises, more costly backstops become affordable, and thus the market seamlessly switches over to the available backstops.
What is notable about the Hotelling Rule is its abysmal failure in predicting oil prices over time. For some background on this issue, see Tobias Kronenberg's Should We Worry About the Failure of the Hotelling Rule? In his Understanding Crude Oil Prices, economist James Hamilton comments on the failure of the Hotelling rule—
Although Hotelling’s theory and its extensions are elegant, a glance at Figure 1 [below] gives us an idea of the challenges in using it to explain the observed data. The real price of oil declined steadily between 1957 and 1967, and fell quite sharply between 1982 and 1986...
Although the sharp run-up in price through June of 2008 might be consistent with a newly calculated scarcity rent, the dramatic price collapse in the fall is more difficult to reconcile with a Hotelling-type story.
Figure 13 — Updated (in blue) to reflect the price as of December 11, 2008 when I wrote The Price Is Not Right. Prices rose steadily after 2003. After 2004, global oil production was more or less flat, so higher prices failed to bring more supply onto the market. More importantly, the steady 5-year rise in price did not impel a prompt switch to substitutes (outside of corn ethanol) as one might have expected based on Hotelling. Such a switch became very unlikely after the oil price crashed in the 2nd half of 2008.
Various attempts have been made to save the Hotelling rule. Despite the declining discoveries trend since the 1960s, technological progress has led to reserves additions over time, a situation which is complicated by the fact that OPEC's unaudited proved reserves numbers never decline to reflect produced oil. Flat or growing proved reserves signals to the market at all times that oil is not yet scarce. Thus the simplest explanation for the failure of the Hotelling Rule is that conventional oil has always been priced as though it were renewable. James Hamilton notes that—
... many economists often think of oil prices as historically having been influenced little or none at all by the issue of exhaustibility.
More to the point, oil prices do not rise at the rate of interest as Hotelling assumed because price shocks are a major cause of recessions, which in turn cause large dips in demand, which pushes prices down. This happened in 1982-1986, and again in 2008-2009. An oil price shock model in a "peak oil" scenario implies great volatility in future prices, as we have seen historically (Hamilton's Figure 1). I made a prediction for future prices based on such a model in The Price Is Not Right (cited above).
Thus if conventional oil were scarce, meaning that a supply ceiling actually exists, market pricing would not necessarily reflect this reality. In the lead up to the oil price shock of 2007-2008, EIA data indicates that world oil production declined slightly in each of the 3 consecutive years 2005-2007 before rising again in 2008 after OPEC committed most of its spare capacity.
Nevertheless, the apparent ceiling on world oil production during those years had little or no influence on future prices. The oil price began to come down after hitting $147/barrel in July, 2008 due to the effect on high, sustained prices on demand, the worsening recession, and the withdrawal of "long" speculators from the market. When the financial crisis hit in October, the price fell dramatically, finally bottoming out in February, 2009 in the $35-40 range.
There are more fundamental difficulties. Markets operate on partial (or incorrect) knowledge; obviously, markets can not know the future. If conventional oil is not treated as an exhaustible resource to begin with, prices will never reflect its long-run scarcity even as annual consumption depletes the resource. Unusually low or high oil prices are always viewed as local minima or maxima in the oil pricing function over time. It is but a small leap to further assume that conventional oil may once again be plentiful in the future. The Hotelling Rule assumes that markets operate with perfect knowledge of the time to exhaustion of the resource, and will thus price it accordingly.
So the continuous increase in price required to bring substitutes (i.e. backstops in Figure 12) onto the market does not exist, and historically, has never existed. Without that price signal, a prompt, seamless transition from conventional oil to coal-based liquids (or other sources) becomes even more unlikely in a "peak oil" scenario owing to investment uncertainty which delays bringing substitutes onto the market.
Even if there were an unremitting rise in the oil price, increasing coal-to-liquids production to significant levels will take decades (Figure 14).
Figure 14 — Making the transition from oil to liquefied coal, from Volume II of the report of the Task Force on Strategic Fossil Fuels (2007). In the “high oil price” case, which is assumed by the Hotelling Rule, it will still take more than 20 years for the U.S. to achieve 2 million barrels-per-day of liquids from coal, assuming the required investments are made over time. Efficient direct liquefaction of coal still faces technological challenges, as opposed to indirect (Fisher-Tropsch) coal-to-liquids methods using an intermediate synthetic gas (syngas) step. See the Rand study Producing Liquid Fuels From Coal.
EIA data indicates the world produced 2.3 million barrels-per-day of unconventional oil from fossil fuel sources in 2007. Most of this (1.4) was synthetic crude from Canada's tar sands and "extra" heavy Orinoco crude (0.6) from Venezuela. The small remainder came from coal-to-liquids (0.2) or gas-to-liquids (0.1). Short-term plans to increase this production have been delayed by the current "Great" recession.
In a paper for Environmental Resource Letters, A. E. Farrell and A. R. Brandt considered the Risks of the oil transition in a "peak oil" scenario. In their short section on economic risks, the authors considered the case in which substitutes for conventional petroleum derived from fossil fuels (SCPs) replace declining conventional oil production.
Assuming conventional oil production declines at a rate of 2%/year and annual growth in demand is 1.6%, aggregate annual additions of SCPs capacity will have to be about 3 Mbbl/day to meet demand. This is equal to today’s total SCP capacity and about five times the current rate of capacity addition.
[My note: Today's SCP capacity is less than 3 million barrels-per-day, as I have noted. Also, at the current oil intensity (0.31) of economic growth, this scenario implies annual global GDP growth of 4.96% per year. Combined with the 2% decline in conventional oil production, this high-growth/sharp-decline scenario can be viewed as a worst case.]
In light of the agonizingly slow increase in coal-to-liquids production in the U.S. in the "high price" case shown in Figure 14, and generalizing this to the entire world for those few countries (like China or Australia) whose coal reserves are sufficient to support large-scale production, it appears that less than a third of the required annual increase would come from this source for most of the first decade in the Farrell and Brandt's scenario.
2008 production at Alberta's oil sands is now listed as 1.2 million barrels-per-day, which is less than 2007 number cited by the EIA. Looking to the future, the Center For Global Energy Studies estimates that—
Oil sands production will increase by 1.19-1.99 million b/d during 2009-20, depending on the degree of economic and environmental cooperation among major countries, the study says.
Cooperation extensive enough to keep the global recession relatively short and ensure strong and lasting growth afterward would support oil prices and enable oil sands production in Alberta to rise from 1.21 million b/d in 2008 to 3.2 million b/d in 2020.
It has taken many years for Canadian oil sands production to get to where it is now. A strong growth scenario sees production rising by 1.99 million barrels-per-day by 2020. Such production growth is only a tiny fraction of the annual 3 million barrels-per-day increase in SCPs that Farrell and Brandt estimate the world would need to meet demand in their high economic growth case. That Venezuela has not been able to increase its "extra" heavy Orinoco crude production much only makes matters worse.
Farrell and Brandt further note that a volatile price signal, combined with the extraordinarily high initial per-barrel capital cost of implementing non-conventional oil, makes investments in this area very risky as I noted above—
Because SCPs require greater initial capital per unit of production relative to conventional oil, and are also more expensive in the long run, SCP projects are financially risky to
investors and may become uneconomical should oil prices fall, as they have in the past. Indeed, investment in SCPs moves the global supply curve for liquid hydrocarbons out and will tend to cause world oil prices to fall...
Investments of this magnitude [in SCPs], in some cases in technologies with which we have limited experience [e.g. for liquids from oil shale], will be a challenge, especially given the risk of stranded capital should oil prices fall.
We are forced to conclude that neither a consistent price signal nor our ability to quickly ramp up non-conventional fossil fuel substitutes supports a just-in-time, seamless transition away from conventional oil to maintain business-as-usual in a "peak oil" scenario.
Within the climate community, only Pushker Kharecha and James Hansen (to my knowledge) made explicit assumptions about business-as-usual in a "peak oil" scenario. Their implicit view of economic growth supported by rising coal emissions mirrors that of Ken Caldeira. Implications of “peak oil” for atmospheric C02 and climate was finally published in Global Biogeochemical Cycles after considerable resistance from reviewers—the paper was rejected by Environmental Research Letters. Kharecha and Hansen's study thus provides a second, more specific, case where future emissions are likely overstated (Figure 15).
Figure 15 — In the business-as-usual scenario (BAU, top left) oil peaks before 2025 (blue line) but coal emissions (orange line) still grow without limit out to about 2075. The Less Oil Reserves (”peak oil”) scenario (bottom left) assumes the Coal Phase-out case (top, middle), so coal emissions are limited by policy, not economic growth.
Their BAU scenario makes it clear that Kharecha and Hansen implicitly assume something like the Hotelling Rule in their estimate of future emissions from coal. In so far as it is likely that a "peak oil" scenario will derail business-as-usual, and thus reduce the growth in CO2 emissions from coal over time, I have taken the liberty of modifying their BAU graph to reflect a more realistic outcome (Figure 16).
Figure 16 — A modified business-as-usual scenario. Kharecha and Hansen’s future coal emissions curve (solid orange line) has been replaced with a more realistic scenario (dashed orange line) which takes future recessions and the timing of technological fixes into account. Coal emissions still grow, but not nearly at the pace envisioned in most BAU climate scenarios. One could make a similar change to projected coal emissions in the Less Oil Reserves scenario as well. In either case, the total anthropogenic emissions (without land use changes, red line) need to be adjusted downward (dashed red line).
The revised scenario in Figure 16 is certainly not the only possible outcome. It represents a family of outcomes in which the adverse economic effects of a peak in world oil production are taken into account. I have argued that these effects are ignored in standard business-as-usual accounts that rely upon a smooth transition to coal liquefaction or other fossil fuel substitutes.
Although I expect "peak oil" to disrupt business-as-usual, there is a danger that economic growth could resume along a BAU pathway once the transition to substitutes for conventional oil had largely been accomplished. It is not clear how long the interruption to growth would last, but it seems reasonable to assume that it would take at least 10-15 years (if not many more) to develop a liquid fuels capability that would once again permit business-as-usual to continue. This complex subject has stirred much controversy in recent years, and a very wide range of projected outcomes have been discussed.
5. Physical Constraints on Future CO2 Emissions?
I would like to relate the foregoing to Tim Garrett's Are there basic physical constraints on future anthropogenic emissions of carbon dioxide? This important paper was recently published in the journal Climatic Change. Necessarily, my exposition here will be far too brief to convey all of the implications of Garrett's work, so consult the original (and highly technical) paper for further details. This overview comes from the University of Utah press release Is Global Warming Unstoppable?
Garrett treats civilization like a "heat engine" that "consumes energy and does 'work' in the form of economic production, which then spurs it to consume more energy," he says.
"If society consumed no energy, civilization would be worthless," he adds. "It is only by consuming energy that civilization is able to maintain the activities that give it economic value. This means that if we ever start to run out of energy, then the value of civilization is going to fall and even collapse absent discovery of new energy sources."
Garrett says his study's key finding "is that accumulated economic production over the course of history has been tied to the rate of energy consumption at a global level through a constant factor."
That "constant" is 9.7 (plus or minus 0.3) milliwatts per inflation-adjusted 1990 dollar. So if you look at economic and energy production at any specific time in history, "each inflation-adjusted 1990 dollar would be supported by 9.7 milliwatts of primary energy consumption," Garrett says.
Garrett describes a thermodynamic growth model ("effectively a heat engine") and by analogy, Garrett applies his growth model to the economic growth of civilization and it's waste products (i.e. CO2 emissions). As an insightful science blogger at Culturing Science said, Garrett—
essentially ... boils down the human-planet system to physics. Carbon dioxide, the output of energy consumption, exits civilization at a constant rate [see below], but accumulates over time. This trade-off is represented as the variable η, which is the “rate of return” of energy to a system. It essentially represents a feedback loop in which the greater the energy consumption and production, the greater is the potential for more consumption and production. (Remember that carbon emissions are tied to this production and energy consumption.)
It is this "rate of return" or "feedback efficiency" η that ties Garrett's work to the arguments I've made here. Figure 17 explains both his economic growth model and the constant value λ cited in the press release above.
Figure 17 — Garrett's economic growth model is explained in his caption to his Figure 2. Note that cumulative emissions E are tied in to civilization's "heat engine" via the cumulative energy a required to keep the economy growing and the carbon content c of that energy.
At all times, the cumulative size (the historical integral) of the economic value of human civilization C (in 1990 inflation-adjusted dollars) is tied to energy consumption a (in watts) through a "constant of proportionality" λ. Thus the time derivatives for energy da/dt and value growth, or the economic growth dC/dt (= P) are related by the same constant. The increase in civilization's capacity to consume energy (or its GDP) enlarges civilization's interface with its environment to allow it to grow further (i.e. consume energy at a faster rate, da/dt = ηa).
By analogy, think of a child that grows to adult size by consuming food (and excreting waste) or primary productivity in plants.
A concrete example that might be particularly easy to relate to is the growth of a young child. As an entity, the child consumes the accessible energy contained in food from the environment in proportion to some measure of the child’s size...
Interestingly, the approach is of identical mathematical form to one often used to successfully model growth of vegetation, where vegetative “value” C refers not to money but instead to biomass, and P to the net primary productivity. Presumably, biological organisms must also maintain a high potential interface with respect to their environment, enabling them to consume energy, produce heat and waste, and do work to incorporate the matter that enables them to grow. Thermodynamic laws are fully general.
A difference between plants and civilization is that plant waste includes CO2 that is recyclable, whereas the global economy creates most CO2 from fossil-carbon, much of which accumulates in the atmosphere.
Garrett tested his theory "for the combination of world energy production a (EIA, Annual Energy Review 2006) and real global economic production P (United Nations 2007) (expressed here in fixed 1990 US dollars) for the 36 year interval between 1970 to 2005 for which these statistics are currently available" as shown in Figure 18. He found a constant λ linking energy consumption of cumulative economic value C.
Figure 18 — Garrett's successful model evaluation.
Here we are interested in the relationship between economic growth P = dC/dt and growth in emissions E as shown in Figure 17. This relationship is expressed in Garrett's equations (9) and (11).
Equation (9) says that the economic growth rate, expressed as the rate of change in the (natural logarithm) of GDP P, equals the (current) rate of return of energy to the system η plus the change in that rate. This states directly that if the sum of these two rates is negative, the economy is shrinking.
Equation (11) relates this result to emissions through the rate of return η. Assuming η is positive, and there is no change in the carbon content of that energy c, emissions E grow with η.
An advantage of appealing to energy efficiency in forecasts of CO2 emissions is that η ... tends to vary rather slowly. Since 1970, growth of η = P/C [expressed in economic terms] has climbed from 1.4% per year to 2.1% per year in 2005... [as shown in Figure 18]
The carbonization of the energy supply c, is changing even more slowly with a time scale of about 300 years. What this means is that future emissions rates for CO2 are most strongly influenced by the current state of η. As a zeroth-order assumption, it is reasonable to assume persistence in η, meaning that on [relatively short] time-scales..., future emissions are unlikely to depart substantially from the recent growth rate of 2.1% per year.
In other words, the rate of return overwhelms heretofore very slow changes in the carbon content c of the energy supply in determining the rate of emissions growth.
In a "peak oil" scenario, assuming that business as usual is ruled out, as I have argued here, the rate of return η will be shrinking, implying that the economy is shrinking as stated in equation (9). In Garrett's model, expressed in purely economic (1990 real dollar) terms, η = P/C, where GDP P = dC/dt, or equivalently, P = ηC. If η is shrinking but still positive, the global economy is in recession (GDP is contracting).
Equation (11), per Garrett's remarks above, strongly implies that if η is positive but shrinking, emissions growth is slowing. In absolute terms, expressed as million metric tons of CO2, total emissions are shrinking, as reported by the EIA in Figure 4. We saw this in the early 1980s and during the current "Great" recession of 2008-2009.
You will recall my proposition (1) based on the historical experience of human civilization over the Industrial Age.
(1) If the economy is growing, then anthropogenic CO2 emissions are growing
Thinking in million metric tons of CO2, we can derive (5) from Garrett's model.
(5) If the positive rate of return η is shrinking, anthropogenic CO2 emissions are shrinking
It then follows directly from (1) that the economy is in recession, as Garrett's equation (9) implies. Proposition (5), together with (1), formalizes what happens in a "peak oil" scenario as described here.
Garrett then directly relates the rate of return to the carbon content of the energy supply—
the “carbon footprint” of civilization in recent decades reflects a simple relationship between the rate of global carbon emissions E and the accumulation over history of real global value C. The coefficient is λc = 5.2 ± 0.2 MtC per year, per trillion 1990 US dollars of global economic value.
To take the result further, Eq. (11) points towards a non-dimensional number [a number with no physical units, a "pure" number]
representing the relationship between the global economy’s rate of decarbonization, −d ln c/dt, and its rate of return, η... If S ≥ 1, [then] d ln E/dt ≤ 0, and [thus] emissions are stabilized or declining.
To reach stabilization, what is required is decarbonization that is at least as fast as the economy’s rate of return. Taking the 2005 value for η of 2.1% per year, stabilization of emissions would require an equivalent or greater rate of decarbonization. 2.1% of current annual energy production corresponds to an annual addition of approximately 300 GW of new non-carbon emitting power capacity—approximately one new nuclear power plant per day.
The Radical Hypothesis assumes that η will always be positive and growing, thus rejecting the premise of (5). This standard view assumes that not only is it possible to reach CO2 stabilization, whereby decarbonization is at least as fast as the economy’s rate of return, but it is also possible for decarbonization to outpace growth in η to support future economic expansion, as shown in the IEA's Figure 2 above.
This view is not contradicted by anything in Garrett's model, but requires a seemingly impossible rate of decrease in carbon intensity (one nuclear power plant per day). Outside this improbable event, we get some version of business as usual (dη/dt > 0) or an economy that is not growing (dη/dt < 0).
Thus Garrett's work supports my conclusion that a growing economy is incompatible with falling emissions. His model also supports (albeit indirectly) my conclusion that emissions (and thus the economy) will not be growing in a "peak oil" scenario. Thus he says in the press release
"Stabilization of carbon dioxide emissions at current
rates will require approximately 300 gigawatts of new non-carbon-dioxide-emitting power production capacity annually - approximately one new nuclear power plant (or equivalent) per day," Garrett says. "Physically, there are no other options without killing the economy"...
"If society consumed no energy, civilization would be worthless," he adds. "It is only by consuming energy that civilization is able to maintain the activities that give it economic value. This means that if we ever start to run out of energy, then the value of civilization is going to fall and even collapse absent discovery of new energy sources."
Garrett's study was "panned by some economists and rejected by several journals" before being published. An economist who reviewed the paper—I wonder if he understood it?—wrote that "I am afraid the author will need to study harder before he can contribute." In my view, this hostility relates directly to these sacred, and thus incontrovertible assumptions—
It is generally impossible to prove a negative, as I discussed in The Secretary of Synthetic Biology. Thus I can not prove any of the following propositions.
This a priori limit on our current knowledge is unfortunate in the climate debate in so far as it makes it impossible for those skeptical of the consensus view to disprove unreasonable assumptions (#1 and #2 above). All we can do is cast a long shadow of doubt and hope for the best. As in many things, only time will tell who was right and who was wrong.
The main conclusions of this essay subvert standard views of how the future looks if humankind chooses to make a serious effort to mitigate anthropogenic climate change.
In his response to Dangerous Assumptions, the University of Manitoba's Vaclav Smil emphasized that Long-range energy forecasts are no more than fairy tales.
Why argue about plausible rates of future energy-efficiency improvements? We have known for nearly 150 years that, in the long run, efficiency gains translate into higher energy use and hence (unless there is a massive shift to non-carbon energies) into higher CO2 emissions.
The speed of transition from a predominantly fossil-fueled world to conversions of renewable flows is being grossly overestimated: all energy transitions are multi-generational affairs with their complex infrastructural and learning needs. Their progress cannot substantially be accelerated either by wishful thinking or by government ministers’ fiats...
China, the world’s largest emitter of CO2, has no intention of reducing its energy use: from 2000 to 2006 its coal consumption rose by nearly 1.1 billion tonnes and its oil consumption increased by 55%.
Consequently, the rise of atmospheric CO2 above 450 parts per million can be prevented only by an unprecedented (in both severity and duration) depression of the global economy, or by voluntarily adopted and strictly observed limits on absolute energy use. The first is highly probable; the second would be a sapient action, but apparently not for this species.
Although I agree in the main with Smil's conclusions, I have argued that his Either-Or proposition yields similar outcomes. If humankind were to voluntarily adopt and strictly observe limits on absolute energy use, the global economy would shrink according to the limits imposed, as implied in Tim Garrett's work. Moreover, Smil's reference to Jevon's Paradox (1st paragraph) also coincides with Tim Garrett's conclusion that greater energy efficiency merely stimulates greater energy consumption supporting more economic growth and higher CO2 emissions (unless accompanied by a massive, but at present unrealistic, decarbonization of the energy supply).
For now, and in the "foreseeable" future, putting the breaks on economic growth appears to be the only practical way out of the climate dilemma. Unfortunately, this solution is politically impossible, a circumstance which is reinforced by economists' incontestable, unshakable belief that economic growth will continue in all future emissions (energy) scenarios. This conclusion rests upon the equally incontestable, unshakable Assumption of Technological Progress.
I will end by quoting climate activist George Monbiot. This passage is taken from the introduction to his book Heat. The introduction is called The Failure of Good Intentions.
Two things prompted me to write this book. The first was something that happened in May, 2005, in a lecture hall in London. I had given a talk about climate change, during which I argued that there was little chance of preventing runaway global warming unless greenhouse gases were cut by 80 per cent. The third question stumped me.
"When you get your 80 per cent cut, what will this country look like?"
I hadn't thought about it. Nor could I think of a good reason why I hadn't thought about it. But a few rows from the front sat one of the environmentalists I admire and fear the most, a man called Mayer Hillman. I admire him because he says what he believes to be true and doesn't care about the consequences. I fear him because his life is a mirror in which the rest of us see our hypocrisy.
"That's such an easy question, I'll ask Mayer to answer it."
He stood up. He is 75 but he looks about 50, perhaps because he goes everywhere by bicycle. He is small and thin and fit-looking, and he throws his chest out and holds his arms to his sides when he speaks, as if standing to attention. He was smiling. I could see he was going to say something outrageous.
"A very poor third-world country."
The inescapable conclusion in 2010 is that continued economic growth at near 20th century rates in the 21st century is incompatible with taking positive, effective steps to mitigate anthropogenic climate change. Moreover, such assumptions are not compatible with a near-term peak in the conventional oil supply. Our species faces unprecedented challenges in this new century. Our response to those challenges will define Homo sapiens in ways we never had to come to grips with during the Holocene (roughly the last 10,000 years) or before that in the Pleistocene. The problems we face in this century are unique, even on geological time-scales extending far into the past beyond the 200,000-year-old Human experience on Earth.
Both our limitations and our abilities, such as they are, will be displayed in the bright, harsh light of the energy & climate outcomes in the 21st century. Regardless of who we pretend to be, our response to these challenges will tell us who we really are.
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