Energy, Growth, and Altruism: The View from 2016

Editor's note: This is the second of a two-part series by the author. The first post: Energy, Growth, and Altruism: Forty Years On.

One could easily spend months chronicling the vast differences between the world of today and the world of some forty years ago. 

In 1975, our primary energy concern was that our dependence on oil for commerce and autos left us insecure. The supply solutions at the time were more coal or nuclear power—both capital-intensive and environmentally harmful. Energy efficiency was viewed as noncommercial, untested backwater.  The cold war was still on; the Internet did not exist; and electricity, phones, trucking, and cable televison were fully regulated. ERG made its calculations on IBM mainframes and typed the results on IBM Selectric typewriters.

Today globalization, financialization, deregulation, and the Internet have swept the world into a post-industrial malaise. The closed-economy substitution of energy for labor gave way to the substitution of cheaper Asian labor for American labor, shifting the American economy from manufacturing into services, innovation, and advanced sectors that could not be outsourced. 

International IT platforms and financial markets helped create a super-wealthy global upper class and raise wages in many developing countries, but also contributed to long-term wage stagnation, disturbingly high inequality, and consequent social unrest. Across the world, stagnating economic growth (albeit defined traditionally, not as ERG or the Stiglitz Commission would want) has become the dominant economic concern. These concerns are quite similar to the outcomes feared by Hannon, but they rise from disparate causes.

Energy concerns have also shifted dramatically. Applied over decades, compromise policies such as CAFÉ standards, erosions in OPEC’s monopoly, and technological change (about which more in a moment) have dramatically reduced the West’s vulnerability to oil shortages. 

Who would have predicted that production of oil and gas by hydraulic fracturing—commercialized, ironically, by George P. Mitchell—would turn the U.S. into the world’s largest oil and gas producer, shipping some natural gas to the Middle East? Although we still import about five million barrels of oil a day, presidential candidates no longer call for energy independence in every stump speech, other than to take the occasional victory lap.

Energy use has also changed greatly. 

The economy is proportionately more reliant on electric power than it was in 1975 and vastly more efficient. Whereas EGA correctly saw technological progress of that era as the substitution of energy for labor, technological progress since 1975 has included large secular GDP growth not tied to greater energy use. 

As noted by Nadel, Elliott and Langer, U.S. GDP grew 144% since 1980 while total energy use increased 26%. The average American home uses 10% less energy in spite of the fact that it is substantially larger and filled with new electronic gadgets. 

A refrigerator meeting the 2014 U.S. standard will use one-seventh the power of the average new fridge in 1975.  The same is true across the OECD, where the International Energy Agency reports that “energy consumption in IEA countries has dropped to levels not seen since the 1980s, while income per capita has never been higher.

Awareness of energy use is also far more widespread and accessible. The Amtrak train I am riding on as I write this, hands out sleeves for its coffee cups that summarize findings that were so rare as to merit refereed publications in the day of ERG.

In place of oil reliance the current overwhelming energy policy concern is climate change. All though there are many common elements, shifting the world’s economy from fossil fuel use to carbon-free energy is a much more difficult and complex challenge than shifting one country away from oil.  

Energy efficiency continues to be an essential energy policy tool, but vast reductions in the cost of renewable energy, and perhaps new “breakthrough” technologies on both sides of the meter, create the possibility of sufficient safe supplies in the foreseeable future. 

Nonetheless, the world now faces the gargantuan task of allocating and living within a total carbon budget of about 1000 gigatons of carbon emissions for the rest of time, rapidly tapering its reliance on carbon fuels or finding ways to remove greenhouse gases from them and/or the atmosphere.

The imperative to preserve a safe global climate provides a critical new context for the very same concerns that motivated EGA, and at a time when economic tensions are even stronger and more dangerous. Essentially all studies of safe climate futures conclude that bold policies are needed in the U.S. and other advanced countries. 

If so, how can this occur without exacerbating the already-devastating loss of jobs and wages from the Great Recession and longer-term stagnation? And regardless of whether the income-energy use relationship remains linear today, political progress towards reduced wealth inequality remain bitterly controversial.  Finally, taxes on energy use—Hannon’s suggested approach to energy equity—are as politically taboo today as they were when EGA was published.        

The stabilization of energy demand in the developed world provides some basis for hope.  Spurred by markets, policies, and changing cultural factors, technological change has enabled sometimes-astonishing progress reducing energy use while allowing whatever it is we define as economic growth and employment to continue (albeit the latter quite weakly).   

New buildings that consume zero net energy, and produce zero greenhouse gases, are now moving beyond mere curiosities and are expected to become the norm by 2030, if not sooner, harking back to the “steady state economy” popularized by ERG fellow-traveler Hermann Daly.

It is important to note that far from all of this decline is simply better technology that uses less energy to provide the same economic value with roughly the same (or less) labor.  As noted by Nadel, et al, Jenkins and Cohen, and the U.S. Department of Energy, many factors beyond pure technical change account for the decline in U.S. use, including:

  • Slowing population growth;
  • Shifting energy-intensive industries to developing countries, such as steelmaking to China;
  • Investments in energy efficiency that specifically substitute upfront capital for future energy use, such as insulating a home or buying a more expensive but efficient appliance;
  • Improvements in the efficiency of energy production and conversion, such as more efficient electric power plants; and
  • Shifts in consumer tastes towards a less energy-intensive lifestyle, such as when millennials move their families into urban centers and spend much less time and money driving.

Because the challenge of economic growth is shared by all countries, and the world has a single carbon budget, shifting energy-intensive activities from one country to another is no climate solution at all.  Yet worldwide energy use per unit of worldwide per-capita GDP also continues to decline significantly, strongly suggesting that technical change is far from a zero-sum game.

In keeping with these observations, the most encouraging progress on Hannon’s dilemmas is on the energy-labor tradeoff.   

Extensive experience and empirical work, including the work of Harvard Professor Michael Porter, suggests that clean energy policies induce economic changes that increase employment and do not depress wages and living standards.

Political rhetoric notwithstanding, the labor effects of energy policies are different and more complex than an outsourcing of manufacturing jobs that leaves behind low-wage jobs at McDonalds and Wal-Mart.  As an example, the business of energy efficiency turns out to involve quite a bit of labor, much of it in skilled trades.  In addition, the renewable energy industry has turned into a substantial job generator of its own. 

Who could have guessed in 1975 that the 2015 solar industry would employ (directly) far more workers than the coal industry—and far more than Apple, Google, and Facebook combined? 

While all of this is very encouraging, the most fundamental dilemma raised by Hannon in EGA remains amazingly fresh in the minds of modern-day energy and climate policy analysts. As impressive as it is, technological change alone is certainly insufficient alone to allow the U.S. and other industrialized economies to continue to grow at historical rates and developing countries to rise to Western living standards.  

We have a number of clear roadmaps to carbon free, steady-state resource economies, but no nation has yet shown that it can muster the political will and huge implementation resources needed for a timely transition.  One can clearly hear echoes of Hannon’s voice in the words of a brand new study of climate futures by Heinberg and Fridley, who write:

If we won’t have as much energy, and we can’t improve the efficiency at continuous and dramatic rates – and therefore energy intensity can’t be reduced at unprecedented rates – then the economy will likely shrink.  Rather than merely streamlining economic activities, we will have to curtail them, at least to a certain degree.

Similarly, energy blogger Gail Tverberg recently inadvertently channeled EGA when she describes the respending dilemma in near-perfect detail: 

Another issue is that the energy use of interest is per dollar of real GDP, and a savings in energy that results in a cost savings may not be very helpful in lowering energy intensity of GDP. For example, suppose that a manufacturer creates a new, smaller car, that is 20% cheaper and uses 20% less gasoline on an ongoing basis. More workers will be able to afford this car.

Furthermore, a well-off worker who can afford this new cheaper car (and who could also have afforded a more expensive car) will have left-over money. With this left-over money, the well-off worker can purchase something else, such as an airline trip, food flown in from overseas, or a new iPod. All of these extra purchases take energy as well.

So when the overall picture is viewed, the fact that more energy-efficient cars are being manufactured does not necessarily translate to lower energy intensity of GDP.

Finally, forty years of data have allowed researchers to verify ERG researcher Robert Herendeen’s hypothesis that energy use grows linearly with income in nearly all developed countries, though not in emerging economies.

Forty years after EGA it is clear that we’ve made enormous progress on energy policy.  We have eased our worrisome reliance on foreign oil, enacted two global climate agreements, created trillion-dollar clean energy industry, and established clearly that some (if not all) clean energy policies create good net jobs. 

At the same time, however, the world is enmeshed in deeply worrisome economic stagnation and social unrest unprecedented in the postwar era. This socio-economic turmoil has the potential to slow, if not reverse, energy and climate progress. Of equal concern, in this atmosphere political leaders may be discouraged from making the bold structural changes and investments necessary to flatten carbon emissions. 

For all its accomplishments, democratic capitalism has yet to prove that it can shift peacefully to an economy with continued economic progress, broad-based equity and mobility, and the steady-state use of resources. On the occasion of EGA’s 80th anniversary, I suspect it will still be grappling with this immeasurable challenge.  

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Dr. Peter Fox-Penner is a professor of the practice at the Boston University Questrom School of Business where he is leading the creation of a university-wide Institute for Sustainable Energy. He is a frequent speaker and the author of numerous published articles and books, including the highly acclaimed Smart Power: Climate Change, the Smart Grid, and the Future of Electric Utilities (Island Press, 2010). He is also an academic advisor to The Brattle Group and chief strategy officer of Energy Impact Partners, a private equity firm. His background includes service as a senior official in the U.S. Department of Energy and the White House Office of Science and Technology Policy. He holds a B.S. in Electrical Engineering and M.S. in Mechanical Engineering from the University of Illinois at Urbana-Champaign and a Ph.D. in Economics from the University of Chicago Booth School of Business.  

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The views expressed by contributors to the Cynthia and George Mitchell Foundation's blogging initiative, "The Economic Argument for Environmental Protection," are those of the author and do not necessarily represent the views of the foundation.


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