Economic development and energy demand

In modeling climate change mitigation alongside sustainable economic development, integrated assessment models need to take into account the qualitative features of growth in developing countries, including the massive energy demand that comes along with industrialization

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Questions about how to mitigate climate change while achieving sustainable development have engendered a series of economic models that chart the interaction of global economic growth and greenhouse gas emissions. Policies that dampen greenhouse gas emissions are examined for their impact on economic activity (usually measured in GDP per capita). Because combustion of fossil fuels contributes the majority of carbon dioxide emissions, a natural focus of policy is on how to reduce their use. The most straightforward way is to substitute fossil with other, non-CO2 emitting fuels. A good amount of policy attention goes, however, towards reducing total energy demand through behavioral changes and efficiency in the models reported by the IPCC and other international agencies, most recently in the IEA’s Net Zero by 2050 report. This focus on reducing energy demanded prompted us to look deeper into just how economic activity and energy inputs into it are assumed to hang together behind these models’ headline figures.
Our interest in the IPCC models was piqued not least by our own research in our group since the mid 2000s on the robust relationship between economic growth and total energy demand, especially in developing countries, for an overview see 
here. Our earlier empirical results here and here informed our own modeling and were in support of arguments of ecological economists and economic historians such as Nicholas Georgescu-Roegen, Herman Daly, Joan Martinez-Alier and Vaclav Smil.  Arguing from thermodynamic principles and historical precedent, these writers highlighted the pivotal role energy played in sustaining economic activity. Their ecological economic argument is intuitively appealing: consider productivity in procuring wood, say, for furniture production. A worker with a gasoline (or battery) powered chain saw can produce much more of the raw material, than one with a manual saw or an axe in any given time interval. This higher labor productivity of chain saw (let alone harvester)-assisted wood cutting is, however, ‘energy-deepening’. That is for any hour worked, more energy is transformed than with a manual tool. In the aggregate, economies that raise their labor productivity (roughly GDP per capita) through energy-intensive activities and in particular through industrialization experience energy-deepening. Therefore, energy productivity (roughly GDP per primary or final energy) grows more slowly than labor productivity, if at all. The increased economic activity is predicated on increased energy use. How do IPCC models square this logic with energy demand reduction, especially in developing countries where rapid projected growth in scenarios of successful climate change mitigation requires some form of industrialization?
In our paper in Nature Climate Change we find that in the current set of IPCC models that chart pathways to 1.5ºC large, near term (i.e. next 10 years) final energy demand reductions are projected to occur in all regions of the world, even in the least affluent ones, while economic growth proceeds apace, often faster than historically observed. The explanation for these rates lies in the economic growth module of an IAM. It turns out that all the models we examine deploy the same simple growth model with an ‘aggregate production function’, that is used for analytical convenience, but hardly represents the context in which industrialization and development take place. Ironically, these models have been critiqued by the same ecological economists since at least the 1970s for their descriptive unrealism when it comes to natural resource and in particular energy inputs. Using exclusively such models and focusing the mitigation debate heavily on reducing total energy demand instead of directly on the need to quit using fossil fuels risks disappointment further down the line. Historical and theoretical evidence strongly suggest that achieving sustained economic growth is difficult enough, but simultaneously reducing the use of one of the key inputs for successful economic growth –  abundant and cheap energy – presents an unresolved policy challenge.

Gregor Semieniuk

Assistant Research Professor, University of Massachusetts Amherst