World Energy Outlook 2012 and the Rebound Effect

I have been reading the 2012 World Energy Outlook from the IEA.  There is a special focus section of three chapters on the role that energy efficiency improvements could play in reducing greenhouse gas emissions. The report is generally very conservative on estimated uptake of alternative energy and, therefore, efficiency will be needed if there is to be any chance of staying within a 2C trajectory.

There is, however, only one mention of the rebound effect in this whole section in Box 10.2 on p316. Somehow they come up with an estimated rebound effect of only 9%. This is almost certainly an underestimate of the rebound effect. Typical estimates for direct rebound in consumer applications are around 30%, while on the production side and at the macro-level rebound effects can be much larger than this. The report does correctly note that:

"A significant portion of this could avoided by appropriate pricing policy"

A cap on carbon emissions will induce energy efficiency improvements as part of the solution. Though there will still be a rebound effect it can't result in the emissions reduction goal not being met. However, an efficiency policy without a carbon cap is likely to yield disappointing results in my opinion. With a carbon tax, rebound means that the carbon tax would have to be higher than it would be if there was no rebound, I think.

Recent Books on Energy

A former student asked me for suggestions for less academic books that address current energy issues. Here is what I suggested.

First, Vaclav Smil has written a huge number of books on energy. He is maybe a bit pessimistic. I read the global catastrophes book (2008) but he has put out more books since then that look interesting. In particular, this one on energy transitions.

By contrast, Amory Lovins is a huge optimist. We brought him to speak in Australia back in 2000. This looks to be his latest book.

Several recent books are listed in this review in the Chronicle of Higher Education. When I was in the US in October, our taxi driver in Ann Arbor was reading Rifkin's book. We discussed it after he asked me what I do...

Peter May's Review of "Prosperity without Growth"

I don't remember seeing this before, except in the form of a special review section - Two reviews of the same book in the same journal. You've seen my version. Now here is Peter May's version.

Poverty and Progress: An Ecological Model of Economic Development

I remembered Mick Common mentioning this book and I saw that it was referred to by Robert Allen. I found that ANU's library had a copy but it was nowhere on the shelves and I put in a missing book search request. It couldn't be found. So I was surprised to get an e-mail while I was in Adelaide telling me to come pick it up from the library! You can see from the cover above that this book was published in 1973. Disappointingly, the copy I'm reading has a boring grey hardback cover.

The central idea of the book is similar to that of Ester Böserup - innovation and economic development are responses to the scarcity caused by increased population. This idea explains a lot, but I think that Wilkinson takes it too far. In his opinion economic development never increases welfare in the long-run. In his view all the innovations of modern industrial society are merely (often inferior) substitutes for goods that were lost in the industrialization process that was necessary to cope with increased population. If this were really true then why don't countries with low population densities relative to resources in today's world (New Zealand?) adopt a medieval way of life?

I think the idea does explain a lot about pre-industrial societies and the beginning of the industrial revolution. As Allen also documents, coal was an inferior fuel to wood, at least until innovations for using coal effectively came into play. Both authors agree that the scarcity of wood in England drove the increased adoption of coal for many uses.

Another important idea in the book is that many pre-industrial societies had various institutions to control population including taboos on sex at certain times or between certain classes of people, contraception methods, abortion, and infanticide. Some pre-industrial societies, therefore, managed to stay well within ecological bounds. Without facing the pressure of meeting subsistence needs there was little reason to innovate. When Christian missionaries arrived in many such places they tried to eliminate these institutions with a resultant take off of population growth.

The main methods in Christian Europe were delayed marriage in periods of reduced prosperity due to high population and (not mentioned by Wilkinson) monastic and priestly orders. These were less effective at maintaining the population within the carrying capacity for a comfortable lifestyle. England already reached carrying capacity in the 14th century. The Black Death then wiped out a large proportion of the population. Only in the 17th century was carrying capacity again approached. The eventual response was the agricultural and industrial revolutions. Would industrialization have started earlier if the Black Death plague hadn't happened?

Review of Prosperity without Growth

Here is a draft of my review to be published in Ecological Economics of Prosperity without Growth:


Prosperity without Growth: Economics for a Finite Planet

By Tim Jackson, Earthscan, London, 2009.

Reviewed by David I. Stern

Usually, I find myself disagreeing with advocates of zero economic growth (defined as non-increasing GDP). First, a large part of the world’s population remains poor by any objective standard and second, I think they have the wrong end of the stick. If the reason that we are concerned about growth is its impacts on the environment we should control resource use and then let the economy determine the optimal level of output within the constraints that are set. And controlling resource use, hard as that has proven to be, is still likely to be both politically and practically an easier goal than somehow directly controlling growth. So, I was a little surprised to find myself agreeing with quite a lot of what Tim Jackson writes in Prosperity without Growth. Jackson is Economics Commissioner for the UK’s Sustainable Development Commission and Professor of Sustainable Development at the University of Surrey.

Jackson draws parallels between the global financial crisis and the looming ecological crisis. Anglophone (and some continental European) economies artificially boosted consumption in recent years by promoting very lax credit standards and low interest rates. Borrowing from the future to fund today’s fun. This irresponsibility, which met its denouement in the credit crunch is matched by the irresponsibility of borrowing resources and assimilative capacity from the future to fund today’s economic growth. In the case of mineral resources and even fossil fuels we could argue that we are developing the technology with which to “pay back” our borrowings but no such argument can be made on biodiversity and habitat loss and the build up of carbon in the atmosphere.

Jackson then reviews the lack of impact of income on national happiness after subsistence needs are met and asks whether growth is still necessary in order to maintain prosperity. Would a zero growth economy have rising unemployment as technology continues to advance (assuming technology does still advance and as implicitly assumed by Jackson in the main text that GDP is produced by a Cobb-Douglas function of capital and labor)? Such an economy will require less and less labor if wages rise. Either wages have to be constant or average hours worked would have to decline. Such an economy could be a utopia or a dystopia depending on which of these dominates and how the reduction in work hours is distributed. Following the lead of Peter Victor (2008), Jackson advocates some regulation of working hours. But, if we restrict the use of natural resources and resources are not good substitutes for capital and labor, as Jackson himself proposes in the Appendix, labor-augmenting technical change (on its own) in fact becomes rather futile (Jackson assumes technological change augments all inputs equally). This is because adding more effective labor to fixed resources has limited results when labor isn’t a substitute for resources. There is then no increasing labor productivity problem to solve. And if resources are good substitutes for labor then there really isn’t a problem with growth per se. Controlling the use of resources would have limited impact on growth and limiting growth would be the wrong focus.

Jackson also highlights the “myth of decoupling”. Though there have been improvements in the energy and resource intensity of GDP in many economies over time, in very few economies have these gains been more rapid than economic growth. Therefore, global energy and resource use and carbon emissions have continued to rise. Decoupling or environmental Kuznets curve effects are the exception rather than the rule. The rebound effect means that a focus on improving environmental efficiency will reduce impacts by less than one would naively think. Neither is there salvation in the service sector – most services are still fairly energy intensive in both their production and consumption. But, in order to achieve the ambitious goal of stabilizing atmospheric concentrations of carbon dioxide at 450ppm by 2050, global carbon intensity will have to decline by an unprecedented 7% per annum from now till then if population and income grow as expected under business as usual scenarios. Put another way, carbon intensity will have to improve 21 fold in the next 40 years. Jackson believes that that is more than can reasonably be achieved and, therefore, growth must come to an end.

Unfortunately, Jackson misinterprets the estimates of the cost of climate policy generated by computable general equilibrium (CGE) models, writing: “The Stern Review famously argued that “the annual costs of achieving stabilization… are around 1 per cent of global GDP.” After mentioning some other estimates he writes: “Though all these numbers look rather small, there’s something very confusing about cost estimates like these: they are already about the same order of magnitude as the difference between a growing economy and a non-growing economy. So if these costs really represent an annual hit of around 2-3 per cent of GDP they would essentially already wipe out growth” (83-84). It is hard to believe, but CGE models actually state that climate policies would cause GDP to be lower by 2-3% in 2050 than it would otherwise be rather than grow at 2-3% less each year. An economy that grows at 2% less each year has GDP that is 54% lower after 40 years.

This is actually a central point. Prosperity without Growth argues that decarbonization with growth is too hard. Therefore, growth must halt. But leading mainstream economics policy models state that the costs of climate policy are very low and, therefore, there is no incompatibility between growth and decarbonization. I suspect that the truth is somewhere in the middle. Moderate cuts in emissions (20-30%) are likely to be very cheap. But once efficiency and fuel-switching options are exhausted the switch to solar and nuclear energy may have much higher costs. Reviewing the parameter values in CGE models, I think that they may overestimate the ease with which consumers can substitute away from fossil-fuel intensive goods and services.
On the other hand, as Jackson points out, growth as we know it looks set to continue the trend to higher resource prices that we saw leading up to the record oil prices of mid-2008. Can business as usual growth continue anyway in the face of rising resource scarcity?

The book is an easy read and despite my disagreements on some points has plenty of substance. There is also much more in this book – discussions of consumerism and governance for example – than I can cover in this review. Jackson rounds off the book with a set of specific policy proposals and a vision of the transition to sustainability. The policy proposals (presumably directed at developed economies such as the United Kingdom) are:

Establishing the limits: caps on emissions and resource use and targets for reduction; green tax reform; support for ecological transition in developing economies.

I wholeheartedly agree with all these suggestions.

Fixing the economic model: Here Jackson proposes a mix of changes to the practice of economics – green accounting and developing an “ecological macro-economics” – and practical measures like investment in green infrastructure and new financial regulation such as the Tobin tax and increasing bank reserve ratios.

Of course, I think ecological macro-economics should be encouraged but I am less enthusiastic about green accounting – more data on the state of the environment is of course valuable but aggregating that data into the national accounts using monetary valuation can give us false indications about sustainability (see Stern, 1997). 100% reserve banking appears to be favored by some ecological economists but is a complete non-starter as it literally means that banks cannot make loans. These are then money warehouses rather than financial intermediaries. Outlawing short-selling and imposing the Tobin tax are likely to make financial systems less efficient. But we should look at limiting the size of financial institutions and regulating credit more tightly again.

Changing the social logic: Policies on working time, inequality, “measuring capabilities”, strengthening social capital, and dismantling consumerism.

If reduced growth in a resource-constrained economy does lead to reduced labor demand we may need new policies to address increasing inequality. Not all societies and individuals will prefer the approaches advocated by Jackson. Limiting employment hours along French lines would drive the more entrepreneurial into self-employment perhaps increasing inequality further. On the other hand, competition for status probably really does result in “positional externalities”. But incentives are more appropriate than blunt one-size fits all regulation.

In conclusion, I think that we should not treat this book as a necessarily correct diagnosis of our predicament and prescription for our future. But it does provide a very thought-provoking research and policy agenda for ecological economists who understand the size of the challenges we face.

References
Stern D. I. (1997) The capital theory approach to sustainability: a critical appraisal, Journal of Economic Issues 31, 145-173.

Victor P. (2008) Managing without Growth: Slower by Design, not Disaster, Edward Elgar, Cheltenham.

Allen: The British Industrial Revolution in Global Perspective

Robert C. Allen tries to explain why the Industrial Revolution took place in Britain in his new book The British Industrial Revolution in Global Perspective.

Allen (2009) places energy innovation centre-stage in his theory. Like Tony Wrigley, he compares Britain to the Netherlands and Belgium. These were the most developed economies in the world in the early modern age with much higher wages than elsewhere due to their dominant position in world commerce. In both countries the price of fuelwood was rising in the early modern period relative to the price of coal. But the price ratio of traditional fuel to coal was higher in London than in the Low Countries and even higher in the coalfield areas of northeastern England and western Britain. Compared to France, India, or China, Britain had both cheap sources of fuel and high wages.

Coal was lower quality than wood as a heating and cooking fuel but became a “backstop technology” once the relative price of wood to coal rose sufficiently, while in the Netherlands peat replaced coal. But innovations were required in order to use coal effectively in new applications from home heating and cooking – new specially designed chimneys had to replace older chmneys and open hearths - to iron smelting and then steam engines. These induced innovations sparked the industrial revolution. Initially though the new innovations were only profitable in Britain where wages relative to energy prices were the highest in the world. Continued innovation eventually made coal using technologies profitable in other countries too.

He concludes: "The British were not more rational or prescient than the French in developing coal-based technologies. The British were simply luckier in their geology... In other words, there was only one route to the twentieth century - and it traversed northern Britain." (p275)

Collapse

I have been reading Collapse, Jared Diamond's account of the collapses of several past civilizations - Easter Island, the Maya, the Anasazi, and the Greenland Norse settlement prominent among them - and discussions of environmental stresses and sustainability issues in modern societies. Included is some original research of his with a coauthor on the factors affecting success or failure in the Pacific Islands. He also discusses a few cultures which adapted and moved back from the brink, including Tokugawa Japan, the New Guinea Highlands, Tikopia and medieval Iceland. In the case of Tikopia success involved the wiping out of two of the clans by the one surviving clans while in Iceland severe desertification occurred in the uplands before things stabilized. So success is relative.

My preconception was that he would be overly deterministic about the role of environmental degradation in these stories. But that isn't the case. In fact, for an economist things seem a bit too open ended. He tries to explain these examples by a five factor theory but I can summarize in fewer points, I think.

Societies tend to overshoot their carrying capacity when either they experience long periods of favorable climate (e.g. Greenland) or move into new areas where they misperceive the carrying capacity even in the short-run (e.g. Iceland). In the latter case environmental degradation results causing a fall in carrying capacity. In the former a change in climate for the worse is the cause in fall in carrying capacity. What happens next depends on the fragility of the environment and the rigidity of institutions. A more fragile environment (e.g. Easter Island vs sustainable example) or more rigid institutions increases the likelihood of collapse. For example, the Greenlanders seem to have eaten no fish for inexplicable reasons and otherwise seem to have tried to maintain European style agriculture rather than adopt ideas from the native Americans (they did hunt seals but not all types). Rulers need to show their people that they can provide for them to legitimate their rule as well as compete with rival rulers. It might make more sense to try to maintain the current system at continuing environmental cost until it finally collapses rather than admit that it has failed. At the same time temples (Maya) or statues (Easter Island) tend to get bigger and bigger.

We can certainly see the same symptoms in our world today. Rulers seek legitimacy by maintaining economic growth. There is a fear of accepting even small reductions in GDP in order to protect the climate. And conservative attitudes in institutions prevail. The Greenlanders didn't want to be like the Inuit, while conservative Americans don't want to be like the French or Swedish today. As institutional economists long-ago noted technology changes faster than institutions do.

Predicting Nobel Prize-Winners in Economics

I've been reading bits of "Lives of the Laureates" on and off recently. The book is based on a lecture series at Trinity University where Nobel laureates in economics are asked to describe their evolution as economists. Many of their lives do seem to have been "stochastic trends" :) Some like Clive Granger weren't even sure that they were ever economists. John Harsanyi left ANU because some people there didn't even know what game theory was (this is in the 1950s). Anyway, that got me to thinking who will win the prize in the future. Robert Barro is one economist that has been very highly cited but has not yet won the Nobel Prize. His top ten articles have all been cited more than 1000 times on Google Scholar. The same is true of Eugene Fama but it is hard to imagine him winning the Nobel Prize in the wake of GFC. Andrei Shleifer is still pretty young to win the Prize, though he is maybe the most cited economist of all. He won the John Bates Clark Medal which is probably a good predictor. He also has some controversy associated with him regarding insider trading in Russian stocks.

You can easily generate more ideas from RePEc's ranking. But if your candidate does not have at least one article on Google Scholar with more than 1000 citations and their top ten papers do not each have hundreds of citations they probably don't have much chance. Actually there have been prediction markets in this, but currently I can't get anything at the website referred to.

Book Review: The Chinese Economy: Transitions and Growth

I have been reading The Chinese Economy: Transitions and Growth by Barry Naughton. It seems to be a nicely balanced objective survey of the Chinese economy covering both its evolution, especially since the key dates of 1949 (founding of the PRC) and 1978 (beginning of liberalization). As the author writes, most commentators seem to either over- or under- estimate China. And as other commenters on the Amazon website say, it is very interesting to read. One of the many things I learnt which I hadn't really realised before is how much economic growth there was in China from 1949 to 1978 though it was largely focused in the (at the time) small urban sector. What happened post 1978 was a doubling of the growth rate rather than the beginning of the era of modern economic growth.

As far as criticisms go, I think the book could benefit from more maps - there are six, five in the early part of the book and one in the final chapter (on the environment) - and some key charts are omitted. I can't remember seeing a chart of GDP or its growth rate over the entire 1949-2005 period (Fig 18.1 does include per capita income from 1953-2000 as part of a chart of the rate of household saving). There tend to be separate charts for many variables for the pre 1979 and post 1979 periods. There is nothing on the transformation of the built environment, especially in the residential sector or other components of changing living standards such as ownership rates of various consumer goods, nutrition etc. Well, I guess it's hard to cover everything about the world's largest country in one book :)

The final chapter cites my argument that the environmental Kuznets curve model does not really explain what is going on in developing economies but then claims it still might be useful to understand what is going on in China despite the evidence marshalled showing that China is working to turn things around environmentally at a relatively low income level.

Vaclav Smil

I'm having a look at a recent book by Vaclav Smil: Global Catastrophes and Trends: The Next Fifty Years . I'm very surprised to find that there is no Wikipedia article on Smil. I'm also a bit shocked by his criticism of other authors. On Jared Diamond's Collapse, he writes: "a derivative, unpersuasive, and simplistically deterministic book". Almost at in the same class as Taleb. The book is a lot more reasonable than George Friedman's efforts. Generally, I agree with most of Smil's assessments of current and future trends - for example peak oil is probably less imminent and less serious a problem than the doom and gloomers think - though I find myself somewhat less pessimistic - for example on the relative decline of the United States.

Book Reviews: Gladwell

I read Blink by Malcolm Gladwell. While it is a good read I found it rather frustrating. I agree totally with the tone of the Wikipedia article. I guess it is too journalistic and not analytical enough. Sometimes making intuitive judgments is good and sometimes it is not. Some people are born with the abilities to make them and other times they can train to have those abilities. Well, the real world is messy I suppose but Gladwell doesn't make it much more tidy.

Next I tried to read "The Tipping Point". After reading about people who are "Connectors", "Mavens", and "Salesmen" I quickly got bored and gave up on reading. Maybe it is just too culturally specific to the US (where I lived ten years so other non-Americans would be really alienated). Very lengthy examples are Paul Revere, Sesame Street etc. It really didn't seem to be about how small things make a big difference as it is subtitled but about how social networks work. It really wasn't about "tipping points" at all as I would understand the term.

Book Reviews: Zilliak and McCloskey and Taleb

Shuang brought home borrowed copies of Ziliak and McCloskey's "Cult of Statistical Signficance" and Taleb's "The Black Swan". in a way both are rants against standard practice in quantitative analysis. But Taleb's book is ten times better or more than Ziliak and McCloskey's. The latter have a single point that researchers often misuse the concept of statistical significance and ignore the actual size of an effect or variable in favor of just stating that it is "significant" - which just means in statistics that there is a low probability that we think there is an effect when there is none (the probability of falsely rejecting a null hypothesis that is in fact true). Now many researchers write up ineffective discussions of what their research found or make fundamental mistakes in method. But it's not universal and the book never really explains key concepts such as what statistical significance is. It's just one huge rant against all the economists and statisticans that the author feels have oppressed them or their like-thinkers. It assumes we know these things and know the authors critique already (which I do as an economist). The statistician R. A. Fisher is the big villain of the story and Gosset the oppressed hero. But there is never any discussion of exactly what their contributions were.

By contrast, Taleb defines all the basic ideas he uses and has more than one idea. Not all are original of course. Many are commonplace in recent behavioral economics and in more general economics. And they are not esoteric ideas in economics. Winner takes all ideas are in Frank and Bernanke's introductry textbook that I used to teach from. There are notes for the sources at the end of the book. And yes he rants and raves against everyone he believes thinks incorrectly but he does it in an amusing way. I like to read him and didn't find him too annoying. Some people complain about his use of fiction, autobiography, and fictionalised autobiography alongside factual material. In this he reminds me of Robert Pirsig who embedded philosophical and autobiographical material in a story about a motorbike trip across America in "Zen and the Art of Motorcycle Maintenance". I don't have a problem with it. It makes the book much more readable than it would otherwise be.

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