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Energy, Climate and the Economy: The Forest Through the Trees – A Systemic View

Energy, Climate and the Economy: The Forest Through the Trees – A Systemic View. Nathan John Hagens Mar 26, 2013 University of Twente. OVERVIEW. Energy Economic Growth Debt 4) Implications for climate and policy. Part 1: Energy as driver of civilization/living standards .

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Energy, Climate and the Economy: The Forest Through the Trees – A Systemic View

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  1. Energy, Climate and the Economy: The Forest Through the Trees – A Systemic View Nathan John Hagens Mar 26, 2013University of Twente

  2. OVERVIEW Energy Economic Growth Debt 4) Implications for climate and policy

  3. Part 1: Energy as driver of civilization/living standards

  4. Fossil Fuels Available Output Solar and labor

  5. Image:Akitu_Northeast

  6. Where growth truly comes from Sources: BEA, EIA, IEA, World Bank, IIER * Efficiency from primary energy conversions in power production, industrial processes, space heating**Efficiency in other processes, renewable sources, change of accounting standards for GDP/inflation

  7. The power lies in the price of energy The key dynamic of industrialization is the exchange of human labor for a relatively large amount of low-cost energy Benefits are significant, but disappear quickly with rising energy prices. Model assumptions: Initial hourly salary: 3$ Goods prices are fixed, for each doubling of non-human energy inputs, human time is reduced by 40%

  8. Yellow line: non-OPEC average cash production cost. Blue line: marginal cost of production Source: Production data from Gregor.us (EIA), cost data from Bernstein, 2012 Exhibit 12

  9. Part 2: Debt as spatial and temporal reallocator of scarce resources

  10. What is money? A simple way to put it is to say it represents “the power to buy a certain amount of energy” It is a marker for time spent by humans and/ or energy embodied in goods and services. Money is a claim on future natural resources

  11. What is debt? Traditional economics see debt as a simple transfer of consumption from person A to person B. In reality it represents a shift in time and/or location. Debt is a claim on future money.

  12. Credit: First a blessing, then a curse In contrast to most macroeconomic views, credit is not neutral to an economy Bank says: nofurthercredit!

  13. Debt growth outpaces the economy For the past 50 years, debt levels have been growing faster than economic output (GDP) for the U.S. in every year except 1966, and similarly in all other OECD countries. Our models suggest that credit growing faster than GDP is unsustainable, eventually leading to instability. *Sources: U.S. Federal Reserve – Flow of Funds,U.S. Bureau of Economic Analysis

  14. How many GDP$ for each $ of new debt? Debt sustainability acts as a measure of the long-term viability of debt and compares economic growth vs. (non-financial) credit volume growth Brazil, India Europe China Private and public sector debt growth (without financial sector) Sources: U.S. Federal Reserve, BEA, IIER calculations

  15. Synthesis

  16. General trends over longer periods «Warren Buffet» Age Government Age Corporate/EmergingEconomy Age

  17. The world is trapped from two sides Higher levels of debt will demandhigher returns, with interest expectations rising further along with economic uncertainty Credit System Restrictions Economies will neither be able to grow debt further nor serve existing debt Unresolved Gap Economic growth becomes almost impossible due to re-source limitations Resource Input Contributions Growth fromapplying more low cost energy and resources is no longerpossible due to higher (extraction) cost, and further burdened by expensive renewables and increased cost of environmental protection measures

  18. Most policy-makers expect growth The predominant expectation is that the current problems are temporary and that growth will resume • No large government or policy-making institution evaluates scenarios that involve long-term stagnation or decline *Sources: U.S. Congressional Budget Office, IIER

  19. Source; IIER research, “Green Growth- An Oxymoron?” Nov 2011

  20. 2013GDP 2014 GDP

  21. Energy/Capita vs. % Very Happy – (worldvaluesurvey.org)

  22. Conclusions The primary drivers of growth – cheap energy and available credit are waning. 2) We don’t face a resource scarcity situation but one of ‘resource contribution’ 3) If OECD growth is over, paradoxically we may have an extended period of ‘energy surplus’ while other inputs become more limiting. 4) Some portion of resources (human, financial, energy) preparing for a lower carbon future need to integrate/plan for a lower consumption future.

  23. Some Relevant Questions What is the carbon footprint of central bank printing/support? What is the decline rate for oil production (and renewable buildoutetc) WITHOUT central bank support? What are we trying to optimize? Given energy/economic constraints, can 3C+ be avoided under capitalism/democracy? What can we do? As a world? As individual nations? As communities? As individuals?

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