REALITY AND THE ROUTE TO NET ZERO
The release of a new policy document from the International Energy Agency marks a decisive stage in the evolution of the consensus around energy, the environment and the economy. Apart from anything else, Net Zero By 2050: A Roadmap for the Global Energy Sector reinforces the growing sense of commitment to a rapid transition away from reliance on climate-harming fossil fuels.
This policy paper confirms how closely the IEA is aligned with the broad thrust of policy intent in the United States, Britain and the European Union. Emerging economies like China and India might be harder to convince.
It would be easy to critique this document, applauding its ambition whilst questioning some of its methodologies and policy conclusions.
What matters much more, though, is the broad question of how we understand the interconnection between energy, the economy and the environment.
Granted that environmental risk is a function of our use of energy, are energy needs themselves a function of an economy that ‘grows’ according to its own, self-propelled, essentially financial and internal dynamic?
Or should the relationship be reversed, identifying economic prosperity as a subsidiary property of the use of energy?
From which direction?
It was pointed out to me recently that, whilst articles here make frequent reference to SEEDS, the meaning of this acronym is seldom explained. This is an omission based in familiarity and brevity, not reticence.
The short answer is that SEEDS – the Surplus Energy Economics Data System – is an economic model based on recognition that the economy is an energy dynamic. This means that it’s radically different from conventional models, which treat the economy as a wholly financial system.
This difference of approach may sound theoretical, but its practical implications could hardly be more far-reaching.
To illustrate, imagine that you’re trying to predict the future demand for some product or service. Conventionally, you’d do this by starting with GDP, and applying a forward rate of growth to calculate the size of the economy at some date in the future. With this as ‘a given’, you have the parameters or context for estimating the potential size of your market. What matters now is the potential expansion or contraction of demand for your product as a share of that broad context.
Your aim, of course, is practical rather than theoretical – you want to predict the scale and shape of the market for your product or service. You’re unlikely to be interested in the theory of economics itself, and are, in all probability, content to work within consensus methods, and arrive at consensus results. Even if your organization is big enough to employ its own economists, the probability is that this makes no real difference at all to the methodologies used, and very little difference to the resulting forecast.
Governments work in much the same way – they start by projecting, along conventional lines, the probable size of the national economy of the future, and only then assess the implications for the many aspects of policy.
The same approach is used for the forecasting of future energy requirements. All such conventional projections start with an assumption about the future size of the economy, and only then calculate what that is going to mean for energy needs. The near-unanimity of conventional forecasting right now is that the economy, meaning GDP, will grow at a trend rate of 3%.
Travelling to Net Zero
Hitherto, the resulting informed consensus around energy has been that, whilst renewable energy sources (REs) will capture an ever-increasing share of the energy market, the quantities of fossil fuels used will continue to increase. In contesting this, the IEA report applies a significantly new impetus to the direction of travel in the forecasting of future energy needs.
To be sure, there are differences between proposals and forecasts. Even so, the IEA’s Net Zero is an almost breathtakingly bold break from the prior consensus. It argues that rapid commitment to energy transition can, by 2050, deliver a world with zero net emissions of CO2.
In addition to massively increased investment in renewable sources of energy (REs), the IEA calls for the immediate cessation of all new oil and gas development projects. This amounts to an accelerated run-down of supplies of legacy energy from fossil fuel sources.
The pay-off, says the IEA, isn’t just the prevention of catastrophic degradation of the environment, but includes millions of new jobs and a big – and this time a more globally-inclusive – spurt of economic expansion.
You won’t be expecting me to agree that all of this is feasible, and I don’t. Let’s be clear, though, that the IEA, and others, are absolutely right to stress the need for transition away from climate-harming fossil fuels to REs.
Indeed, SEEDS analysis takes this imperative even further.
Environmentalists – whose ranks now include most Western governments, as well as organisations like the IEA – assert that continued reliance on fossil fuels risks inflicting irreparable harm to the environment.
Where SEEDS goes further is in arguing that, whilst continued fossil fuel dependency would probably wreck the environment, it would certainly destroy the economy.
The explanation for this is simple – it is that the cost of fossil fuel energy is rising, such that its net (post-cost) value is decreasing.
What this means is that the established sources of energy value that have powered the Industrial Age are fading away.
Thinking – forwards or backwards?
This brings us back to the critical issue of method. Instead of assuming a future economy of a given size, and then working backwards to the energy that this economy will require, SEEDS starts with energy projections, and only then asks what size of economy can be supported by the forward outlook for energy.
Put another way, SEEDS dismisses any notion of commencing with an assumed rate of growth in economic output. At the same time, the model also dismisses the idea that GDP is, or can be, a meaningful metric for economic prosperity.
Consensus forward “growth” assumptions, typically 3%, are based on a supposedly cautious continuation of what are accepted as recent trends. These depict the economy, measured as GDP, as something capable of expanding at annual rates of between 3.25% and 3.75%.
That seems to check with stats showing that, between 1999 and 2019 – that is, in the twenty years before the coronavirus shock – annual increments to reported GDP averaged 3.6%.
What this ignores is that, over that same period, annual net borrowing averaged 10.4% of GDP. Unless you believe that the spending of newly-created purchasing power has no effect on the activity measured as GDP, then changes in GDP itself are linked to the rate at which credit expands.
Moreover, debt is by no means the only form of forward obligation whose expansion is linked to economic activity. Whilst each $1 of reported “growth” between 1999 and 2019 was accompanied by an increase of nearly $3 of debt, adding in the expansion of broader financial obligations lifts this ratio to well over $6 of new commitments for each dollar of “growth”.
As so often, the acid test for such varying interpretations is observation. If conventional data is right, global GDP increased by 110% between 1999 and 2019, whilst population numbers expanded by 26%. Even after a surprisingly modest fall (of -3.3%) in world GDP during crisis-hit 2020, output was still higher by 103% over a period (1999-2020) in which population growth was 27%.
This ought, surely, to mean that the economy is in far better shape now than it was back in 1999. Sharply higher prices for assets such as stocks and property seem to reinforce this optimistic reading.
But the economy as we observe it today doesn’t conform to this description.
Most obviously, we’re caught in a stimulus trap. If we carry on pouring gargantuan amounts of liquidity into the system, we face a very real risk of the hyperinflationary destruction of the value of money. But if we stop – or even scale back on – stimulus, asset prices would crash, and a cascade of defaults would ensue.
Can we square this observation of ‘fragility edging into crisis’ with the assurance that economic output has almost effortlessly out-grown population numbers over a very extended period?
The answer, of course, is that we can’t.
After all, if the economy had been performing as strongly as prior growth rates imply, why would we still be locked into a supposedly “temporary” and “emergency” reliance on negative real interest rates that began back in 2008-09?
We can’t, to any significant extent, put the blame for this on covid-19, not least because the official data itself puts the scale of the hit to the economy in 2020 at only -3.3%. At worst, then, we’ve lost a single year of the growth supposedly enjoyed during each of the twenty years preceding the pandemic.
The bottom line is that GDP stats are telling us one thing, and what we can see unfolding right in front of our eyes is the diametric opposite. On the one hand we have an economy that’s growing robustly – on the other, an economy dependent on the life-support of financial gimmickry, and trapped in a cul-de-sac from which there is no obvious route of escape.
Other roads
This is where alternative approaches are so important. To be clear, economic orthodoxy describes a robust economy that doesn’t exist, whilst policy orthodoxy is based on the continuation of positive trends which, it turns out, don’t exist either.
The SEEDS approach begins with three observations, familiar to regular readers and requiring only the briefest introduction for those for whom this is new.
First, the economy is an energy system, because literally everything which constitutes economic output is a product of the use of energy.
Second, whenever energy is accessed for our use, some of that energy is always consumed in the access process. This second principle establishes the role of the Energy Cost of Energy (ECoE), and divides the stream of energy and its associated economic value into “cost” (ECoE) and “profit” (surplus) components.
The third principle is that money has no intrinsic worth, but commands value only as a ‘claim’ on the products of the energy economy.
An economy stripped of money would have to resort to barter, or would have to create a replacement human artefact as a medium of exchange.
An economy stripped of energy, on the other hand, would, as of that moment, cease to exist.
These principles identify a dynamic which, though complex in application, is straightforward in principle. We use energy to create economic value. Some of this energy value has to be used in the energy access process itself. What remains powers all economic activity other than the supply of energy itself. ECoE is the factor which differentiates between economic output and material prosperity.
From this perspective – and in an economy which still derives four-fifths of its primary energy supply from oil, gas and coal – a critical trend has been the relentless rise in the ECoEs of fossil fuels.
This increase in ECoEs fits with observable trends, first by explaining the emergence (though not, in general, the accurate interpretation) of “secular stagnation” in the 1990s, and then by tracking the subsequent, crisis-strewn descent into that dependency on the credit and monetary gimmickry that has created the stimulus trap described earlier.
In short, what SEEDS interpretation says should happen as ECoEs rise coincides with what has happened as this trend has developed.
Feasible directions?
To resolve this issue, and to restore the capability for growth as well as minimising environmental harm, a transition to REs would need to accomplish two things.
First, it would need to provide a volumetric replacement for fossil fuels. This, unfortunately, is about as far as the conventional setting of targets usually goes.
Second, and critically, it would also need to drive overall, all-sources ECoEs back downwards.
For Western countries, successful ‘transition with growth’ would need, at a minimum, to drive overall ECoEs back below 5%, from a current global trend ECoE level of 9% and rising. For advanced economies, whose complexity involves high maintenance requirements in terms of ex-ECoE (surplus) energy, 5% is the upper ECoE parameter beyond which prior growth in prosperity goes into reverse.
Put another way, driving ECoEs down from 9% to 5% might be enough to forestall “de-growth”, but wouldn’t be low enough to reinstate growth itself. To achieve that, we’d need to push ECoEs down a lot further, probably to levels below 3.5%.
The volumetric side of the transition equation is tricky, and has been costed at between $95 trillion and $110tn. The financial price tag, of course, isn’t the issue, least of all in a world in which money is routinely conjured out of thin air. What matters is the quantity of material inputs which these sums represent.
Let’s assume, for purposes of hypothesis, that the Earth can supply the requisite amounts of raw materials necessary for the provision of inputs ranging from steel and copper to plastics, lithium and concrete.
As we know, accessing these materials and putting them to use is absolutely dependent on the use of energy. Without energy-intensive activity, we can’t even supply water, let alone extract minerals and convert them into components.
In short, the principle of ECoE – which applies, not just to the creation of capacity, but to its operation, maintenance and replacement as well – tells us that getting energy from RE sources at the scale that we require is absolutely dependent on the prior use of energy for these purposes.
Since, at least for the foreseeable future, the supply of these materials depends on legacy energy from fossil fuels, the ECoEs of renewables are linked to those of oil, gas and coal.
Identifying process
So here’s the equation that net zero combined with growth invites us to accept.
On the one hand, energy sourced from fossil fuels declines rapidly. On the other, physical products of energy – the inputs that we’ll need to expand RE supply dramatically – will become available in very large amounts.
Another way to put this is that we’re planning to abandon the sunk energy invested in the carbon infrastructure, and build a replacement infrastructure at global scale, and carry on driving, flying and doing everything else that we do with energy, at the same time as we’re driving down energy supply from legacy sources.
An obvious snag here is that nobody seems prepared to tell us what uses of energy will need to be relinquished in order to free up the resources needed for physical investment at a transformational scale.
If we free ourselves from the delusion that the economy is some kind of self-perpetuating, wholly-financial, perpetual-motion mechanism operating independently of energy, the only way to square this circle is to rely on indefinite cost reduction through continued progress in technology. This is why faith in the indefinite advance of technology is implicit in so many aspects of the ‘net-zero-without-economic-sacrifice’ narrative.
The problem with this is that it overlooks the reality, which is that the scope of technology is bounded by the physical parameters of the resource. This, of course, is why no amount of technology – or, for that matter, of financial commitment – has been able to use shale resources to turn the United States into “Saudi America”.
In addition to technological extrapolation to a point beyond the limits of physics, the critical snag with driving the ECoEs of REs downwards far enough is the fallacious assumption that, through some kind of internal financial dynamic, the economy can “grow”, of its own accord, to make all of the necessary transitional steps possible.
If we once accept the proposition that, whilst energy use falls, real economic output can rise, then we’re in danger of endorsing the fantasy that we can “de-couple” the economy from the use of energy. And, since we cannot produce anything of any economic utility at all without using energy, “de-coupling” is a logical impossibility.
From here
None of this is to say that we can’t, or shouldn’t, bend every effort to transition from fossil fuels to renewables. On the contrary, the transition to net zero goes far beyond the desirable, and into the imperative.
Far from contesting the necessity for transition, SEEDS establishes a compelling economic as well as an environmental case for endeavouring to do exactly that. An economy tied in perpetuity to the rising ECoEs of fossil fuels would face inexorable deterioration.
This isn’t a trend that we have to predict, because it’s beyond doubt that this is already happening.
Where SEEDS-based analysis parts company with the ‘new consensus’ is over the belief, amounting to an article of faith, that this process (a) can be accomplished without sacrifice, and (b) can be combined with economic growth.
Any given quantity of energy cannot be used more than once. Legacy energy value from fossil fuels, already a finite quantity, becomes a smaller finite quantity under plans to accelerate the abandonment of oil, gas and coal.
A situation in which this limited quantity of legacy energy is used to expand RE supply, and to build the requisite infrastructure, and to maintain current energy uses such as driving and flying, fails the test of practicality. The associated assumptions – that technology will provide a fix for everything, and that the economy ‘will carry on growing’ thanks to some kind of internal momentum – fail the test of logical interpretation.
All of this, of course, carries the obvious, if startling, implication that we’re trying to progress to a desirable destination using a basis of planning that’s demonstrably false.
The pace at which we should abandon the use of fossil fuel energy is a matter for debate.
But the need to abandon those fallacious, money-only methods of interpretation which create the myth of the economy as a perpetual-motion machine, growing ever larger through an internal mechanism disconnected from energy, has become imperative.
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