Igor Bashmakov Three Laws of Sustainable Energy Transitions November 25-26, 2007.

Igor Bashmakov

Three Laws of Sustainable Energy Transitions

November 25-26, 2007

• There are many dimensions of sustainable energy-economic development• All disproportions finally impact sustainability of economic development -

both rates and costs of growth - through a depletion of resources needed to sustain development, including the resources of stable environment and climate

• The economy is a combination of poorly known but amazingly stable constants, as well as variables

• We put too much focus on variables, but:• What is important for the sustainable development – is to keep critical

energy-economic proportions within the very narrow ranges of their sustainable evolutions

• Another dimension of constants is the stability of the rates of change, which prevents from exceeding historical rates of change needed to mitigate climate change in the absence of specific policies

• Climate policies should not ignore constants of sustainable development

Constants and variables of sustainable development

The need to go beyond historical rates of changes towards stabilization of atmospheric

concentrations of GHGs: energy intensity reduction

a) Ranges of rates of energy intensity change in different mitigation scenarios provided by different models and model runs for1990-2100

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

400450500550600650700750800

Emission stabilization levels (ppmv)

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rate

s of

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ty

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)

Historically achieved levels (1860-1990)

The need to go beyond historical rates of changes towards stabilization of atmospheric

concentrations of GHGs: carbon intensity reduction

b) Ranges of rates of carbon intensity change in different mitigation scenarios provided by different models and model runs for 1990-2100

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%

400450500550600650700750800

Emission stabilization levels (ppmv)

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Historically achieved levels (1860-1990)

Geographic (North to South) shift of carbon dioxide emissions increases “downtown”.

Patterns of energy transitions will determinate the heights of emission skyscrapers

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ific

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Com. Build.

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Industry-400

-200

0

200

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1600

Pacif

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Agriculture

Com. Build.

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0

500

1000

1500

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1971-2000 2000-2030

On the millennium-long time horizon, energy transitions are relatively slow

But they have grown up to the level, where the scale of energy activities endangers the stability of the global climate

More than just conventional wisdom is required to effectively address climate change at affordable mitigation and adaptation costsSocial inertia and behavioral constants are poorly investigated. Present consumption and behavioral patterns are very deeply rooted in the past, a lot more deeply, than one may thinkPeople are still trying to obtain more personal freedom and build more privacy, which has become a synonym of prosperity. The concept of well-being for many years has been perceived as a concept of more-having On average, people spend the same 1-1.5 hours for daily travel, irrespective of the country and transportation modeEconomics of happiness, sufficiency, values and consumption patterns, innovative life-styles may be very important for the transition from the present to the future.

Hundreds of presently available scenarios of global energy system development until 2100 critically disagree on the scale and structure of future global energy systems and energy transition pathwaysIdentifying regularities (or laws) of energy transitions allows it to balance conservatism (while transferring some past to the future) and unlimited imagination, which may tentatively shape the future using the backcasting approach

Three laws of global and regional energy transitions

• For long-term projections and for the identification of a potential for the future emergencies the following three laws of energy transitions are to be taken into account:

The law of long-term energy costs to income stability

• In the long run, energy costs to income ratios are relatively stable with only a very limited range of variations

The law of growing energy quality• Growing overall productivity requires a better quality of energy

services

The law of growing energy efficiency• As energy quality improves against a relatively stable costs-to-

income ratio, energy productivity grows, or energy intensity declines

Every time, like a pendulum, the energy costs/GDP ratio driven by some economic gravitation gets back to

the equilibrium, or sustainable dynamics zone

0%

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En

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USA OECD

Energy costs to GDP ratio evolution in OECD and the USA

The law of long-term energy costs to income stability

• Energy costs to income proportions are relatively stable over decades, if not over centuries, and very similar across regions and large countries

• Sustainable variations of energy costs to GDP ratios are limited to 8-10% for the U.S. and 9-11% for the OECD. The range for energy costs for final consumers to gross output is even narrower: 4-5% for the U.S. and 4.5-5.5% for OECD

• Energy costs to GDP ratio evolves with about 25-30 years’ cycle. Statistics allows for an assumption, that the upper threshold in the U.S. was exceeded around 1810, 1835, 1870, 1900, and 1920, 1949-1952, 1973-1985, and starting from 2005

• Every time, like a pendulum, the ratio driven by some economic gravitation gets back to the equilibrium, or sustainable dynamics zone

• Stability of energy costs to income ratio results from the existence of energy affordability thresholds and behavioral constants

-5%

-4%

-3%

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-1%

0%

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5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%

energy costs/GDPen

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Energy costs/GDP growth rates “wing” function: after energy costs exceed 10-11% of GDP, economic

growth slows down

• The approach used is based on the evaluation of limits to energy purchasing power

• Energy demand is more a function of energy to income ratio, than of income and price separately

• Energy demand functions have asymmetric elasticity

• Elasticity coefficients are drifting, as purchasing power thresholds are approached or exceeded

• Energy costs/GDP ratio for OECD are crossing the thresholds in 2007- 2008

• After that, the oil price may collapse late 2008 - early 2009

Energy demand to energy costs/GDP ratio --,-0,2 --0,5 -1,0

Energy costs to income ratios are to be kept close to the thresholds to motivate energy efficiency improvements without slowing down economic

growth• While the energy costs to income

ratio is below the threshold, the economic growth is not affected

• But as soon as energy costs to income thresholds are exceeded:

– economic activity slows down– energy productivity accelerates – as a result, both energy demand

growth and energy prices escalation slows down until the ratio is back to the sustainable range

• This effect makes price elasticity asymmetric

• It is important to statistically monitor energy costs to GDP ratio as an important business cycle indicator

y = -0,0144x + 0,0868

R2 = 0,0006

y = 0,1771x + 0,0847

R2 = 0,0149

y = 0,136x + 0,0844

R2 = 0,0262

4%

5%

6%

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9%

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-1% 0% 1% 2% 3% 4% 5% 6% 7%

En

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to G

DP

rat

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GDP grow th rates energy productivity grow th rate

energy consumption grow th rates

y = -0,9995x + 0,1557R2 = 0,9241

y = 1,3127x - 0,1505R2 = 0,6993

y = -2,8445x + 0,3773R2 = 0,8671

-4%

-2%

0%

2%

4%

6%

8%

8% 9% 10% 11% 12% 13% 14% 15% 16%

Energy costs to GDP ratio

GDP growth rates energy productivity growth rate

energy consumption growth rates

The ratio of housing energy costs to personal income varies in a very narrow sustainable range in many

countries

0%

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USA Japan China India EU Russia

The share of housing energy costs in personal income before tax for several countries and the EU stays in a very narrow range with amazingly universal 3-4% thresholds

“The Bashmakov wing”. Housing & municipal utility services affordability thresholds. When housing energy costs exceed 3-4% of income, energy consumption start declining. When it exceeds 7-8%, energy consumption declines below the sanitary level, and low-income families need assistance

0%

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0 2/1 4/2 6/3 8/4 10/5 12/6 14/7 16/8

communal and housing (numerator) and energy expenditures (denominator) as percentage of family income (%)

colle

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Consumption or collection rate price elasticity

-0,2 -0,4 -1,0

Threshold 1: consumption

starts declining

Threshold 2: consumption

declines below the sanitary level

When housing energy costs exceed the threshold, they bring along a mortgage crisis: less new homes are sold, and the

economic growth slows down (USA – case)

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Household energy costs GDP growth rates Sold houses/pop

The ratio of transportation energy costs to personal income also varies in a very narrow range in many

countries

The share of fuel transportation costs in personal income before tax in the USA and Japan

-2%

-1%

0%

1%

2%

3%

4%

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8%1959

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of energ

y c

osts

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onal tr

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befo

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Gasoline and oil Motor vehicles and parts - USA GDP growth rates

0%

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share

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Gasoline and oil-USA Motor vehicles and parts-USA

Trasportation-USA Transportation-Japan

When personal transportation energy costs exceed the 3% threshold, the share of income spent for the procurement of new cars comes down, slowing the rate of economic growth

Energy affordability limits approach allows for some more findings

Limits of energy affordability for all energy end-users keep the sustainable lane for energy costs to income fluctuation very limitedMitigation response to carbon and energy tax policy may bring different results, depending on how far the energy costs to GDP or income ratio is from the thresholdCarbon taxes should be flexible: the tax rates should be brought down when energy costs/GDP ratio is high to sustain economic growth; and they should go up if this ratio is low to keep the motivation “spring” compressed High oil prices cannot be sustained for a long time. They will collapse late 2008 – early 2009Long-term scenarios with the energy costs/GDP ratio far beyond the 8-10% range are not sustainable and should be rejectedSuch approach shrinks the uncertainty range of future energy-economy-climate system evolution

Economy is an organic interaction of constants and variables

• Analysis of economic and behavioral constants deserves more attention, than it currently gets

• Some macroeconomic proportions are extremely stable, including the share of energy costs in the gross output

• Fluctuations of these proportions beyond very narrow limits of sustainable dynamics give birth to cycles in the economy (including Kondratiev’s long waves), which re-establish the economic equilibrium, but on a new technology basis

• When the share of energy costs grows, the rate of return drops, slowing down economic growth and shrinking sustainability zone for the economic dynamics

• ‘Learning-by-researching’ and ‘learning-by-doing’ speed up a lot in such situations, allowing for future acceleration of the economic growth rates

• In general, the ‘learning rates’ are higher, if innovations were introduced right after considerable energy costs increases. Technological progress is accompanied by improving energy quality/productivity

• The technology change leads to the substitution of low-quality production factors with the same production factors, only of a better quality

• The notion of high quality energy resource was evolving across times: fuel wood, coal, petroleum products, natural gas, compressed air, heat, chill, electricity, hydrogen

• From the economic standpoint, the quality of energy is mirrored by its contribution to the overall economic growth and to the total factor (not just energy alone) productivity

• They appear less expensive, when it comes to lifecycle costs of integrated energy service systems

• End-users switching from coal to petroleum products, gas, and electricity pay more for a unit of consumed energy, but not for a unit of purchased energy service

• When price for higher-quality energy source (electricity) goes up, it requires more lower-quality energy sources (coal, petroleum products) to substitute it, than visa versa

• If it were not for energy price volatility, the best way to compare the quality of energy carriers would be to use energy prices

The law of growing energy quality

The law of growing energy productivity

• Staying within relatively stable long-term energy costs to income thresholds means, that

– more expensive, better quality energy services have to be accompanied with

– improved energy productivity

• Energy productivity improvement is a centuries-long trend of the civilization development

• All energy carriers, not only commercial ones, are to be considered

• Global long-term sustainable average annual rate of energy productivity growth is 1.0-1.5 percent

0102030405060708090

1850

1860

1870

1880

1890

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2005

GJ/

1000

$ 19

80

USA - including biomass USA - including biomass and animal power

UK- only commercial energy

• Average annual energy productivity growth rates decline, as time frame expands:

• Russia 1998-2005 – 5,0%

• China 1971-2003 – 4.2%

• Japan 1960-2004 – 1,9%

• UK 1960-2004 – 1,5%

• USA 1850-2004 – 1,0%

• Can we keep long-term energy productivity growth rates over 2.5%?