Stanford, California
When discussing anthropogenic impacts on global climate change, the focus must be on the energy sector. Gross domestic product (GDP), energy consumption, and carbon emissions are all coupled to some extent. The United States is using less energy for each unit of GDP than before, and producing less carbon for each unit of energy than before, but the growth trends in all three factors still go up together. In other countries, this varies. For developing countries, a shift toward commercial fossil fuels from biomass burning is causing carbon emissions to grow as fast as the economies.
Sweeney says that some of the things called renewable or biomass fuels are frauds because they don't really decarbonize the energy sector. One example is the use of so-called "biofuel" in gasoline, when the fuel is made from corn grown and distilled using fossil fuels.
Long-term projections of energy use are difficult to make because there are many things we don't know about energy technology development, social changes, etc. Nevertheless, various modelers have generated business-as-usual scenarios for future world carbon emissions, and the long range projections are clearly cause for concern. Figure 16.1 shows 6 to 7 fold increases in emissions by the year 2100 in a business-as-usual scenario! Figure 16.2 shows regional projections of carbon emissions. The implications up to about 2020 don't look so bad, but several decades later, it looks like real trouble. Based on very common assumptions, the possibility of very large carbon emissions in the future is very likely.
The dominant economic growth is projected to be in China, which expects to use its large and dirty coal reserves to fuel this development. We must take a world view when looking at carbon emissions. Cutting US emissions by some small percentage is equivalent to rearranging deck chairs on the Titanic. Fifty to sixty years from now, the carbon emissions from China alone will be greater than the total world's current emissions. You can't fix this problem thinking short term and thinking about the US alone - it is a world problem. In all the models of future regional carbon emissions, China accounts for the most significant growth. There are large variations among the models' predictions about emissions from the former Soviet Union. In the US, some significant increases are expected if we do nothing, but Sweeney thinks it is unlikely that this will come to pass because the US will probably do something.
Who will pay for China to solve the problem? We must begin to think about the environment as an internationally tradable commodity. There are already some examples of multilateral deals in which one country protects its forests or makes some effort to reforest with other countries paying for it -- the so-called debt-for- nature swaps.
Policy responses to climate change include both mitigation and adaptation strategies. What will the physical environmental effects be, and what is the value of these effects? What will be the cost of adaptation to these physical effects? One policy mindset suggests that we can mitigate climate change in a costless way -- a no-regrets strategy -- by doing things it makes sense to do anyway, i.e., increasing energy efficiency.
Regarding how much emissions can be reduced and at what cost, one study concluded that 25% of carbon emissions could be cut while saving money, and that two-thirds could be cut at zero cost by paying for costly ones with ones that pay you back. But Sweeney, skeptical of this notion, calls the "technology view" a static view. In reality, he says, technology changes happen over time; there is a process by which the turnover takes place, and therefore a time trend is involved in economic models.
Before the energy crisis, labor hours per unit GDP fell faster than energy per unit GDP as society began using energy and capital in place of human labor; this was "technology advance" (shifting from a labor-based economy to an industrial economy does this). Following this general trend of declining labor, we are now headed the other way, mainly due to the prevalence of the two-worker family. Accompanying our attempts to move away from energy intensity; there is a shift in technology focus. There is a reduction in both labor and energy and the expectation is that we will become more energy efficient over time because it will be in people's best interests. They will choose to do what is good for them and thus adopt the "best" technologies.
In order to get the market to work efficiently, we must get the prices right, which means, among other things, including environmental externalities. Are there free energy savings available, above and beyond what would be adopted by the market? Do people apply too high a discount rate? Sweeney thinks not. There is a high implicit discount rate; people have credit limitations. There is undiversifiable risk, and options value. Are people rejecting investments with a high rate of return? Is this irrational ? Sweeney thinks not. If technology is changing rapidly there is good reason not to buy first generation products. An example is the early compact fluorescent lamp (CFL). Since the technology improved so rapidly, the original CFL may not have paid for itself as promised because you'd want to get rid of the obsolete technology before you had exhausted its useful life and the financial commitment is irreversible.
Technology-driven estimates suggest that there is significant carbon reduction available for free and that people are not currently adopting technologies that they should be adopting due to lack of knowledge and/or failures of the marketplace. Sweeney disagrees with this notion. He believes most decisions are being made rationally, and in accordance with market principles.
Significant economic growth is projected over time so we need to bring down the energy intensity per unit of GDP (a demand side issue) and also decarbonize energy sector (a supply side issue).
How will the demand side respond to economic forces? Evidence that it will respond is that long-run aggregate price elasticity is in the -0.3 to -0.7 range, meaning that a 10% increase in energy prices leads to a 3-7% reduction in energy demand with GDP growth held constant. There is a slow adjustment process; in one year, the elasticity is an order of magnitude lower.
Usage elasticities are much smaller than those associated with equipment characteristics. For example, there is more significance in the heating system than in the thermostat setting, and in the car, rather than in how much it is driven. Modelers tend to underestimate the long run elasticities because they take into account only the modelers' concept of technology; they underestimate or ignore substitution possibilities. During the oil price shocks, the elasticity was at the upper end of the response range, around 7%.
Sweeney believes that most of the action is not on the demand side, but rather in decarbonization through technologies that use less fossil fuels. He believes that we will use up all the oil that exists and most of the natural gas (unless there are vast amounts as yet undiscovered). The issue is how much of the coal we will use and with what technologies. How do we ensure that fundamental research goes into making appropriate, low-carbon technologies available? It would be a mistake to force premature technologies on the system through government intervention.
There is a hysteresis effect: when energy prices go up, and people insulate their homes or create new technologies, even if prices go back down, the insulation will still be there and the new technology will still be there. So we don't lose all gains as prices fall back down. But when they do, some of the choices made when they were higher may look like bad choices. Smooth price rises are better than shocks.
Sweeney thinks that unless something changes, the most likely scenario is that we could have dramatic increases in carbon emissions, about 7 times current levels, and possibly even more. But that is the business-as-usual scenario and many think it unlikely that it will happen that way.
How hard do we have to push the system with price rises to see significant carbon reductions? Very hard, Sweeney says. It would take a tax of $20-$150 per ton just to stabilize emissions. To get 20% reduction, $100-$400 tax per ton would be needed, and this would require a real political commitment.
Do the prices of non-fossil "backstop" technologies vary with fossil prices? A potential area of surprise lies here; what will be the costs of these future technologies? Will we pursue policy options to bring down the costs of these non-fossil technologies?
The models, which are only looking at the cost of mitigation options, include no externalities. The environmental effects of carbon emissions are very long term. What happens to the ecosystem and biodiversity, and what are the socioeconomic impacts? What is the value we place on these things?
What is the cost of avoiding carbon emissions increasing by a factor of 7? If one becomes 12 times as wealthy as now, the value of nonmaterial things rises relative to the value of the dollar. As people get wealthier, the value of environmental amenities grows relative to material things. The small reduction in GDP necessary to avoid major environmental disruption seems worth it. Throughout this discussion, fairness issues were raised. Who pays for the commons, i.e. clean air? The developed countries must be willing to pay for reducing emissions by China; they should be compensated for not using their coal to fuel their development.
