Energy, Climate and the Economy:
The Forest Through the Trees –
A Systemic View
Nathan John Hagens
Mar 26, 2013
University of Twente
OVERVIEW
1) Energy
2) Economic Growth
3) Debt
4) Implications for climate and policy
Part 1:
Energy as driver of civilization/living standards
Fossil
Fuels
Solar
and
labor
Available
Output
Image: Akitu_Northeast
Where growth truly comes from
1970-2010
Primary
energy
conversion
efficiency
12%*
2000-2010
Primary
energy
conversion
efficiency
1%
Others
14%**
Growth in
consumption
of primary
energy
74%
Others
3%
Growth in
consumption
of primary
energy
96%
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
The power lies in the price of energy
180
160
140
5 cents
10 cents
15 cents
20 cents
120
100
80
60
40
20
Energy units replacing human labor
7680
2560
640
320
160
80
40
20
10
0
0
1280
Model assumptions: Initial hourly salary: 3$ Goods
prices are fixed, for each doubling of non-human
energy inputs, human time is reduced by 40%
Salary raise with industrialization
(for different prices per energy unit)
$/human hour
The key dynamic of
industrialization is the
exchange of human
labor for a relatively
large amount of lowcost energy
Benefits are significant,
but disappear quickly
with rising energy
prices.
Yellow line: non-OPEC average cash production cost. Blue line: marginal cost of production
Source: Production data from Gregor.us (EIA), cost data from Bernstein, 2012 Exhibit 12
Part 2:
Debt as spatial and temporal reallocator of scarce resources
What is money?
A simple way to put it is
to say it represents “the
power to buy a certain
amount of energy”
It is a marker for time
spent by humans and/ or
energy embodied in
goods and services.
Money is a claim on
future natural resources
What is debt?
Traditional economics
see debt as a simple
transfer of
consumption from
person A to person B.
In reality it represents a
shift in time and/or
location.
Debt is a claim on
future money.
Credit: First a blessing, then a curse
In contrast to most macroeconomic views, credit is not neutral to an economy
A family (or country) with ever-growing debt…
Money available for consumption
200
Bank says: no further credit!
150
100
50
0
-50
Income
New credit
Credit payments
Net income
-100
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Debt growth outpaces the economy
*Sources: U.S. Federal Reserve – Flow of Funds,
U.S. Bureau of Economic Analysis
U.S. debt and GDP growth*
60
50
Total public and private debt
in 2005$
40
GDP in 2005$
30
20
10
0
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
US$ trillion
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.
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
1.20
1.00
minimum requirement for long term sustainable credit growth
0.80
0.60
Brazil, India
Europe
China
0.40
0.20
actual debt sustainability
minimum
Private and public sector debt growth (without financial sector) Sources: U.S. Federal Reserve, BEA, IIER calculations
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
-
1954
GDP growth per $ of new non-financial debt (nominal)
U.S. sustainability of new debt (3-year moving average)
Synthesis
General trends over longer periods
Physical world
expansion
Debt creation
Globalization
Stagnation (and
decline)
1750-2000
1980-2008
1980-2008
2008-
Industrialization bringing
access to more and
cheaper resources
Fast growth of credit
allowed a further
expansion
Allocation of effort to
place of lowest effort
Last attempt of debtdriven expansion with
low debt productivity
Led to more wealth for
everybody in advanced
economies
Led to high asset value
gains and high returns
Allowed to continue
consumption and grew
emerging economies
Keeps status up, but
introduces significant
volatility
Is limited by reduced
marginal returns and
higher extraction cost
Is limited by absolute
debt limits and rising
default risk
Is limited by the lack
of further large outsourcing destinations
Is limited by fewer
and fewer creditworthy borrowers
«Warren Buffet» Age
Corporate/Emerging
Economy Age
Government Age
The world is trapped from two sides
Higher levels of debt will demand
higher returns, with interest expectations
rising further along with
economic uncertainty
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
Growth from
applying more low cost
energy and resources is no longer
possible due to higher (extraction) cost,
and further burdened by expensive renewables and
increased cost of environmental protection measures
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
Source; IIER research, “Green Growth- An Oxymoron?” Nov 2011
2013
GDP
2014 GDP
Energy/Capita vs. % Very Happy – (worldvaluesurvey.org)
Conclusions
1) 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.
Some Relevant Questions
•
What is the carbon footprint of central bank
printing/support?
•
What is the decline rate for oil production (and
renewable buildout etc) 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?