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The economics of the climate

Orignally published on 2021-10-30 00:00:00 by www.economist.com

IF DELEGATES TO the Glasgow COP fancy a day out, they could do worse than take a 50-minute train journey to Wemyss Bay and a 35-minute ferry journey across the Firth of Clyde to Rothesay on the Isle of Bute. Rothesay’s charms as a resort have faded, but its distance from the madding crowd and wonderful sea views remain. So do the lessons it holds about how fossil fuels became integral to industrial growth.

The first cotton mill in Rothesay opened in 1779, using the water that flowed out of Loch Fad to power a new type of spinning machine which was transforming the textile industry: Richard Arkwright’s water frame. But the stream proved fickle and underpowered. By 1800 the mill was running on steam engines based on James Watt’s design. But shipping coal to the island was pricey, and Rothesay’s industrial future looked increasingly bleak.

Robert Thom, an engineer, turned things round. In the 1810s he increased the water supply with a dam and drainage cuts to feed it, and installed an ingenious, self-acting sluice to govern the flow of water, ensuring its perfect evenness. The power for the mills doubled, and the steam engines were retired.

The school-book version of Britain’s Industrial Revolution is that the steam engine drove it by providing more power than previously possible. By the end of the 19th century that was true. But to explain the rapid take-up of coal in the late-18th and early-19th century only in terms of steam power is to put cart before horsepower. As Andreas Malm of Lund University in Sweden points out in “Fossil Capital” (2015), steam triumphed when there was still lots of untapped hydropower. Even in the 1830s industry was not taking out more than 10% of the water energy that was available in the English Midlands. Although watermills were an old technology, they were open to improvement by modern entrepreneurs like Thom. And unlike steam engines, they rarely exploded.

What set steam apart were several advantages which appealed to investors. The most important was the ability to build new steam-powered mills close to old ones in towns which already had textile industries, so long as a supply of coal was nearby. The cheeks of cloth-producing factories could run up against the jowls of garment producers. The owner of a new mill could get workers from old ones without having to move them to some faraway river.

The large industrial cities which this produced also encouraged the flow of ideas and skills that made it quicker and easier to improve steam. Watt’s development of the condenser did not just improve one particular mill and steam engine, in the manner of Thom’s changes at Rothesay. It made all subsequent steam engines better, and built improvement into the very idea of such things. What is more, however good water wheels might have become, they were never going to drive locomotives or ships, as steam had begun to do.

Putting that engineering culture into big cities spun it even faster. Alfred Marshall, an English economist, waxed poetic about this in the 1890s, noting that “The mysteries of the trade become no mysteries; but are as it were in the air.” As the 19th century wore on, growth was increasingly driven by the more systematic pursuit and application of technical knowledge, for which the steam engine provided the paradigm model. And it had ever greater amounts of energy at its disposal.

Coal-powered machinery may not have initiated the Industrial Revolution, let alone created the new attitudes to capital, growth and investment which underlay it. But it universalised what began as something peculiarly British and parochial. It allowed industry to be moved—indeed, when boilers and pistons were attached properly to appropriate wheels or propellers, to move itself—around the world. And as sustaining further growth required ever more energy, it was later joined by other fossil fuels, notably oil and gas.

Some, including Mr Malm, take the centuries of structural intimacy between fossil fuels and the capitalist system that was inaugurated by England’s mill-owners and mines to mean that one cannot get rid of the first without also demolishing the second. It is a matter of “Capitalism vs. the Climate”, as Naomi Klein, a writer and activist, puts it in the subtitle to her bestselling book “This Changes Everything” (2014). In this view the fossil-fuel industry’s insistence on putting its own profits ahead of the global risks posed by its effluent is not just a brake on sensible climate policy but a sign of a systemic inability to reach climate goals in a capitalist economy.

It is essential that the world proves this thesis to be wrong. Doing so means embracing the aspect of capitalism which most worries environmentalists: growth. To develop while reducing dependence on fossil fuels—the only sort of growth with a real future—the poor world needs new technology and new investment. The growth supplied by capitalism is what provides both these things, which is why most economists see it as crucial to bringing the fossil-fuel age to an end. All that is needed is to find ways to ensure that growth does not have to be linked to rising CO2.

The issue is nicely summed up in a formula credited to Yoichi Kaya, a Japanese energy economist, which links the size of the economy, the scale of emissions and the amount of carbon in the energy system:

Emissions are the product of population, GDP per head, energy used per unit of GDP and carbon emissions from that energy. To reduce emissions one must reduce one or more of those four factors. Private and government action on the climate has concentrated on the last two: carbon emissions per unit of energy (decarbonisation) and energy use per unit of GDP (efficiency). But given insufficient progress, some say it is time to look at the first two.

The history of the 20th century shows that reducing population, though still spoken of as a long-term goal by some greens and predicted by demographers for much of the world later this century, is not a course of action that governments can effectively and decently pursue (though dealing with unmet contraceptive needs certainly is). That leaves GDP per head. When this grows, as it has by a factor of ten worldwide since the carbon needle began to tick up in the 19th century, energy efficiency and carbon intensity must improve merely to keep carbon emissions stable. If growth stops, the benefits from increased energy efficiency and reduced carbon intensity can go straight into reducing emissions.

The degrowth debate

Since the Paris agreement of 2015, discussion of degrowth has become an increasingly hot topic among some ecologists, heterodox economists and other scholars. Some see it as a strategy solely for the rich world, which they feel does not need any more affluence, while accepting the need for continued growth in poorer places. Others are dubious about the whole idea of sustained growth. Either version, though, has huge moral, political, and economic drawbacks.

The moral problem is that, fine though it may be for individuals to renounce increased consumption, it is not for them to impose their choice on others. There are specific things that societies can require people not to produce or consume, and there may be reasons for rationing some things during emergencies and in special circumstances. But production and consumption in general should remain matters of individual choice.

If those devoted to degrowth could persuade everyone else, their goal might conceivably come about as a voluntary, consensual moral revolution. Otherwise they would need to gain political power and impose their aims. And that raises the problem of political practicality. Governments can and do suppress growth in various ways. Often they do it through wrongheadedness, haplessness or as the result of capture by pernicious interests. Sometimes they do it as explicit policy—as in the austerity imposed on some countries in the early 2010s. But an overt policy of deliberately slowing, stalling or reversing long-term growth, even if presented as being for the good of the world, is a highly unpromising platform on which to win elections.

Even if it were not both wrong and impractical, enforced degrowth would still be a bad idea. Much of the increase in prosperity in poorer countries over the past 20 years has been driven by rising demand from rich countries. Remove that motor and the rate at which the world’s poor are raised out of poverty would slow. It would also hobble the fight against climate change. Rapid decarbonisation requires massive investment in renewables everywhere, but most of all in emerging economies. Much of the money must come from investors in rich countries seeking returns, even if rich-world governments commit resources too. Without huge amounts of investment, decarbonisation will take longer.

And without accelerated innovation it will be incomplete. The current system is not the only way to get from bright ideas to products used on a broad, even world-changing, scale. But it has the best record. A lot of innovations are still needed if the world is to speed up its decarbonisation—better ways of storing energy, of heating houses, of cooling houses, of processing crops, of growing crops, of powering large vehicles, of producing plastics and more. A contracting, low-demand, low-investment economy is not likely to provide any of these.

This case against degrowth does not necessarily mean business as usual, however. To serve the goal of decarbonisation, innovation must be directed towards specific goals with particular properties—it cannot simply roam freely in search of ideas that look profitable. Some of this purpose can come from founders and investors. Tesla is a good example: a company built up by Elon Musk to make both money and electric cars, and, by showing that it could do so, to establish the need for other carmakers to follow suit. But without the certainty of a price on carbon to constrain their sense of the possible, it is asking too much of private innovators to expect them to provide all the tools needed.

Making good the lack requires governments not just to help the private sector through tax credits targeted at innovations which decarbonise—one of the parts of President Joe Biden’s climate package that seems most likely to pass—but also to find ways to bridge the gap between research and development and full scale deployment with a more serious commitment to large-scale demonstration projects.

The ways in which the emission-free technologies to hand and yet to be developed reshape the energy economy will be less marked than those seen with the advent of coal. In an increasingly electrified world, sources of energy are less distinctive and more fungible. The plug does not care where the socket gets its power. An example is the way today’s grid-linked gigawatt world of skyscraper-topping turbines and solar farms spreading over cropland and desert alike has little place for the putatively innate characteristics which first attracted greens to solar panels and wind turbines in the 1970s and 1980s. They saw them as “appropriate” technologies suited to decentralisation, self-sufficiency and the living of less industrialised lives.

But if renewables no longer have the smallness once seen as beautiful, they have special characteristics that come to the fore the more that grids depend on them. The most obvious is intermittency. The flows powering renewables are familiar to the farmer more than to the industrialist. They change with the passing of clouds, the turning of Earth, the rolling of weather fronts, the succession of seasons and the differences between good years and bad.

Dealing with this variation will require new ways of balancing flows of energy and storing it for later use. As Robert Thom discovered, you need to have both storage and a careful approach to regulating flows through the system. But those principles must be applied on scales both local and continental, and measured in both split seconds and years. Grids need to become larger, to make up for shortfalls in wind or sun, and smarter, to balance demand to supply rather than always working the other way round. To what extent markets can be designed to provide all this remains an open question. But it seems a fair bet that a more centrally planned approach will often be necessary.

In return renewables promise to provide grids and their customers with a new resistance to scarcity. The overweening power of coal-miners and oil ministers alike will be broken. With energy freed from physical fuels things will be far harder for would-be rentiers. As in Rothesay, once you have invested, you have guaranteed power with minimal operating expenses and minimal risk.

And they should allow a new form of energy-abundant environmentalism. Environmentalist worries about growth are not limited to relationships between carbon emissions and GDP. There are deeper worries that the demand will break nature’s bounds in other ways. But in a world of copious clean energy the demands industrial civilisation makes of the natural world may in principle be curbed through reuse and recycling. What some call the circularisation of the economy could be spun round more quickly and smoothly. Clean energy need not undermine the capitalism that commoditised fossil fuels built. It could still change its complexion, its political economy and its geopolitical setting.

But it is unlikely to do this in the time demanded by Paris. So the world needs more than an energy system without emissions. It also needs innovation and investment to reverse them.

Full contents of this special report
The agenda for the COP 26 summit: Stabilising the climate
What the Paris agreement of 2015 meant: The state of play
How Asia is crucial in the battle against climate change: The Asian century’s emissions
The economics of the climate: Economics and energy*
Why the world needs negative emissions: Negative emissions
The case for geo-engineering: Veils and ignorance

This article appeared in the Special report section of the print edition under the headline “Flows and fuel”

Orignally published on 2021-10-30 00:00:00 by www.economist.com

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