Some Economics of the Energy Transition
Sjak Smulders
Tilburg Sustainability Centre, Tilburg University
Energy Days
“Energy & carbon emissions: Technologic and economic measures to mitigate emissions”
Eindhoven June 3 2014
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Outline
How to think about energy transition from an economic perspective?
For climate change policy and energy transition, we need carbon policies and technology
policies, but we are in a second best world: imperfect policies and imperfect cooperation.
Economic perspective:
 Technologically feasible versus costly
 Micro versus macro,
 Short run versus long run.
Efficiency, incentive effects, second-best
This talk:
 Macro perspective, long run “growth and energy”.
o Innovation economics
o Resource theory
 Overview of the newest ideas in the academic literature (with links to technology
perspective and policy)
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Energy transition – Learning from the past.
Rise of fossil
(Moreno Cruz and Taylor 2012, Figure 1)
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Energy transition – Learning from the past.
Rise of fossil (shares)
(Moreno Cruz and Taylor 2012, Figure 1)
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Historical perspective: energy density
Moreno Cruz and Taylor (2012 p.7):
 “humans have always turned to increasingly dense fuels during our industrialization (…)
 density refers to the flow of energy these resources provide (measured in Watts of power)
per m2 needed for their maintenance or exploitation”
(Moreno Cruz and Taylor 2012, Figure 1)
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Implications for economic growth
energy density …creates… density of economic activity
 urbanization industrialization
 learning by doing and scale economies
 economic growth
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Aside: potato
Nunn and Qian (2011) “The Potato’s contribution to population and urbanization:
evidence from a historical experiment.”
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Implications for Green transition
Moreno Cruz and Taylor (2012, p. 60):
“Any significant movement back to an organic economy in our future
will create new geographic winners and losers,
require radical changes in our energy transportation system,
and will create strong pressures for the redistribution of economic activity
towards those regions with relatively dense, but still green, renewable resources.”
Broader interpretation:
Green transition has pervasive effects and might be costly because of the direct impact on the
organization of society and on innovation.
Pessimistic: fossil episode. (more later)
Optimistic: refocus of innovation and life.
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Redirecting Technical change – History
Current situation: “Carbon Lock In”
Addicted to fossil, big push needed to make a transition
Determined by history:
Acemoglu et al (2012)
 Most innovation in past created fossil-based products/processes
 Big market for fossil-based products.
 Users do not buy non-fossil-based products (cost disadvantage)
 small market for alternative-energy based products
 Innovation looks for biggest market
 Cost advantage of fossil is reinforced
 lock in
Policy implication:
 Policies for alternative energy need to be strong initially, but redundant ultimately
 The longer we wait, the more costly it is.
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Redirecting Technical change – Expectations
Current situation: “Carbon Lock In”
Addicted to fossil, big push needed to make a transition
Determined by expectations:
Van der Meijden and Smulders (2014)
Uncertainty about the future role of alternative energy
 Good equilibrium: everybody expects alternative energy to take over
 fossil-based innovation stops
 fossil becomes too expensive to use
 this justifies the transition
 Bad equilibrium (no transition): everybody expects alternative energy to be too expensive
 expect big market for fossil
 innovation in fossil  cheap
 this justifies the expectations, no transition
Policy implication:
 Needed: Transparent policy to steer expectations
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Life after fossil?
Will growth continue after transition?
GDP Growth follows from
 Growth in inputs (capital, labor, energy, natural resources)
 Growth in efficiency
 Growth in productivity (= technical change)
Technical change is the main driver of growth
 New production process, materials and products
 Skills
 Diffusion as well as innovation  technical change
 Capital accumulation is spurred by productivity changes
Do we really think Green Policies are going to affect the sources of growth much?
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Lighting - Nordhaus 1996
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Nordhaus 1996
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Innovation economics
Technical change
…stems from deliberate decisions (“endogenous”), at least partly:
 R&D, patents
 Learning, experience
 Adoption and diffusion
…is an investment decision
 Rate of technical change (fast versus slow)
 Direction of technical change (green versus brown)
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Green innovation economics
Green policies might hurt investment and technical progress if capital and innovations are
complementary to polluting inputs:
 Inputs scarcer  return to investment and innovation lower  crowding out
 Magnified growth drag: both capital accumulation and technology advance are crowded
out
However, green policies might boost investment and technical progress if capital and
innovations are substitutes to polluting inputs:
 Polluting inputs scarcer  shift to cleaner sectors  higher return to investment and
innovation here
  “Crowding in” of investment and green technology transition
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Is green innovation more difficult?
Effect of redirecting technical change to green…
 Restricts menu of innovations to choose from
 But spillovers may be even bigger
 Market size should not be different
Not sure about the effect of redirection on overall technical change,…
but (given the opposite forces listed above) no strong reason to expect much lower opportunities
for innovation.
Evidence: Dechezlepretre et al (2013).
Value of a patent (to society, apart from its commercial value): spillovers of knowledge to other
innovators.
Measured by patent citations.
Green innovations get more citations  green innovation is easier.
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Patent numbers
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Explanations
Generality:
“clean inventions are more cited within their own field than dirty inventions are.
However, clean inventions are also significantly more cited across their field.”
Newness:
Green innovations involve “radically new innovations”.
Similar to IT-inventions, nanotechnology, etc.
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Policy implications
Double externality:
 Technological spillovers  technology subsidy
 Environmental externality  carbon tax
In practice:
 Remove distorting subsidies,
 Shift taxes from labour and capital to pollution
 Cap and trade
But also paradoxes:
 Cheaper green technology in future  more emissions today?
 Rising carbon tax  more emissions?
“Green paradox”
Sinn (2008)
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Background: resource theory
Fossil energy – non-renewable resource
Fixed stock of resources, to be extracted over time, typically at low cost.
For the owner, the question is not how much to extract,…
but when to extract!
If less can be extracted in future, more needs to be extracted today.
Now the paradoxes are clear:
 Cheaper alternative energy in future  less to be sold in future  sell more today
 Rising carbon tax  lower demand in future  sell more today.
 Announcement effect  policy can be implemented only after a lag  benefit ad interim
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Is there really a Green Paradox?
Valid model?
Big effect?
Worry?
Policy implications?
Gaudet (2007)
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Alternative model (I)
Economic depletion rather than physical depletion.
 Resources with low extraction costs are scarce,
 but there will be many alternatives with higher extraction costs
 First extract cheap resources.
 Never extract resources with too high costs
 Stop using fossil if extraction cost higher than cost alternative.
Implication for Green paradox:
 Initial production and emissions might “paradoxically” rise,
 But cumulative production likely to fall.
Puzzle:
 Simultaneous use of resource with different costs.
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Alternative model (II)
Geological constraints
(Cairns 2014, Okullo et al 2014)
 Oil/gas production per well/field cannot be adjusted easily
 Pressure in the well matters.
Implications for Green Paradox
 Short run production cannot go up  no Green Paradox
 But short run production will also not easily go down…
 In the long run, exploration will fall  cumulative emissions likely to fall.
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Evidence Green Paradox
1. Sulfur regulation US.
(Di Maria et al 2014).
Acid rain program in Clean Air Act
 Approved in 1990
 Implemented in 1995
 announcement effect
Empirics:
 In 1990, the price of coal falls, in particular the price of high-sulfur coal.
 Shift to high-sulfur ccoal, but only in subset of powerplants (not all are flexible).
2. Oil trade.
(Curuk and Sen 2014)
 Exports of oil, from OPEC to OECD.
 Bilateral trade flows.
 Responds positively to environmental regulation and green subsidies.
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Green Paradox without scarcity
Criticism Green Paradox theory:
In practice resources are abundant rather than scarce
 Traditional mechanism for Green Paradox less relevant.
But also without scarcity a Green Paradox can arise.
(Smulders et al 2012)
Scenario:
 Implementation lag: announcement of future climate policies.
 This implies a cost in future: people are poorer after the policy.
 Precautionary savings:
lower consumption and raise investment in anticipation of the negative shock.
 faster growth, more demand for energy
 emissions rise (in short run).
Notice:
implication of the “fossil episode”.
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Carbon leakage
Green Paradox: carbon leakage over time.
Leakage over space  more relevant?
Numerical effects small.
Van der Werf and Di Maria 2012
Solution:
 Border Tax Adjustment
 Buy coal policy.
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Conclusions
Costs small?
 energy share in GDP is small – but this may change
 effects on innovation not clear yet
Excessive focus on costs?
 Climate change policy is insurance policy!
Policies
 Cap and trade
 International cooperation versus unilateral.
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References
Cairns, R. 2014. “The Green Paradox of the Economics of Exhaustible Resources.” Energy
Policy.
Curuk, M. and S. Sen. 2014. Oil trade and the green paradox. Mimeo Tilburg University.
Dechezleprêtre, Antoine, Ralf Martin, Myra Mohnen. 2013. “Knowledge spillovers from clean
and dirty technologies: A patent citation analysis.” Mimeo LSE.
Di Maria, C., and E. van der Werf (2008) ‘Carbon leakage revisited: Unilateral climate policy
under directed technical change.’ Environmental and Resource Economics 39(2), 55–74
Di Maria, Corrado, Ian Lange, Edwin van der Werf. 2014. “Should we be worried about the
green paradox? Announcement effects of the Acid Rain Program”. European Economic Review
forthcoming.
Gaudet, Gérard (2007). “Natural Resource Economics under the Rule of Hotelling,” Canadian
Journal of Economics, Vol. 40, No. 4, pp. 1033-1059, November 2007.
Nordhaus, W.D. 1996. “Do Real-Output and Real-Wage Measures Capture Reality?
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The History of Lighting Suggests Not” in Timothy F. Bresnahan and Robert J. Gordon, editors,
The Economics of New Goods. University of Chicago Press.
http://www.nber.org/chapters/c6064.
Moreno Cruz, Juan and Scott Taylor. 2012. “Back to the future of green powered economies.”
NBER working paper 18236.
Sinn, Hans-Werner. 2008. “Public Policies against Global Warming.” International Tax and
Public Finance 15(4): 360–394.
Smulders, Sjak, Yacov Tsur, and Amos Zemel. 2012. “Announcing climate policy: Can a Green
Paradox arise without scarcity?” Journal of Environmental Economics and Management 64
(2012), 364–376.
Van der Meijden, G. and S. Smulders. 2014. “Carbon Lock-In: The Role of Expectations.”
Mimeo, VU Amsterdam.
Van der Werf, Edwin, and Corrado Di Maria. 2012. “Imperfect Environmental Policy and
Polluting Emissions: The Green Paradox and Beyond” International Review of Environmental
and Resource Economics, 2012, 6: 153–194.
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