It might have gone unnoticed but 2014 was the year when the fight against climate change looked to have turned a corner. For that was the first time in more than 40 years that the world managed to grow its economy without increasing its emissions of greenhouse gases.
Data from the International Energy Agency show that while global output of goods and services expanded by 3.4 per cent, emissions of carbon dioxide were unchanged at 32.3 billion tonnes.
As a marker of progress in the struggle to save the world from potentially catastrophic warming, the development might seem small. But it is highly significant in a debate about whether industrialised nations can achieve ambitious targets for cutting carbon emissions without permanently damaging their economic potential.
Many governments worry that cutting carbon emissions would amount to sacrificing economic output. Polish Prime Minister Andrzej Duda, for example, recently said European Union plans to cut fossil fuel use were “bad for Poland” which is a major coal producer. Meanwhile, a view common among ecologists is that economic growth must be sacrificed on the basis that if population increases and modern patterns of consumption are not curbed, the world will sooner or later face disaster.
But a growing consensus in the economics profession argues that emissions can be reduced without impinging on productivity or growth. To this camp, the latest IEA evidence will have come as a great comfort.
Perhaps the best known champion of this view is Nicholas Stern, former chief economist of the World Bank and chair of the London School of Economics’ Grantham Research Institute on Climate Change.
“There is now much greater understanding of how economic growth and climate responsibility can come together and, indeed, how their complementarity can help drive both forward. To portray them as in conflict is to misunderstand economic development and the opportunities that we now have to move to the low-carbon economy,” he told delegates at a recent conference organised by the London School of Economics.
Much intellectual sustenance in academia is taken from the ideas of Austrian-born economist Joseph Schumpeter, who talked of “creative destruction” of old methods and systems in a capitalist economy by a new “disruptive” technology. It follows, therefore, that carbon-based technology at the root of global warming should eventually be replaced by something cleaner and better.
There remains a problem of market failure, however. The technology that will render fossil fuels obsolete is on its way but, at the current rate of development, will not come fast enough for the world to fend off environmental disaster. That’s easy to solve, say the advocates of creative disruption: governments can simply redirect investment to ‘nudge’ the economy towards a low-carbon future.
The worry, however, is that by forcing the new technology through, possibly with state intervention, economic activity will be disrupted and there will necessarily be a setback in growth.
But a line of economic research that has sent ripples of excitement among climate-change academics argues this will not necessarily be the case if the state’s nudges are done properly. An influential economic paper, published in 2012 but still central to the debate, argues that well deployed¹ environmental policies such as taxing use of carbon and subsidising research into clean energy would be sufficient to redirect technical change and avoid an environmental disaster.
This intervention would only be temporary because once clean technologies are sufficiently advanced, they would attract their own resources and research interest without the need for further help from government. This means, therefore, that the world can be saved without permanent government intervention and without sacrificing economic growth in the long term.
Another school of thought is influenced by a 2001 study by economist David Popp, that examines US patent data to study the effect of energy prices on innovations in energy efficiency. The study concluded that energy prices have a strong impact on innovation which implies that environmental taxes, which increase the cost of energy, encourage the development of new technologies.
Simply relying on technological change as a panacea for environmental problems is not enough. There must be some mechanism in place that encourages innovation.
So much for the theory. But is there any hard evidence showing that this could work?
In its most recent annual outlook report, the IEA said renewable energy made up half of new global power generation in 2014, “a clear sign that an energy transition is underway.”
Take wind power, for instance. The IEA has identified wind power as a technology that stands out for its recent progress. In response to “a pressing need to accelerate the development of low carbon energy technologies,” the IEA developed a series of “road maps” showing what can be achieved for the most promising technologies. In its most recent edition of the Technology Roadmap for wind energy, it upgraded its target for its share of global electricity generation to 18 per cent in 2050 from an earlier target of 12 per cent, set in 2009. The more ambitious target reflects “very significant progress” since 2009.
“Wind power is now being deployed in countries with good resources without any dedicated financial incentives”, the IEA says. This appears to vindicate the optimistic predictions outlined above, suggesting subsidies and other incentives will only be temporary as the technology will gather its own momentum quickly, reducing the need for state interventions.
“Since 2008, wind power deployment has more than doubled, approaching 300 gigawatts (GW) of cumulative installed capacities, led by China (75 GW), the United States (60 GW) and Germany (31 GW). Wind power now provides 2.5 per cent of global electricity demand – and up to 30 per cent in Denmark, 20 per cent in Portugal and 18 per cent in Spain. Policy support has been instrumental in stimulating this tremendous growth,” the IEA says.
So much for the theory. But is there any hard evidence showing that this could work?
In its most recent annual outlook report, the IEA said renewable energy made up half of new global power generation in 2014, “a clear sign that an energy transition is underway.”
Take wind power, for instance. The IEA has identified wind power as a technology that stands out for its recent progress. In response to “a pressing need to accelerate the development of low carbon energy technologies,” the IEA developed a series of “road maps” showing what can be achieved for the most promising technologies. In its most recent edition of the Technology Roadmap for wind energy, it upgraded its target for its share of global electricity generation to 18 per cent in 2050 from an earlier target of 12 per cent, set in 2009. The more ambitious target reflects “very significant progress” since 2009.
“Wind power is now being deployed in countries with good resources without any dedicated financial incentives”, the IEA says. This appears to vindicate the optimistic predictions outlined above, suggesting subsidies and other incentives will only be temporary as the technology will gather its own momentum quickly, reducing the need for state interventions.
“Since 2008, wind power deployment has more than doubled, approaching 300 gigawatts (GW) of cumulative installed capacities, led by China (75 GW), the United States (60 GW) and Germany (31 GW). Wind power now provides 2.5 per cent of global electricity demand – and up to 30 per cent in Denmark, 20 per cent in Portugal and 18 per cent in Spain. Policy support has been instrumental in stimulating this tremendous growth,” the IEA says.
Transition to the low-carbon economy combines strongly with development and poverty reduction.
Similar progress has been made in the development of photovoltaic (PV) energy, harnessing the sun to generate power. In 2009, the IEA predicted that solar would account for 11 per cent of global electricity generation by 2050. Five years later, the organisation raised that forecast to 16 per cent, citing rapid improvements in PV efficiency.
Nevertheless, Professor Stern warns against complacency.
“The transition to the low-carbon economy combines strongly with development and poverty reduction,” he said.
“This is about the two defining challenges of our century: overcoming poverty and managing climate change.
If we fail on one, we will fail on the other.”
1See Daron Acemoglu, Philippe Aghion, Leonardo Bursztyn and David Hemous, ‘The Environment and Directed Technical Change’, American Economic Review 2012, 102(1)
