Unit 2 Technology and incentives

2.11 Capitalism + carbon = hockey stick growth + climate change

The Industrial Revolution marked the transition from an economy in which photosynthesis is the source of most energy, so that land is a constraint on growth, to an energy-rich economy based on fossil fuels. The switch to coal was a necessary condition for the Industrial Revolution. By 1800, replacing the use of the energy stored in coal in England by energy from living trees would have required the use of one-third of the surface area of the country. By 1913, British coal production was equivalent to four times its land area.

The benefits for the people of countries escaping the Malthusian trap are clear from the historically unprecedented increases in per capita income illustrated by the hockey sticks (Figure 1.1). But equally unprecedented has been the rise in surface temperature of the earth (Figure 1.2b). This threatening side-effect results from the particular combination of technologies and institutions that propelled the continuous technological revolution, which we summarize as ‘carbon plus capitalism’.

Carbon plus capitalism has brought unprecedented increases in material wellbeing to billions, but most of the people of the world remain poor by the standards of the higher income countries. Climate change induced by burning carbon means that an ongoing reduction in global poverty cannot be accomplished by the same carbon plus capitalism that accounted for rising income in the now-rich countries.

Capitalism plus carbon: End of the road?

For 100,000 years or more, humans—like other animals—lived in ways that modified the biosphere, but did not substantially and irreversibly degrade its capacity to support life on the planet. Starting in the eighteenth century, humans learned how to use the energy available from nature (burning carbon) to transform the production of goods and services. The capitalist economy made the technological revolution a continuous feature of our lives.

In many countries, workers’ power and wages were enhanced through extension of the vote, prohibition of slavery and hiring children, and organization into trade unions and political parties. (Figure 2.18 explains how this happened in Britain.) Their living standards rose.

But rising labour costs provided ongoing incentives for firms to adopt labour-saving innovations using non-human energy from fossil fuels—leading to an impoverishment of nature.

A degraded and threatened environment cannot be reversed by the same mechanism that created this affluence. In raising their wages, workers were their own advocates. Their success in improving their living standards—by gaining higher wages—made it profitable for owners of firms to adopt a pattern of technological change in which less labour was used relative to other inputs, including natural resources.

You could imagine that a similar process might raise the price of natural resources, leading to nature-saving technical change. But the biosphere does not have the vote. Soon-to-be-extinct animals cannot form unions or political organizations to protect their interests, and the profit incentives to save them are not clear.

New terms, new tools: Stocks and flows

To understand how the process of climate change could be contained, let’s consider the underlying scientific process.

Burning fossil fuels for power generation and industrial use emits CO₂ into the atmosphere. Greenhouse gases such as CO₂ allow incoming sunlight to pass through the atmosphere, but trap reflected heat on the earth, leading to increases in atmospheric temperatures and changes in climate. Some CO₂ also gets absorbed into the oceans, increasing the acidity of the oceans and killing marine life.

stock

A quantity measured at a point in time, such as a firm’s stock of capital goods, or the amount of carbon dioxide in the atmosphere. Its units do not depend on time. See also: flow.

flow

A quantity measured per unit of time, such as weekly income, or annual carbon emissions. See also: stock.

The amount of CO₂ in the atmosphere is called the stock⁠stock A quantity measured at a point in time, such as a firm’s stock of capital goods, or the amount of carbon dioxide in the atmosphere. Its units do not depend on time. See also: flow.close, while the amount being added per year is called the flow⁠flow A quantity measured per unit of time, such as weekly income, or annual carbon emissions. See also: stock.close. To better understand what the terms stock and flow mean, consider Figure 2.19. The stock of CO₂ is the amount in the bathtub.

A flow is a measure based on a time period, like the number of tons of CO₂ per year. CO₂ emissions are an inflow that adds to the amount of atmospheric greenhouse gases, while the natural decay of CO₂ and its absorption (for example, by forests) are outflows that reduce the amount.

A key fact of climate science is that global warming results from the stock. It’s what’s in the tub that matters. The flow matters only because it will alter the stock. Figure 2.20 illustrates the movements in the stock of atmospheric CO₂ and annual temperatures.

The increase in the stock of atmospheric CO₂ is occurring because the outflows (natural decay, and absorption by forests and other carbon sinks) are far less than the new emissions that we add annually. Moreover, deforestation in the Amazon, Indonesia, and elsewhere is reducing the CO₂ outflows while also adding to CO₂ emissions. Forests are often replaced by agriculture, which produces further greenhouse gas emissions—including methane from livestock, and nitrous oxide from fertilizer overuse.

The natural decay of CO₂ is extraordinarily slow. Of the carbon dioxide that humans have put in the atmosphere since the mass burning of coal that started in the Industrial Revolution, two-thirds will still be there a hundred years from now. More than a third will still be ‘in the tub’ a thousand years from now. The natural processes that stabilized greenhouse gases in pre-industrial times have been entirely overwhelmed by human economic activity. And the imbalance is accelerating.

A future without fossil fuels

The GDP hockey sticks in Unit 1 tell a powerful story of the entry of country after country onto the path of continuously rising average living standards—and of the many countries that have not yet experienced the transition to broad-based growth. The production of energy is currently responsible for 87% of global greenhouse gas emissions. For the 85% of the global population who live below the level considered poor in a high-income country, is a fossil fuel-based transition to that standard of living in their future?

The evidence from climate science says that the growth in world production that would be required to raise incomes this much (estimated to be more than four times the size of today’s total output) will have to be based on renewable energy combined with reduced energy input per unit of consumption.

How quickly this happens and at what cost depends critically on the policies that governments pursue; and these differ across countries. Figure 2.21 shows the link between rising living standards and CO₂ emissions: countries where GDP per capita is higher tend to have higher CO₂ emissions as well. This is to be expected because greater income per capita is the result of a higher level of production of goods and services per capita, involving greater use of fossil fuels. The upward-sloping ‘line of best fit’ shows the average emissions per capita for each level of GDP per capita. Low emissions by low-income countries signal energy poverty, not green energy or energy conservation.

But even among countries with similar per capita income, some emit much more than others. Compare the high emissions in the US, Canada, and Australia with the lower levels in France, Sweden, and Germany. Norway and Switzerland both have higher per capita incomes than the US but emit half as much CO₂.

This suggests that it is possible to organize production to offset, in part, the tendency for increased emissions as income rises. In low-emitting countries like France and Sweden, a substantial share of electricity is generated by non-fossil fuel sources (92% and 99% respectively) and petrol prices are much higher than in the countries with high emissions like the US and South Africa (above the line). For the poor countries on the left of the figure, their move to higher incomes needs to be a more nearly horizontal one rather than along the ‘line of best fit’.

A transition to low-carbon electricity could occur simply by governments ordering it, but it would be more likely to happen—either by government order or by private decisions—if the energy from these sources is cheaper than from fossil fuels. Until well into the twenty-first century, electricity generated from renewables was far more expensive than from fossil fuels. Even in the absence of a carbon tax which will—as intended— raise the price of fossil fuel-based energy, prices have changed dramatically more recently. In most parts of the world, power from new renewable facilities is cheaper than from new fossil fuel ones.

The collapse in the price of renewable electricity generation since 1976 is illustrated vividly in Figure 2.22 by the data on the cost of photovoltaic cells for producing solar energy. This chart uses a different scale from other charts so far: it is a ratio (or equivalently, logarithmic) scale. Each step up the vertical axis corresponds to a doubling of the price, and each step along the horizontal axis multiplies the installed capacity by ten. The data points form close to a straight line: its slope tells us that a 10-fold increase in capacity roughly halves the cost.

Concentrating on the last ten years, Figure 2.23 compares the changes in the costs of generating electricity using renewables and fossil fuels. As we have discussed in this unit, it is the relative price of electricity generation over the lifetime of the power plant that affects decisions to switch to a new technology: the changes in ranking of wind, and especially solar (from the most expensive to the least) mean that by 2019, 72% of all new additions to capacity worldwide have been in renewables.

It was government policies that initiated the exponential technological improvement in solar energy illustrated in Figure 2.22. Similarly rapid innovation characterized wind energy and lithium-ion batteries. The combined effect of government interventions and competitive markets drove progress. For example, subsidies for solar energy began in the 1970s in several countries including Japan, Germany, the US, and China. The schemes created incentives for energy providers to use solar and private companies to compete for market share. Equally important was government research funding (mainly in the US) leading to scientific advances that were applied to develop new solar cell materials and panel designs more efficient at converting sunlight to electricity.

The technological progress in renewables is a sign that a path to higher living standards without fossil fuels may be possible. But whether this is feasible on the scale required both to arrest climate change and make a serious dent in global poverty is doubtful.

What is not in doubt is the need to decouple growth from environmental destruction. The case of Sweden illustrates that this can happen. Figure 2.24 shows how GDP per capita has grown since 1995 alongside a decline in per capita energy use—whether measured by domestic energy use, or by a trade-adjusted measure that subtracts energy used to produce exports and adds energy used to produce imported goods.