A Historical Perspective on Economic Growth, Energy and the Environment Roger Fouquet Grantham Research Institute on Climate Change and Environment London School of Economics (LSE) Exergy Economics, Sussex University, 14 July 2016

The Importance of History “Those who cannot remember the past, are condemned to repeat it” George Santayana Long Run and Very Long Run Trends Experiences to Learn from (Price Shocks, Transitions) Generalizable from Many Experiences “History Matters”: Tech., Inst. and Cultural Lock-In matter to Present Behaviour and Development System Transformation and Evolution Yet, Lack of Historical Lessons for Policy

Purpose Relationship between Energy Technologies and Transitions and Economic and Social Development Relevance for Future Energy Tech. and Transitions and Economic and Social Development Relationship between Low Carbon Energy System and Knowledge Economy

History of Economic Growth and Development Part 1 History of Economic Growth and Development

GDP per capita for selected European Countries, 1300-1800 Holland England Italy Sweden Spain Portugal Sources: Fouquet and Broadberry (2015)

English/British GDP per capita, 1300-1900 Phase VI: Second Industrial Revolution Phase V: First Industrial Revolution Phase IV of English Economic Development Phase III of English Economic Development Phase II of English Economic Development Phase I of English Economic Development Source: see Broadberry et al (2013)

The Role of Energy in Economic Development Part 2 The Role of Energy in Economic Development

Energy Intensity in the United Kingdom, 1700-2010 Primary Energy Intensity Final User Energy Intensity Source: updated from Fouquet (2008)

The Role of Energy in Industrial Revolution Many Factors: Tech., HK, Finance, Institutions, Culture Historians: Cipolla (1962), Wrigley (1988), Allen (2009) Importance of the Transition to Coal Ayres and Warr (2009) Role of Energy and Technical Efficiency Toman and Jemelkova (2003) Importance of Energy Services Different Channels of Effect of Energy Services Effects Change with Economic Development (Confirmed by Stern and Kander 2012 for Sweden)

Price of Producer Energy Services in the United Kingdom, 1700-2010 GDP per capita Sea Freight Transport Power Iron Heating Land Freight Transport Source: Fouquet (2011) REEP, Broadberry et al (2013).

Impact of 1% Decline in Energy Service Prices on GDP per capita, 1750-1950 Land Freight Transport Power Iron Heating Sea Freight Transport Source: Fouquet (2014)

Drivers of First Industrial Revolution (1760-1830) Cheaper Iron (Switch from Charcoal to Coke): Efficiency: 10t (1750) to 4t (1800) of Coke/1ton of Iron Iron Production: 1750-1780: 8-fold Increase 1785-1815: 8-fold Increase But, ‘Impact’ on GDP pc only 1750-1780 Cheaper Power (1780-1810) Cheaper Land Freight in 1790s

Drivers of Second Industrial Revolution (1830-1913) Cheaper Sea Freight (from 1820s) Cheaper Land Transport (from 1830s) Cheaper Power for Industrial Production (from 1870s)

The Role of Producer Energy Services on the Industrial Revolution Technological Impact on GDP per capita: Role of Efficiency in Reducing Energy Service Prices Kick-Starters and Drivers of Periods of Ec. Growth Declining Role for Energy in GDP (Stern and Kander 2012) Co-Evolution and Synergies between Technologies Transformative Effect of Energy Technologies

Transformative Effects of New Energy Systems New Modes of Power enabled Economic Transformation Mills influenced decline of Feudalism Water Mills enabled Factory System Steam Engine enabled Mass Production Electricity enabled 20th c. Capitalism New Economic Systems Stimulate new Political Systems and new Institutions (and new growth?)

Part 3 The Welfare Effects of Energy Transitions (The Role of Energy Services in Social Development)

0.1 0.01 Consumption of Energy Services in the UK, 1700-2010 Lighting Domestic Heating Industrial Power PassengerTransport Lighting 0.1 Freight Transport 0.01 Source: Fouquet (2014)

Price of Consumer Energy Services in the United Kingdom, 1700-2000 Passenger Transport Domestic Heating Lighting Source: Fouquet (2014).

Income and Price Elasticity of Demand for Energy Services, 1800-2010 Values Greater than One: 10% Increase in GDP pc leads to a more than 10% increase in Energy Service Lighting Passenger Transport Domestic Heating Domestic Heating Price Elasticities Passenger Transport Lighting $(2010)3,300 $(2010)6,400 $(2010)11,800 $(2010)28,500 Source: Fouquet (2014).

Consumer Surplus CSQ1 = ½ . [(P1.Q1)/Y1]/η Supply Price Demand Q1 Quantity

How does Consumer Surplus Change? Increase in Demand & Supply (declining Price) Supply in 1880 Price Increase in Demand due to Rising Income Price D(η(2000)) Supply in 2000 Price’ Q1880 Q2000

Demand for Passenger Transport in 2000 Demand for Heating in 2000 Demand for Passenger Transport in 2000 D1900 * units: 10s of kgs of oil equiv. heating * units: passenger-kms Demand for Lighting in 2000 D1900 * units: 1,000s of lumen-hours

Consumer Surplus of Domestic Heating, Passenger Transport and Lighting in the UK, 1800-2010 Dominance of Price elasticity (Transport CS rising in 20th C, Heating Falling in 19th C and Rising in 20th C, Lighting Falling in 19th C, Rising in early 20th C, and Falling from 1930s) Domestic Heating Source: Fouquet (2015)

Consumer Surplus from Lighting Technologies and Services Electric Lighting Kerosene Lighting Gas lighting revolutionised lives. Cheaper gas was an “enabler” of or complement to other goods and services. Activities such as working, socialising, and education all became much easier to undertake (or cheaper to ‘produce’) at night. The expansion of street lighting also promoted urbanisation and reduced urban crime. Interestingly, lighting improvements also changed sleeping behaviour. Prior to the growth in lighting use, the long nights were often broken-up into two periods of sleep; however, as the day was ‘lengthened’, work, socialising or education replaced sleeping, which became more concentrated (Koslofsky 2011). However, by the 1950s those changes had occurred and better or cheaper lighting had more modest effects on welfare. Gas Lighting Tallow Candles Source: see text

Consumer Surplus from Transport Technologies and Services Cars Buses Railways Horse-Drawn Source: see text

Consumer Surplus from Heating Technologies and Services Woodfuel Heating Electric Heating Gas Heating Coal Heating Energy transitions do not always increase consumer surplus (can just be an energy substitution) Source: see text

Consumption of Energy by Energy Services in the United Kingdom (mtoe), 1800-2000 Lighting Transport Domestic Heating Industrial Heating Power

Pollution Concentration (London) Deaths from Bronchitis (London) Deaths from Bronchitis (England & Wales) Source: Air Pollution: Brimblecombe (1987); Deaths: Registrar General (1838 onwards)

External Costs of Energy Services as a % of GDP in the United Kingdom, 1700-2010 Domestic Heating Passenger Transport Industrial Heating Freight Lighting Power Source: Fouquet (2015).

Part 4 Growth and Limits

Global Population and GDP per capita, 1820-2008

Global Energy Consumption by Energy Source, 1800-2008 Nuclear Electricity Hydro Electricity Gas Oil Coal Woodfuel

Global Carbon Dioxide and Methane Emissions, 1850-2000 CO2 Fossil Fuel Methane CO2 Land-Use Marland et al (2007), Houghton (2008), Stern and Kaufmann (1998)

Energy Service Consumption Energy Limits Supply-Side Shift Energy Consumption Energy Limits Supply-Side Shift Energy Limits Technological Revolution Technological Revolution 1700 1800 1900 2000 2100

The Growth Agenda The Growth Machine Modern Economic Systems: Largely Successful Partly due harnessing and conversion of energy Anthropocene (Alarm bell …) Need to Change Signals and Incentives Where to next? Problems with ‘No-Growth’ Agenda Rise of Unemployment and Social Tensions Rise of Inequality (Picketty: r>g) Decline of Social Progress (Benjamin Friedman)

The Development of the Knowledge Economy Part 5 The Development of the Knowledge Economy

Pillars of the Knowledge Economy Potential for Low-Energy/Resource Growth Low Carbon Growth Pillars of the Knowledge Economy Information and Communication Technologies and Infrastructure Human Capital Knowledge Production and Innovation System

Price of Communication Services in the UK, 1700-2012 Telephone Telegraph Telegraph Mail Mail Mobile Phone Mobile phone Telephone Source: Fouquet and Hippe (2016)

Consumption of Communication Services in the UK, 1700-2012 Mail Mobile phone Telephone Total Telegraph Source: Fouquet and Hippe (2016)

Energy Intensity and Energy Service Intensity in the UK, 1800-2010 Transport Intensity Communication Intensity Heating Intensity Source: Fouquet and Hippe (2016)

Dematerialization of Communication Dematerialization of Communication Services How Many Mail Coaches for Global Internet? 2010: 9 Zetabytes = 13 trillion mail coach j. 183 billion horses/year = 18,000 mtoe = 1.5 times Global Prim. Energy Cons. = 800 times Global Data Center Cons.

Part 5 Conclusions

The Long Road to Green Growth History of Economic Growth and Development Avoid Major Risks of Decline VLR Economic Growth: Transformation Energy and Environmental History Change in Energy Tech. in Ind. Revolution Transformative Effective Value of New Technologies for Society Environmental Problems The Development of the Knowledge Economy Dematerialisation of the Economy Structural Transformation A Key to VLR Economic Growth

Low Carbon Economy Impact Cheaper Power? Transformative Effect of Economy and Society? Declining Role of Energy in Econ. and Social Devel. Low Carbon Transition Slow (50 years minimum) All Sectors and Services (Very Slow) Need Favourable Prices of Energy Services and Characteristics (Ease, Flexibility, New Features) Incentives: Government to Internalise External Costs Synergies/Co-Evolution with other Industries Link with the Knowledge Economy

Toolkit for Thinking about the Very Long Run Synergies and Coevolution Development Blocks Strong Lock-Ins Path Dependence Not in Equilibrium Non-Linearities in Relationships Critical Junctures/Tipping Points Disruptive Change and Structural Transformation Complex Adaptive Systems Feedbacks Change System

Consumer Surplus of Domestic Heating, Passenger Transport and Lighting in the UK, 1800-2010 (with Income Elasticity of Demand = 1) Passenger Transport Lighting Dominance of Price elasticity (Transport CS rising in 20th C, Heating Falling in 19th C and Rising in 20th C, Lighting Falling in 19th C, Rising in early 20th C, and Falling from 1930s) Domestic Heating Source: Fouquet (2015)

Thinking about the Very Long Run Part 5 Thinking about the Very Long Run

GDP per capita in Selected European and Asian ‘Countries’, 0-1300 Central and Northern Italy China Rome Southern Iraq Multiple causes of decline: vested interests and extractive institutions; lack of or misdirected of creativity; resource limits Lesson: Civilisations can experience decline as well as growth Japan Source: Lo Cascio and Malanima (2011), Broadberry et al. 2013, 2014, Pamuk and Schatzmiller 2014, Malanima (2011)

Source: Fouquet (2008 p.246)

Source: UK Intellectual Property Office (2006)

The Very Long Run Infrastructure Strong and Long Lock-Ins US Cities today based on Portage routes in 17th c. Roman Road Network path dependence in France Thus, the Very Long Run: can be more than 2,000 years (Period in which Lock-Ins broken and Return to Equilibrium) So, Most Economic Analysis is in Disequilibrium Potential Reconciliation between Neoclassical and INET (i.e. Neoclassical admit that we never reach equilibrium)

Maintaining Roman Road Network Roman Baseline Towns (o) and Medieval Bishoprics and Archbishoprics, (8th and 9th century, o) Britain abandoned Roman towns, and lost urban network Sources: Michaels and Rausch (2014)

Energy System Lock-Ins Once Technology part of System Low Cost/High Benefit of Improving Technol. Generations of Similar Energy Technologies: Water Mills Introduced around 10thC., Decline in 20thC. Steam Engine Introduced in 1740s, Decline in 1950s Internal Combustion Engine Introduced in 1890s, Decline in …?

Duration, Drivers and Barriers of Energy Transitions Duration Innovation Chain Diffusion Minimum : 45 Years 30 Years Average (Post-Ind Rev.): 135 Years 50 Years Drivers: Necessary: Favourable Price of Energy Services Stronger: Better Quality/New Characteristics Barriers and Delays: Higher Prices of Services (Fuel or Efficiency or Inefficiency of Scale) Unfavourable Characteristics (lowering Value) Competition from Incumbent Energy or Technology

Creating a Learning Society Mokyr (2009): “Economic Change in all periods depends […] on What People Believe” Stiglitz and Greenwald (2014): Attitudes to Change are Crucial Social Construction of Learning  Belief Systems Government Needs to Correct Market Failures to Create Dynamic Learning Economy

Books Printed in selected European Countries, 1450-1800 England Germany N’lands Italy Spain Sources: Fouquet, Rivera-Moreno, Carattini (2016)

The Trends in Inequality: r – g (Picketty)

Hitting Limits Hitting Limits Labour, Capital (Financial, Physical, Human, Natural) Natural Capital: Land, Material, Energy, Ecosystem Find new Energy Reserves, new Sources, new Tech. This time its different (e.g. Environmental Limits) What happens when economies hit limits? Soft Limits (e.g. 1970s, 2006-8): Capacity Strong limits (e.g. Agriculture in ) Reserves Extreme Limits: no substitutes Leibig’s Law (of the minimum) and Limits of Substitutes Labour limits occur in frontier economies (Spain after Black Death, USA West, etc..); Physical and human capital can be replenished in time, through investment

The Importance of Energy Price Shocks on Economic Growth Kilian (2009), etc..: Since 1948, Declining Impact of Energy Price Shocks Our Hypothesis: Impact of Energy Price Shocks declined as Economies Developed Separate Shocks into: Supply Shocks Aggregate Demand Shocks Residual/’Speculative’/Energy-Specific Shocks

Aggregate Demand Shocks Supply Shocks 1710, 1731, 1740: Poor Harvests 1893, 1921 & 1926: Coal Miners’ Strikes 1980: Iran-Iraq War & Economic recovery 2006-08: Economic Recovery 1704: War of Spanish Succession 1815: Battle of Waterloo 1873: Economic Recovery 1915, 1942: First and Second World War Aggregate Demand Shocks Residual Shocks Source: van de Ven and Fouquet (2014)

Aggregate Demand Shocks Residual Shocks Aggregate Demand Shocks Supply Shocks Source: van de Ven and Fouquet (2014)

Changing Impact of Energy Price Shocks on Economic Growth Supply shocks: Stronger with Increasing Dependence on Coal (1920s) Declining Impact after WW-II Confirmed Aggregate Demand shocks: Positive Impact Dependent on Import-Export Reject Hypothesis: Impact does Not Decline as Economy Develops But, Still a lot to Understand… @ supply shocks: also note that initially lower with early transition biomass to fossil @ demand shocks: explain high gains with exporting coal, low gains with importing petroleum  relevant demand shifts out of UK

0.1 0.01 Consumption of Energy Services in the UK, 1700-2010 Lighting Domestic Heating Industrial Power PassengerTransport Lighting 0.1 Freight Transport 0.01 Source: Fouquet (2014).

Demand for Heating in 1900 Demand for Lighting in 1900 Demand for Heating in 2000 Demand for Lighting in 2000 Demand for Passenger Transport in 1900 Demand for Passenger Transport in 2000 Source: see text; * units: passenger-kms; 1,000s of lumen-hours; 10s of kgs of oil equiv. heating

Consumer Surplus = ½ . ((P.Q)/Y)/η = Consumer Expend./ The Net Benefits of Energy Technologies and Services Supply in 1880 Consumer Surplus = ½ . ((P.Q)/Y)/η = Consumer Expend./ (2 * Price Elasticity) Price Demand in 1880 Price’ Demand with 2000 Price Elasticity (η) Q1880 Q2000

Consumer Surplus of Lighting by Energy Source (relative to GDP) Consumer Surplus of Lighting by Energy Source (relative to GDP) in the UK, 1800-2010 Kerosene Lighting Tallow Candles Gas Lighting Electric Lighting Source: Fouquet (2015).

Consumer Surplus of Domestic Heating, Passenger Transport and Lighting in the UK, 1800-2010 Dominance of Price elasticity (Transport CS rising in 20th C, Heating Falling in 19th C and Rising in 20th C, Lighting Falling in 19th C, Rising in early 20th C, and Falling from 1930s) Lighting Source: Fouquet (2015).

Net Welfare (i.e. Cost-Benefit Analysis) of Domestic Heating, Passenger Transport and Lighting in the UK, 1700-2010 Domestic Heating Passenger Transport Lighting Source: Fouquet (2015).

Net Welfare Effects of Energy Services Value of Innovations to Society Are some Technologies Socially Undesirable? Where should we focus Investment in R&D rel. to Energy Services, Sources and Technologies? Do Economies fail to take the Optimal Path? Net Welfare

The Development of the Knowledge Economy Part 3 The Development of the Knowledge Economy

Knowledge Economy Index and GDP per capita, 2012 Source: World Bank (2008).

Pillars of the Knowledge Economy Human Capital Information and Communication Technologies and Infrastructure Knowledge Production and Innovation System Seeking to Understand the Development of Knowledge Economy Potential for Low-Energy/Resource Growth

The Role of the Knowledge Economy in Green Growth Potential for Low-Energy/Resource Growth Dematerialisation of the Economy Lessons from History of Governance Openness to Change Investments in Public Goods

The Human Capital Transition Why the Shift from Low to High Human Capital? Was it Demand- or Supply (ICT)-Driven? Were there Market or Government Failures? What Role did Government Play? What Lessons does the Transition offer?

The Printing Press (ICT) and Government Gutenberg Press (Late 1440s) Responding to Demand Revolutionised Government/Authorities Response Europe: Church Initially Positive Governments: Lack of Power to Control Ottoman Empire: Effective Ban Korea: Strong State Control

Price of Books in the Netherlands, 1460-1800 Source: van Zanden (2009).

Book Production in Selected European Countries, 500-1750 Source: Based on Buringh and van Zanden (2009).

European Human Capital Transition Supply Cheaper Books (1460-1600, 1800s) Church Provider of Education Private Demand (Religious, Political, ...) Broader Interest amongst Wealthier Pop. ‘Public’ Demand Military: Educated Soldiers Industrialists: Educated Worker Public Education Direct Benefit: Moulding Minds of Nation State

Public Expenditure on Education in Europe, 1850-1910 Germany USA Italy UK France Source: Lindert (2004).

Literacy in the world, 1870-2010 Eastern Europe Europe and Offshoots Latin America Africa Other Asia South Asia Korea-Japan China Source: Morrisson and Murtin (2013).

Creating a Learning Society Mokyr (2009): “Economic Change in all periods depends […] on What People Believe” Stiglitz and Greenwald (2014): Attitudes to Change are Crucial Social Construction of Learning  Belief Systems Government Needs to Correct Market Failures to Create Dynamic Learning Economy

Towards a Dematerialised Economy? ICT: Pillar of the Knowledge Economy What Insights from ICT for Dematerialisation?

Price of Communication Services in the UK, 1700-2012 Telephone Telegraph Telegraph Mail Mail Mobile Phone Mobile phone Telephone Source: Fouquet and Hippe (2015).

Consumption of Communication Services in the UK, 1700-2012 Mail Mobile phone Telephone Total Telegraph Source: Fouquet and Hippe (2015).

Energy Intensity and Energy Service Intensity in the UK, 1800-2010 Transport Intensity Communication Intensity Heating Intensity Source: Fouquet and Hippe (2015).

Dematerialization of Energy Services Dematerialization of Communication Services How Many Mail Coaches for Global Internet? 2010: 9 Zetabytes = 13 trillion mail coach j. 183 billion horses/year = 18,000 mtoe = 1.5 times Global Prim. Energy Cons. = 800 times Global Data Center Cons. Can Other Energy Services Dematerialise? Race between Rebound Effects & Income Elast. versus Dematerialization…

Price of Producer Energy Services in the United Kingdom, 1700-2010 GDP per capita Sea Freight Transport Power Iron Heating Land Freight Transport Source: Fouquet (2011) REEP, Broadberry et al (2013).

Impact of 1% Decline in Energy Service Prices on GDP per capita, 1750-1950 Land Freight Transport Power Iron Heating Sea Freight Transport Source: Fouquet (2014) IAEE Energy Forum.

Energy and Economic Growth Technological Impact on GDP per capita: Kick-Starters and Drivers of Periods of Ec. Growth Co-Evolution and Synergies between Technologies Transformative Effect of Energy Technologies Need to Understand How Cheap Energy Services Intensifies Energy Service Use in the Economy Energy-Intensive Industries Impacts on the Environment

Welfare Effects of Energy Systems Part 4 Welfare Effects of Energy Systems

External Costs of Energy Services (by cause) as a % of GDP in the United Kingdom, 1700-2010 Climate Change Air Pollution Fires Mining Source: Fouquet (2015)