MEETING 10: “ENERGY: THE GREAT TRANSITION” Environment and Natural Resources - 0722002 Dr. Ayşegül Özbakır MEETING 10: “ENERGY: THE GREAT TRANSITION” April 24, 2008

Outline Energy and Economic Systems Economic and Ecological Analyses of Energy Energy Trends and Projections The Economics of Alternative Energy Futures Policies for Future Energy Development April 24, 2008

Energy and Economic Systems Energy is fundamental to economic systems and indeed to all life! However our need for energy is to some degree camouflaged in a modern economy. Measured in terms of gross domestic product, energy resources represent only about 5 percent of economic output. Yet the other 95 percent depends absolutely on energy inputs. In less developed, agrarian economies dependence is more evident. People’s basic need for food calories is of course a need for energy input. April 24, 2008

Energy and Economic Systems Traditional agriculture is essentially a method for capturing solar energy for human use. Solar energy captured in firewood meets other basic needs for home heating and cooking. As economies develop and become more complex, energy needs increase greatly. Each stage of economic development has been accompanied by a characteristic energy transition from one major fuel source to another. Today fossil fuels (coal, oil and natural gas) are by far the dominant energy source in industrial economies. The twenty first century will see a further great transition in energy sources. April 24, 2008

Energy and Economic Systems From the point of view of economic analysis, the most important factor affecting the use of energy is its market price! Distortion of this price, for example by government subsidies, leads to inefficient energy use. A major goal of energy policy, in this view, to avoid or to correct such distortions. But we must also consider the need to internalize externalities such as the impacts of pollution and the user costs of resource depletion. April 24, 2008

Energy and Economic Systems We can take a broader, more ecologically oriented perspective on energy. Theorists of the ecological economics school see energy as fundamental to economic development and focus on a crucial distinction between the stock of nonrenewable fossil fuel reserves and the renewable flow of solar energy. Because so much of the capital stock and energy infrastructure of modern economic systems rely on fossil fuel use, any transition away from fossil fuel dependence will involve massive restructuring and new investment. April 24, 2008

Economic and Ecological Analyses of Energy What makes energy so special??? To answer this question, we turn the physical laws of thermodynamics: The first law says that matter and energy can be neither created nor destroyed! Second law relates to the concept of entropy1! The second law states that entropy increases in all physical processes. April 24, 2008 1. is defined as as measure of unavailable energy in a system.

Economic and Ecological Analyses of Energy Economic perspectives on energy suppy: Remember that economic supply of nonrenewable resources differ from the physical supply! The reserves of any given nonrenewable resource are fixed in physical terms, but the conomically recoverable proportion of these reserves varies with changing technology and prices. The following equation links energy’s price and productivity to the price of a nonrenewable resource such as copper: PE / MPEC = PC PE is price pf energy, PC is price of copper, MPEC is marginal productivity of energy in producing copper April 24, 2008

Economic and Ecological Analyses of Energy Economic perspectives on energy suppy: PE / MPEC = PC this relationship implies that more copper can be obtained from lower-grade ores (with lower MPEC) if either the price of energy falls or the price of copper rises. An abundance of low cost energy will make it possible to obtain increasing quantities of all other resources, in essence without any limit. Also if copper prices rise, producers have an incentive to increase recycling of copper, which will extend the effective resource lifetime, using energy for recycling rather than for primary production. April 24, 2008

Economic and Ecological Analyses of Energy Economic perspectives on energy suppy: However, same logic does not hold for energy itself. For one thing, energy is by nature nonrecyclable! In addition, MPEE , the productivity of energy in producing energy (sometimes called as energy return on investment “EROI”) has an inherent limit. If we replace copper output with energy output in the equation above, it simplifies to: PE / MPEE = PE or simply MPEE This is the theoretical limit for energy production! April 24, 2008

Economic and Ecological Analyses of Energy Economic perspectives on energy suppy: When recovering an extra barrel of oil requires a barrel of oil as energy input, net production of oil is neither economically nor physically possible! Most energy production is far from this margin, but the EROI or MPEE is close to 1 for some forms of energy such as ethanol produced in high-energy-input agriculture. Political forces such as effective farm lobbies, or the desire for energy self sufficency, have led countries including the United States and Brazil to mandate ethanol use. But unless ethanol is produced from agricultural wastes, it is difficult to justify this policy on the grounds of saving energy, because producing it uses almost as much energy as it provides! April 24, 2008

Energy trends and projections Worl Energy Consumption: Global energy use has grown rapidly! Currently, more than 80 percent of the world’s energy comes from fossil fuel sources. Worl energy consumption in 2000 was close to double that of 1970 and World Bank projections show future world energy demand approaching another doubling by about 2030 with almost all the increase in presently developing nations. This would leave per capita consumption in presently developing nations at least one-third of what presently developed nations consume. April 24, 2008

Energy trends and projections Patterns of energy use: How will we meet this massive increase in world energy demand? Standard projections see fossil fuels mostly supplying the increase. According to a theory advanced by petrolium geologist M.King Hubbert in 1956, the typical pattern of energy use over time resembles a bell curve. In the early period of resource exploitation, prices fall, discovery and production expand, and consumpiton grows exponentially. Eventually, limited suppiles and rising resource recovery costs force a turnaround, and consumption starts to fall. The Hubbert Curve projection has wroked out well for U.S. Oil production. But the picture for world oil prodcution is a little different!! April 24, 2008

Energy trends and projections Hubbert Curve: April 24, 2008

Energy trends and projections The Future of World Oil Production: April 24, 2008