The Role of Energy Technologies in Long Run Economic Growth: A Historical Perspective Roger Fouquet Grantham Research Institute on Climate Change and Environment London School of Economics (LSE) IAEE New York, 16 June 2014

Energy Services and Economic Development Stern (2011) ANYAS –Changes in Energy Use-Economic Activity Linkage: - Subs Energy and Other Inputs for Existing Tech. - Technological Change; - Shifts in Composition of the Energy Input; - Shifts in Composition of Economic Output. Toman and Jemelkova (2003) EnJ –Different Channels of Effect of Energy Services –Effects Change with Economic Development 2

Part 1 The Importance of Demand

0.1 Domestic Heating Industrial Power Passenger Transport Freight Transport Lighting 0.01 Source: Fouquet (2014) REEP

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

Part 2 The UK Energy-GDP Linkage

Source: Broadberry et al (2013) England and Great Britain GDP per capita, Take-Off of English Economic Development First Industrial Revolution Second Industrial Revolution

The Importance of Energy Cipolla, Wrigley, Allen: Role of Energy in Ind. Rev. Major Technological Innovations in –New Energy Sources –Incorporate Role of Technologies –Major Improvements in Energy Efficiency Producers Want Energy Services –Power for Mineral Extraction and Repetitive Tasks –Heating to Manufacture Metals –Freight Transport (Land and Sea)

Industrial Power Industrial Heating Source: Fouquet (2014) REEP Domestic Heating Passenger Transport Freight Transport Lighting Consumption of Energy by Energy Services in the United Kingdom (mtoe),

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

Sectoral GDP in the United Kingdom, Source: Broadberry et al (2013)

Energy Service Intensity per GDP in the United Kingdom, Source: Updated from Fouquet (2008) Iron Production Power Land Freight Transport Sea Freight Transport

Part 3 The Impact of Energy Technologies on Economic Growth

Integrating Energy Services into Energy-Intensive Industries’ Production Function Y = f1 (y 1 (K,L,E), y 2 (K,L,E), … ) For Energy Intensive Industries, e.g. UK Energy Service (ES) combines K, L and E. Y = f1 (y 1 (ES), y 2 (ES), … ) The Role of Costs of Production Y = f1 (y 1 (C(ES)), y 2 (C(ES)), … ) Thus, when the cost of producing ES falls, the costs of energy-intensive industrial production fall 14

Source: Fouquet (2011) REEP, Broadberry et al (2013) Price of Energy Services in the United Kingdom, Power Iron Heating Sea Freight Transport Land Freight Transport

Energy Energy Services Source: Fouquet (2011) Price of Energy and Energy Services in the United Kingdom,

Exogeneity of the ‘Price’ of Energy Services Price of Energy Service: Price of Energy Efficiency of Energy Technology Price of Energy may be affected by Economic Growth if price elasticity of supply is low Adoption of Energy Efficient Tech. is less affected Combined (i.e. Price of ES) assumed to be exogenous Thus, can identify the effect of Price of ES on GDP 17

Granger Causality Tests Effect of GDP per capita: Price of Land Freight pre-1850? : Price of Power, Ind. Heat. & Land Transport on GDP per capita : Little Effect : Price of Sea Freight, and then Price of Land F : Price of Power, of Land Freight (Modest Effect: Price of Sea Freight/Ind.Heat.) 18

Power Source: Author’s Own Estimates Iron Heating Land Freight Transport Sea Freight Transport Impact of 1% Decline in Energy Service Prices on GDP per capita,

Power Industrial Heating Passenger Transport Domestic Heating Lighting Freight External Costs of Energy Use in the United Kingdom, Source: Fouquet (2011) Ecological Economics

Part 4 Concluding Remarks

Insights Demand: Income Elasticities and Rebound Effects 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

Energy and Information Intensity in US, Communication Energy Information: Newspapers and Internet Energy Source: Fouquet and Hippe (2014)

Energy Limits Supply-Side Shift Technological Revolution Energy Consumption Energy Service Consumption Pushing the Energy Frontier or ‘Malthusian’ Energy Growth Trap? Technological Revolution

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Appendix Pre-1750

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

Sectoral GDP in the United Kingdom, Source: Broadberry et al (2013); Five-year average

Expenditure on Energy per GDP in the United Kingdom, Source: Fouquet (2008)

Expenditure on Energy per GDP in the United Kingdom, Source: Fouquet (2008) Power The Decline in % Power Exp. in GDP is not due to a Decline in Power Expenditure, it is due to an Increase in GDP

Energy Service Intensity per GDP in the United Kingdom, Source: Fouquet (2008) Iron Production Power Freight Transport

Source: Fouquet (2011) REEP, Broadberry et al (2013) Price of Energy Services in the United Kingdom, Power Iron Heating Sea Freight Transport Land Freight Transport

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

France Energy Intensity in European Countries, Netherlands United Kingdom Germany Italy Source: Kander et al. (2013) Early Adopter: Exports and Inefficiencies

Energy and Information Intensity in US, Communication Energy Information: Newspapers and Internet Energy Source: Fouquet and Hippe (2014)