1. EP06: Energy and Climate Change Dr Jean-Francois Mercure, jm801@cam.ac.ukjm801@cam.ac.uk Pablo Salas, pas80@cam.ac.ukpas80@cam.ac.uk

2. Lecture 4 – Energy economics Lecture 4-H1: Energy demand and intensity -GDP, intensity and energy demand -Classical approach: the Kaya identity -Energy intensities of GDP and carbon intensities of energy -Energy efficiency of systems -Expected future Kaya terms from the IPCC 2014 -Technological progress and learning by doing -Learning-by-doing -Technological progress and energy intensity -Evidence for asymmetric response: the oil crisis -Rebound effects Lecture 4-H2: Energy, emissions and economic development -Future projections of energy demand -Decoupling of carbon intensity from energy intensity -Issues with the classical approach -Energy demand and economic development -Energy poverty and access

3. -Total primary energy production: 560 EJ/y -Fossil fuels: 461 EJ/y -Oil: 176 EJ/y -Coal: 166 EJ/y -Gas: 119 EJ/y -Nuclear: 27 EJ/y -Renewables: 74 EJ/y -Hydro: 13 EJ/y -Biomass: 54 EJ/y -Wind: 1.9 EJ/y -Solar: 1.3 EJ/y -Geothermal: 2.7 EJ/y -Total primary energy use: 560 EJ/y -Energy industry + transf.: 176 EJ/y -Industry: 106 EJ/y -Transport: 105 EJ/y -Buildings: 130 EJ/y -Non-energy 34 EJ/y IEA Extended World Energy Balances 2014 Lecture 4-H1: Energy demand and intensity -GDP, intensity and energy demand -Classical approach: the Kaya identity

4. Lecture 4-H1: Energy demand and intensity -GDP, intensity and energy demand -Classical approach: the Kaya identity -Kaya identity: -1 st term: population -2 nd term: Income per capita -3 rd term: Energy intensity of income (GDP) -4 th term: GHG intensity of the energy supply -If terms were independent, we could explore changes (taking a derivative): -This is incorrect: changes may be interrelated -Problem is: what are growth, energy and carbon intensities? Are they independent variables? How do they evolve with time? See IPCC AR4 WGIII CH3 p182 (2007)

5. Lecture 4-H1: Energy demand and intensity -GDP, intensity and energy demand -Energy intensities of GDP and carbon intensities of energy Global Energy Assessment Ch6 p396 (2012) Global Energy Assessment Ch1 p114,120 (2012) -A) Energy use as a function of GDP is not constant, and different across countries -B) Energy use per GDP against GDP is not constant and different across countries -C) Emission intensity of energy use changes

6. Lecture 4-H1: Energy demand and intensity -GDP, intensity and energy demand -Energy intensities of GDP and carbon intensities of energy Marchetti & Nakicenovic, IIASA Working Paper, (1978) -Changes in fuel type consumed stems from changes of technologies used -Technological change is gradual and follows distinct patterns -Leads to gradual changes in carbon intensities

7. Lecture 4-H1: Energy demand and intensity -GDP, intensity and energy demand -Energy efficiency of systems M. Grubb Planetary Economics Ch1 p.15-16 (2014) -Engineering systems (machines) have all sorts of efficiencies -Different national energy systems work at different intensities -Energy costs is only one of the multiple considerations by engineers and designers -The amount of energy used is not the relevant quantity; service generation is key -The energy used per service generated changes all the time as technology evolves -The technology changes at different rates in different contexts

8. Lecture 4-H1: Energy demand and intensity -GDP, intensity and energy demand -Expected future Kaya terms from the IPCC 2014 IPCC AR5 WGIII Ch6 Assessing Transformation Pathways p15 (2014)

9. Lecture 4-H1: Energy demand and intensity -Technological progress and learning by doing -Learning-by-doing Weiss et al Energy Policy (2012), Grubler, Nakicenovic & Victor, Energy Policy (1999) -Costs of technologies decrease with cumulated investment (we will come back to that) -Follows a power law relationship -Learning rate is % cost decrease per doubling of investment -‘Ordering principle’ observed in myriads of contexts

10. Lecture 4-H1: Van Bursik et al Environ. Res. Lett. 9 (2014) 114010

11. Lecture 4-H1: Energy demand and intensity -Technological progress and learning by doing -Technological progress and energy intensity Global Energy Assessment Ch6 p396 (2012) -Technologies (industry, end use) have a lifetime -Consumers and firms replace technology periodically -Technology R&D works forward (No going back to older models!) -As technology gets scrapped, ‘quality’ is ever increasing, including energy consumption -Higher prices may incentivise higher turnover rate or choices towards higher efficiency (both on the supply and demand sides) -Therefore: Hypothesis: -Price hikes lead to permanent changes in energy efficiency -As a result: energy efficiency is not a unique function of energy prices -Hysteresis exists, it depends on history! But is it true? Energy Prices Energy Intensity

12. Lecture 4-H1: Energy demand and intensity -Technological progress and learning by doing -Evidence for asymmetric response: the oil crisis Left M. Grubb ‘Planetary Economics’ Ch1 p5 (2014) Right McKinsey p161 (2007) See also M. Grubb ‘Planetary Economics’ Ch5 p171 (2014) Evidence: -Efficiency is not a simple function of the price of oil -Efficiency changed following the price increase -It did not decrease again after the price hike -Efficiency stopped progressing after 1985 -Note: standards and policy were involved in instigating the changes Conclusion: -Path-dependence

13. Lecture 4-H1: Energy demand and intensity -Technological progress and learning by doing -Rebound effects Direct rebound effect: -As energy end-use technologies improve, energy costs to households go down -As energy costs go down, households have leftover income -Households spend part of the income on higher levels of the same energy end-use services (e.g. heating, mobility) Indirect rebound effect -As technologies improve and energy costs go down, income is used to consume other goods/services (e.g. holidays) International rebound effects -As energy end-use technologies improve, fuel consumption go down in some groups -Energy prices go down with lower demand -Other groups increase their consumption with lower energy prices (e.g. in different countries in the case of oil) Chitnis et al Ecological economics (2014)

14. Lecture 4-H1: Energy demand and intensity -Technological progress and learning by doing -Energy expenditures Evidence: -Energy Prices x Intensity = Constant -Means constant expenditure 6-10% GDP -When energy prices are higher, economies apparently adjust with lower consumption -Likely related to rebound effects -Likely related to path-dependent technological change (Lectures 5-6) M. Grubb Planetary Economics Ch6 p.209 (2014)

15. Lecture 4-H2: Energy, emissions and economic development -Future projections of energy demand -Decoupling of carbon intensity from energy intensity -Issues with the classical approach -Resource intensity and emissions -Energy demand and economic development -Energy poverty and access

16. Lecture 4-H2: Energy, emissions and economic development -Future projections of energy demand Edenhofer et al Energy Journal (2010), IEA World Energy Outlook (2010) Future energy demand: -According to current energy-economy models -Useful as an order of magnitude range -Goes from 500 EJ/y now to between 600 and 1200 EJ/y in 2100 -Consistent with IEA projections

17. Lecture 4-H2: Energy, emissions and economic development -Decoupling of carbon intensity from energy intensity IPCC AR5 WGIII Ch6 p17 (2014) Business as usual scenarios from the IPCC (Baselines) -Varying rates of intensity decline against GDP in model assumptions -Varying total intensities -Emissions: up to ~100 GtCO 2 in 2100 Baseline IPCC scenarios (i.e. without specific climate change mitigation policies)

18. Lecture 4-H2: Energy, emissions and economic development -Decoupling of carbon intensity from energy intensity IPCC AR5 WGI TS p94 (2014) 100 80 60 40 20 0 GtCO 2 /y Back to the RCPs: -RCP 8.5 similar to median baseline of IPCC scenario database -The predominant change in emissions comes from intervention -Incentivised by radical climate change mitigation policies -Transformations of energy systems: technologies and resources used -Fossil fuels (i.e. new carbon from the ground) nearly entirely phased out in 2100 for RCP 2.6

19. Lecture 4-H2: Energy, emissions and economic development -Decoupling of carbon intensity from energy intensity GEA Ch. 17 Energy Pathways for Sustainable Development (2012) Example of analysis: Energy modelling using MESSAGE (IIASA) and IMAGE (PBL Netherlands): Normative analysis -Different scenarios with different objectives -Universal energy access -Avoid warming beyond 2 0 C with 50% chance -Improve Energy security

20. Lecture 4-H2: Energy, emissions and economic development -Issues with the classical approach Back to the Kaya identity: -Technological progress is a complex process: 1- Emissions and energy use are not a unique function of economic activity 2- The carbon intensity is not a simple function of time or GDP -Why? -Technological change is complex and path- dependent -Due to technological learning and diffusion and historical events -The future can take different directions depending on choices or events that happen along the way -We will discuss this further in Lectures 5-6 M. Grubb Planetary Economics Ch10 p.385 (2014)

21. Lecture 4-H2: Energy, emissions and economic development -Energy demand and economic development -Different stages of economic development require different energy consumption growth rates Mercure et al. Energy Policy 2014 See also GEA Chapter 6 (2012)

22. Lecture 4-H2: Energy, emissions and economic development -Energy poverty and access -Two way relationship between access to energy and economic development -Relationship between poverty and lack of access to energy services (electricity, mobility, etc) -Development and access to energy can lead to lock-ins to high emissions systems or low emissions systems GEA Ch2 p 164-165 (2012)

23. Lecture 4: Further reading -Following this lecture, please read: -Global Energy Assessment 2012 – Freely accessible to download http://www.globalenergyassessment.org http://www.globalenergyassessment.org -Chapter 1: Energy Primer -Chapter 6: Energy and Economy -Michael Grubb Chapter 1 -Further reading (not in the exam but interesting): -Global Energy Assessment Chapter 17: Energy Pathways for Sustainable Development

24. Lecture 4: References Edenhofer et al. The economics of low stabilisation, Energy Journal, 2010, special issue https://www.pik-potsdam.de/research/sustainable-solutions/flagshipspld/MitigationScenarios/adam https://www.pik-potsdam.de/research/sustainable-solutions/flagshipspld/MitigationScenarios/adam Chitnis, Sorrell, Druckman, Firth & Jackson, Ecological economics 106 (2014) 12-32 Global Energy Assessment (GEA) (2012) Cambridge University Press, http://www.globalenergyassessment.orghttp://www.globalenergyassessment.org Grubler, Nakicenovic & Victor, Energy Policy 27 (1999) 247-280 IEA CO2 emissions from fuel combustion 2014, IEA Extended World Energy Balances 2014 Access IEA databases through http://ukdataservice.ac.uk/get-data/key-data/international-macro-databanks.aspxhttp://ukdataservice.ac.uk/get-data/key-data/international-macro-databanks.aspx IPCC AR5 WGI (2013), IPCC AR5 WGIII (2014) Fifth Assessment Report of the Intergovernmental Panel on Climate Change, Work Group 1: The physical sciences basis (2013), http://www.ipcc.ch Work Group 3: Mitigation of Climate Change (2014)http://www.ipcc.ch Marchetti & Nakicenovic, IIASA Working Paper, (1978), http://www.iiasa.ac.at/Research/TNT/WEB/PUB/RR/rr-79-13.pdfhttp://www.iiasa.ac.at/Research/TNT/WEB/PUB/RR/rr-79-13.pdf McKinsey, Curbing Global Energy Demand Growth: The Energy Productivity Opportunity (2007) Mercure, J.-F., Salas, P., Foley, A., Chewpreecha, U., Pollitt, H., Holden, P. B., & Edwards, N. R. (2014). The dynamics of technology diffusion and the impacts of climate policy instruments in the decarbonisation of the global electricity sector. Energy Policy, 73, 686–700. http://dx.doi.org/10.1016/j.enpol.2014.06.029http://dx.doi.org/10.1016/j.enpol.2014.06.029 Michael Grubb, Planetary Economics, (2014) Routledge Van Bursik, Kantner, Gerke & Chu, Environment Research Letters 9 (2014) 114010 Weiss, Patel, Junginger, Perujo, Bonnel & van Grootveld, Energy Policy 48 (2012) 374-393,