Post-2015 Consensus: Energy Assessment, Galiana Sopinka
Summary of targets from the paper
|Energy Targets||Costs per year ($B)||Benefits per year ($B)||Benefit for Every Dollar Spent|
|Double research, development and demonstration (RD&D) in energy technologies||$11|
|Phase out fossil fuel energy subsidies||<$45||$675||>$15|
|Provide Access to Modern Cooking Fuels to 30% of the current unserved population||$11||$161||$15|
|Universal access to modern cooking facilities||$61||$536||$9|
|Universal energy access||$135||$916||$7|
|Universal electrification access||$74||$380||$5|
|Double the rate of energy efficiency improvement globally||$213||$576||$3|
|Double the share of renewable energy in the global energy mix||$514||$415||$0.8|
The global energy system is undergoing a rapid and significant transformation from both demand and supply perspectives. The former is due in large part to emerging economies’ growth and rapid urbanization, both of which are extremely energy intensive. The latter is due primarily to the ‘shale gas revolution’, the events at Fukushima and the push for renewables.
Governments are struggling to produce coherent energy policies that balance the key dimensions of energy sustainability: energy security, social/economic equity and environmental sustainability. In the meantime, more than 70% of the population of sub-Saharan Africa and more than 700 million people in Asia have no access to electricity and almost two billion people still burn wood, dung and crop waste for cooking and heating with significant health and environmental consequences.
Existing global energy programs
The repeated failures of UNFCC climate negotiations are due in large part to the justifiable unwillingness of nations, but particularly emerging economies, to compromise economic development for the sake of climate change mitigation. The newfound awareness of the intrinsic coupling of environment, energy and growth has drawn attention to the importance of energy policy globally. The United Nations’ Sustainable Energy for All initiative (SE4ALL), launched in 2011, focuses on three objectives: ensuring universal access to modern energy services, doubling the rate of improvements in energy efficiency and doubling the global share of renewable energy to 30%, all by 2030.
Energy – The Basics
Modern energy – electricity, natural gas, clean cooking fuels etc – improves productivity and health, reduces transaction and transport costs and provides numerous consumer benefits. Energy policy focusses on efficiency measures, driven by environmental concerns, and production targets which are concerned with the energy mix and its distribution. The move from traditional biomass fuels through transitional fuels such as kerosene and on to a mix of modern fuels including grid electricity is encapsulated in the ‘energy ladder’ hypothesis. At the top of the ladder currently is energy generated from nuclear power and renewable resources. The possibility of skipping the fossil fuel rung is attractive to some people, but the cost-effectiveness and welfare implications of this are uncertain.
Current Trends in Energy Production and Use
World energy consumption is projected to grow 56% from 2010 to 2040, with the bulk of the growth in non-OECD countries. Unfortunately, only modest growth is forecast for sub-Saharan Africa, which suffers from severe energy poverty. Renewable energy and nuclear power are projected to be the fastest-growing sources to 2035, each increasing at 2.7% annually, but fossil fuels continue to dominate, with natural gas growing faster than coal.
The EIA’s World Energy Outlook includes a New Policies Scenario, taking account of present commitments and plans, including climate targets and phasing out of fossil fuel subsidies. This shows a gradual decline in the number of people without electricity, but a much smaller net fall in those without clean cooking facilities. Present investments in the energy supply amount to over $1.6 trillion annually, with $130 billion going to energy efficiency and $250 billion to renewables. The IEA scenario sees the total rising to $2 trillion in 2035 with expenditure on energy efficiency going up to $550 billion. With all announced policies implemented, low-carbon technologies would account for almost three-quarters of investment.
Shale Gas and the Growth of Liquefied Natural Gas
For the most part, the increased supply of energy over the last two decades has been due to exploitation of shale gas. This depresses prices locally, but the gas can be liquefied and exported to regions where demand is high and prices higher. The EIA expects world LNG production to double to about 20 trillion cubic feet by 2040. Both China and India are expected to significant importers.
Implications of Fukushima
Since Japan is dependent on imports for most raw materials and primary energy sources, investment in nuclear power stations was a pragmatic choice. 30% of the country’s electricity came from nuclear reactors, but the entire fleet was shut down after the Fukushima earthquake in 2011. Electricity is now all supplied from coal, oil and LNG, with a consequent rise in CO2 emissions. Germany has also seen a rise in emissions as coal stations are being used to replace the base load lost when nuclear stations were closed after the Fukushima disaster. In the long run, the Japanese government continues to support the use of nuclear energy, but in the meantime record amounts of coal are being used.
The Rise of Coal in China and India
In 2012, 41% of the world’s electricity was from coal, with China, Japan and India being the top three coal importers. Coal demand continues to increase and China alone accounted for 47% of global coal use in 2012. The EIA forecasts that coal will remain the second largest energy source globally due to the significant increases in use in China and India and other non-OECD countries.
Energy and Development
The importance of energy forms the core of the Growth theory linking economic growth and energy consumption: economic growth is driven by the use of more resources and the advances made by society in the 20th Century are closely related to the huge increase in energy consumption. Evidence can be found to support this and alternative hypotheses including two-way feedback between growth and energy use.
Energy and the Environment
Environmental and energy policies are fundamentally linked because of the inevitable environmental impact of energy use. At the global level, energy and climate change are strongly related. It is also urgent to decrease indoor and outdoor air pollution from fuel combustion and its impacts on human health and ecosystems.
Burning fossil fuels puts some 10 billion tonnes of CO2 into the air each year, plus a number of other pollutants and particulate matter. Despite a NIMBY attitude towards nuclear, it is one of the most environmentally sound sources of base load energy. Hydropower disturbs water flow and habitats, while the use of rare earth metals in solar and wind systems causes pollution at the mining and refining stages. All major forms of energy generation except for wind require large amounts of water, while there are numerous concerns over the use of both traditional and modern biofuels.
Target 1: Increase Access to Modern Forms of Energy to 100% of the Population (The ‘Zero Target’)
Household access to electricity and clean cooking facilities is considered by some to be a fundamental requirement for economic development, but there are still 1.3 billion people with no electricity and 2.7 billion without access to modern forms of energy. Only 31% of people in sub-Saharan Africa have access to electricity. Improved energy access helps to provide jobs, food, health services, education, housing, clean water and sanitation. The time savings achieved free children to attend school and allows women to generate income, so contributing to gender equality.
The costs of providing global access to modern cooking facilities has been estimated at $61 billion per annum, including the costs of fuel price support and grants for stove purchase, without which the target cannot be met. Assuming an oil price of $100 per barrel, achieving universal modern energy access via complete electrification would cost around $100 billion a year.
About 950 TWh of additional energy would need to be delivered by 2030, requiring an extra 250 GW of capacity. Welfare gains from household lighting alone in rural areas could be $0.15-0.65 per kWh; scaling this up for the total extra energy delivered would give benefits in the range $142-618 billion. Even based on more modest willingness to pay figures from Ghana, the total benefit would be $260 billion. Health benefits of providing modern cooking fuels would be the avoided morbidity and mortality from indoor air pollution, amounting to 41 million DALYS (Disability Adjusted Life Years). Valuing these in the range of $1,000-5,000 gives health benefits in the range $179-893 billion annually.
Overall, the total cost of achieving universal energy access would be $75-195 billion annually, for benefits of $321-1511 billion, giving benefit-cost ratios in the range 4.3-7.8.
Looking solely at universal electrification, costs have been estimated from as low as $14 billion to as high as $134 billion while the benefits are in the range $142-618 billion annually. Benefit-cost ratios then fall in the range 4.6-10.2.
For the provision of modern cooking facilities alone, a realistic cost is $61 billion annually, with benefits of $179-893 billion each year and a benefit-cost ratio of 2.9-14.7.
Target 2: Double the Rate of Energy Efficiency Improvement Globally
Improving energy efficiency, the ratio to GDP to energy use, is a popular policy tool presented as cost-saving, job creating and environmentally friendly. The EU’s target of 20% improvement in energy efficiency by 2020 is expected to save households up to €1,000 annually and create up to two million jobs by increasing competitiveness. China’s current Five Year Plan targets a cut of 16% in energy use per unit of GDP by 2015.
Improved efficiency can reduce prices, increase security and improve industrial competitiveness. The ‘negawatt’ argument – that conservation is much cheaper than expanding energy production capacity – cannot be overstated. Ultimately, EE programs are seen as “no regrets” policies that provide multiple benefits for the government, energy consumers and the environment. In developing countries, generation efficiency tends to be low, so that improvements can be made at moderate expense. Although energy access naturally takes priority over efficiency in least developed countries, efficiency can enable energy systems to reach more people.
Energy efficiency in the recent past has been growing at about 1.2% per annum, so doubling the rate implies a 2.4% annual fall in energy intensity, an increase of about 0.4% from the IEA’s current reference scenario to 2040. However, from 1971 to 2010, the arithmetic mean world energy intensity decreased by 1.07% each year. A doubling of this longer-term trend may be more technologically feasible, especially as the increasing convergence of energy efficiency implies certain physical limits.
The rebound effect may also be significant, with an improvement in energy efficiency not bringing about a proportional reduction in energy demand. From a developmental perspective rebound is in fact something that can be capitalized on to spur growth objectives since energy efficiency gains can increase consumption.
An additional factor is the energy efficiency gap, the unexploited economic potential for energy efficiency. This is partly because opportunities are fragmented, but also due to underpricing of energy and a number of other market failures.
The IEA puts forward a New Policies Scenario, in which EE investment quadruples from its present level to $550 billion towards 2035. Even more radical scenarios are presented, but it is unlikely that current economic trends and objectives would make these feasible.
There is evidence that each additional 1% improvement in energy efficiency increases GDP growth rates by 0.1%. If there were a 1% improvement in EE, combined GDP for OECD countries in 2030 would be $612 billion (1.78%) larger than projected. For a 2% improvement, it would reach 20% above the projected baseline by 2030.
The IEA estimated in 2006 a need for $3.2 trillion worldwide to double the rate of energy efficiency improvement, offset by the avoidance of $3 trillion in new supply investments. A global 2.5% efficiency improvement would save 97 EJ and return energy consumption to 2004 levels by 2030. At the industrial level, investments of $360 billion in energy efficient technology will be needed and lifetime savings in energy costs are estimated to be more than $900 billion.
In summary, for a cost of $3.2 trillion, doubling the rate of energy efficiency improvement would avoid $3 trillion in other infrastructure investment, benefit industry and consumers by $500 billion and make CO2 emissions reductions worth $25-250 billion annually by 2030. Benefit-cost ratios would be 2.4-3.0.
Target 3: Double the Share of Renewable Energy in the Global Energy Mix
The growth of renewable energy technologies is aimed at reducing global carbon dioxide emissions, but their output is intermittent (with the exception of large-scale hydro). The need for conventional backup and adapted transmission networks makes them relatively costly and makes net carbon benefits ambiguous. Subsidies and other inducements are extremely cost-ineffective and have not impacted emissions as hoped.
The International Renewable Energy Association (IRENA) analysed the costs and benefits of doubling renewable energy capacity, although there are significant limitations to the study. The annual costs of achieving this target are $448 billion if fuel cost savings are included, or $580 billion if not. The additional use of renewable energy could displace 8.6 gigatonnes of CO2, with a value of $415 billion each year. There would also be savings of $200 billion through reduction in indoor and outdoor air pollution. Benefit cost ratios for this target are in the range 0.72-0.92.
Target 4: Phasing Out Fossil Fuel Energy Subsidies
Since 2009, the G20 has made commitments to rationalize and phase out inefficient fossil fuel subsidies. This could simplify the tax system, produce efficiency gains, reduce trade distortions, and help meet environmental goals. Subsidies have been shown to encourage wasteful consumption, exacerbate energy price volatility, encourage smuggling and undermine the competitiveness of renewables.
The European Union has a goal of phasing out subsidies for uncompetitive coalmines by 2018. Germany has traditionally subsidised hard coal mining. However, Germany has numerous other exemptions from energy taxes that are not deemed inefficient. The main subsidies in the United Kingdom are a partial offsetting of petroleum revenue tax for oil and gas producers and a lower VAT rate for domestic consumers. Sweden has extremely ambitious environmental and climate policies and is in the process of phasing out remaining subsidies to users of fossil fuels. Their experience shows that loss of competiveness and carbon leakage can both be mitigated by gradual change. In all cases, economic effects are marginal.
Energy services are often heavily subsidized in developing countries so that the costs of (often imported) energy be affordable to their citizens. Subsidies are targeted at the poor but frequently miss their goal entirely, benefiting the middle and upper classes most. Moreover, they are a heavy burden on the public purse. Although the global case for subsidy elimination is clear, it can be less so for developing countries. The wealthiest 20% benefit most from subsidies, while the poorest 20% would be hardest hit by reform.
Overall the total benefits are at least $600b-$750b per year, plus non-quantifiable benefits from health improvements and emission reductions. The costs are mainly administrative, as well as distributional impacts to the poorest, but these can be mitigated through appropriate revenue recycling. Benefit-cost ratios are likely to be greater than 15 with proper revenue recycling.
Target 5: Provide Access to Modern Cooking Fuels to 30% of the Population Currently Using Traditional Fuels
The complexity of achieving universal energy access may prove its undoing, so this may prove a more fruitful avenue. By 2030, 2.7 billion people are expected to rely on traditional solid fuels, leading to 1.9 million deaths, disproportionately among women and small children.
Switching 30% the current users of traditional fuels to liquefied petroleum gas would have total economic benefits of $54b-$268b a year (mainly related to time saving and health-related productivity) for costs of $11 billion for a benefit-cost ratio of 4.8-23.9.
Target 6: Doubling Investment in R&D in Energy Technologies
Research, development and demonstration (RD&D) of advanced technologies will be crucial to meeting future energy challenges. Although energy R&D is forecast to increase 4.8% to $22 billion globally in 2014, this is only approximately 1.4% of total global R&D and 0.02% of gross world product. In countries that remain highly dependent on fossil fuels, fossil fuel R&D is found to be more important for economic growth than fossil fuel consumption. Energy R&D has numerous potential co-benefits beyond GDP growth, including spillovers into other sectors, employment and environmental benefits in the short run (2030) as well as the expectation of technological breakthroughs to address long-term issues. BCAs have been estimated to be in the range 2-30.
Target Recommendations for Post-2015
Our analyses suggest that Providing Access to Modern Cooking Fuels to an additional 30% of the Population and Doubling Investment in R&D in Energy Technologies as well as Phasing Out Fossil Fuel Subsidies should be the top priorities for a Post-2015 development agenda. Universal electrification, energy access and access to modern cooking facilities are all valuable targets but the universality implies increasing costs at the limit and thus suggests a more restrained target would result in greater benefit-cost ratios. Until the low-carbon energy sources solve the issues of intermittency and storage, energy access will be shaped primarily by fossil fuels.