Towards Sustainable Energy Conversion: An Overview

By David Anstey

A primer on the transition to low-carbon energy and its effect on economic performance.

The widespread use of fossil fuel has transformed productivity over the last 150 years, bringing prosperity to billions. But now there is a problem. The vast flow of cheap fossil fuel energy that currently powers over three-quarters of the global economy is no longer sustainable. Low-cost reserves are being depleted, and there are mounting concerns about the cumulative effect of fossil fuel emissions on the environment. As a result, this vital source of power will have to be substantially replaced over the next few decades.

What happens when you replace such a productive energy platform? This book investigates the likely economic consequences, taking into consideration the scale of the task, the productivity of low-carbon substitutes and the disruption of fossil fuel energy. It highlights the cost and displacement pressures involved, but also shows how these will be offset to some degree by ongoing improvements in the overall efficiency of energy conversion.

Finally, it charts the likely course of this transition and its effect on economic performance over time, taking into account the dynamic interactions between suppliers, consumers, policymakers and investors; as well as the role of factors such as scale, network effects, know-how and technology.

• Language: English
• Publisher: Useful Energy Pty Ltd
• Release date: Apr 30, 2019
• ISBN: 9781925786590

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Copyright

Preface

This book is designed to serve as a primer on:

The role of energy conversion in economic performance.

The likely economic effects of transition to a lower-carbon mix of energy.

Energy has to be in a specially ordered form to power most kinds of work. As this degree of order does not occur naturally, available sources have to be converted into the appropriate forms—such as gasoline at the pump, or electricity at the plug. These specially tailored forms are collectively referred to here as useful energy, insofar as they power useful work.¹ Only useful energy has economic value; and this value, in turn, is determined by the value of the work it performs.

The term energy conversion refers to the entire process by which natural sources of energy are converted into work. In other words, it covers both the production of useful energy and the ways in which it is used to power work.

Advances in the sourcing and conversion of energy have played a major role in our economic progress. Early examples include changes in diet, the use of fire, the use of basic tools, and improvements in communication (which allowed for more effective coordination of effort within groups). Later on, agricultural settlement delivered surpluses of food that allowed us to diversify into new modes of production. The domestication of draft animals also increased the muscle power available for work, and the employment of more sophisticated tools afforded us the benefit of greater leverage, making it possible to get more work from the same level of exertion. In addition to this, the development of converters that harnessed new sources of energy for specific kinds of work (such as charcoal furnaces, sails, water wheels and wind mills) opened up new possibilities in production and trade.

All these innovations led to increases in the scale and efficiency of energy conversion during the pre-industrial era. However, the scope for economic growth and development was limited by the supply of fuel. Most of the mechanical work was powered by manual labour and draft animals (in other words, it was muscle-powered), while most thermal work was powered by burning wood. As muscle power is ultimately fuelled by crops and pasture, and fuelwood has to be procured from forests, the potential for work was limited by the amount of fuel that could be grown (Wrigley 2010, Ch 1).

Then came the Industrial Revolution, in which fossil fuel progressively replaced crops, pasture and wood as our principal source of useful energy. This opened the way for significant advances in energy conversion.

For example, coal had the necessary attributes to power the First Industrial Revolution during the nineteenth century—it had high energy density, it was relatively cheap and it was abundant. New technologies were developed to harness these advantages, such as the coal-fired furnace and the steam engine (together with the machinery it activated). The employment of these new converters led to an increase in productivity. Moreover, this increase was sustained as they were more widely employed, and also as they became more powerful and more fuel efficient.

Thus, a source with sufficient energy density called forth new converters, and improvements in the efficiency of these converters, in turn, helped consolidate and extend the role of the new source. As the source was also abundant at the time, the combination of increasing fuel consumption and increasing conversion efficiency was able to sustain the growth in production.

New fossil fuel converters such as the steam turbine generator, the internal combustion engine and the gas turbine engine added impetus to this dynamic and sustained it right through the twentieth century (in the Second Industrial Revolution). The ability of these new technologies to convert growing volumes of fossil fuel with increasing efficiency transformed the productive power of economies, bringing prosperity to billions.

As a result, the world economy is now well over 100 times larger in real terms than it was when the Industrial Revolution was getting underway two centuries ago (DeLong, 1998, adjusted for subsequent growth). Behind this mid-range estimate is a 6-fold increase in the world population and a more than 15-fold increase in global average real GDP per capita.² This leap in productivity, and the surge in population and prosperity it made possible, contrasts with the preceding pre-industrial millennium of comparative economic stasis, when societies laboured under the constraints of an organic economy—one in which the supply of principal fuels (crops, pasture and wood) was limited by the availability of suitable land and the rate of photosynthesis.

But escape from these traditional limitations came at a price, in the form of a deepening dependency on fossil fuel as our chief source of energy—fossil fuels currently provide 80% of the global economy’s primary energy needs (International Energy Agency: World Energy Outlook 2018, Table 1.1).³ And now there are problems with this source. To begin with, low-cost reserves are being depleted, which is placing production costs and yields in the energy sector under pressure. Advances in extraction techniques have helped to offset these pressures, but they cannot remove the underlying cause—which is that fossil fuels are a finite, non-renewable and non-recyclable resource that is being depleted by use. Overall yields in the production of crude oil and natural gas have declined over recent decades. Only the coal industry has managed to sustain high production yields so far, mainly by switching to large-scale open-cast mining.

Although new extraction techniques have increased the reserves of oil and gas by extending economic access to unconventional deposits (and also by extending the economic life of depleted fields), the cost of extraction from these additional reserves is generally higher, so investment yields are lower. A good example of the long-term effect of depletion on production yields is found in the US oil industry. According to one study of net energy yields, investment of the energy equivalent of one barrel of oil used to yield as much as 100 barrels of crude oil in the early 1900s.⁴ By 1954 this was down to 24 barrels, and by 2007 it was down to 11 barrels (Guilford et al. 2011, pp. 1866–1877). Net energy yields from unconventional deposits in shale and deep-sea beds are even lower—ranging between 4 and 7 barrels. Overall net energy yields in the industry are expected to continue falling as the contributions from these new sources increase. The trend to lower net energy yields is also apparent in the global oil industry, although it is not as advanced as in the US.

Declining energy yields lead to higher production costs and lower investment yields in the energy sector. This, in turn, creates cost and displacement pressures in the wider economy.⁵ The problem is not so much that we are running out of oil, but rather that we are running out of cheap oil—the stuff that keeps production costs in the economy low. In real terms, the cost of oil today (at $60 per barrel) is over three times higher than it was prior to 1970.

A more pressing problem with fossil fuels is that the carbon dioxide (CO2) they emit when burned is contributing to an increase in the stock of CO2 in the atmosphere and the oceans. Basically, the growth in these emissions has outrun the capacity of the environment to recycle them, with the result that atmospheric concentrations are rising. As CO2 is a greenhouse gas, this is causing global temperatures to rise. The risk is that if CO2 concentrations are not stabilised, the ongoing rise in temperatures will affect the climate in ways that damage the global economy.

At this stage, CO2 emissions from our use of fossil fuel are running at around 33 billion tons per annum (over 1,000 tons per second). While this is small in the context of the overall global carbon cycle, it has become large enough to create an imbalance in the flows of CO2 within it. This imbalance in the flow is accumulating as an additional stock of CO2 in the atmosphere. Fossil fuel emissions represent nearly two-thirds of the estimated total of 50 billion tons (CO2 equivalent) of greenhouse gases emitted each year by the world economy (Stern 2015, Ch 1.4; IEA WEO 2018, Table 1.1.).

These are vast quantities, but such has been the extraordinary growth in global fossil fuel consumption—up more than 80-fold over the last 150 years, and up more than 12-fold over the last century.⁶ It is difficult to accept that this might now be affecting our biosphere. Yet this seems to be the case, now that we are collectively consuming fossil fuel at the rate of over 350 tons of oil equivalent energy per second (IEA WEO 2018, Table 1.1).

There is now broad scientific agreement that the current level of CO2 emissions from fossil fuel will have to be substantially reduced over the next two to three decades to stop global temperatures from rising to levels which can potentially cause significant economic damage. This means we will have to replace the majority of our current fossil fuel energy with lower-carbon substitutes within that timeframe.

The subject of energy conversion has thus become topical because we are embarking on a transition away from our chief source of energy. The challenge in this is that fossil fuel energy (without carbon abatement) is still our most cost-efficient source. Why else would it be so dominant? Furthermore, the vast majority of work in our economy is currently performed by technologies that were developed to convert fossil fuel energy—industrial furnaces, turbine generators, internal combustion engines and jet engines. All of these have been refined to a very high degree of efficiency. So, we are seeking not only to replace fossil fuel as a source, but also the entire fossil fuel energy-conversion platform, with all its specific technologies and bespoke infrastructure (not to mention sunk costs).

There can be little doubt that this transition is now underway. Take electricity—the fastest growing form of useful energy—where there has been a concerted attempt to increase the share of generation from noncarbon sources over the last couple of decades. Annual global investment in noncarbon renewable energy (RE) capacity has increased over 6-fold since 2000 and has accounted for over two-thirds of total global investment in generating capacity since 2011 (IEA World Energy Investment 2017, figure 1.12). In contrast, investment in fossil fuel capacity has dropped from half to a quarter of global investment in generating capacity since 2000.

However, this marked shift in investment profile is taking time to show through in share of generation. RE’s share of global generation has only moved up by around 6 percentage points since 2000—from 19% to 25% in 2017. Moreover, this has been offset by a 6 percentage-point decline in the share of nuclear power—from 17% in 2000 to less than 11% in 2017 (IEA WEO 2018, Table 1.4). The share of hydro power has remained the same over this period (at around 16%). The bottom line is that, notwithstanding the increased share of investment in noncarbon generation since 2000, the overall share of global electricity supplied from noncarbon sources remains exactly the same 17 years later, at 35%. By the same token, fossil fuel has retained its share at 65%.

Furthermore, much of the investment in RE capacity requires subsidy, as the fastest growing forms of RE generation—wind and solar power—are not yet commercially competitive with incumbent fossil fuel generation. New capacity in nuclear power also remains uncompetitive, mainly due to safety considerations. Measures to contain emissions from fossil fuel energy (such as carbon capture) have also proved too expensive to be commercially viable in most instances. Biofuels in transport also require subsidy, for the same reason. The current cost gap between these low-carbon substitutes and incumbent fossil fuel energy is due to factors such as lower energy density, lower conversion efficiency, limited scalability, lower quality of supply (for instance, due to intermittency in wind and solar power) and higher capital requirements due to distance from markets or for safety reasons (in say, nuclear power).

However, we should not lose sight of the powerful cost dynamics in some noncarbon technologies. For instance, significant cost reductions have been achieved in wind and solar power. According to the IEA, the levelised cost of electricity from onshore wind (in the US) has fallen by 40% and that from utility scale photovoltaic solar power (in China) by more than 60% since 2011 (IEA WEI 2017, Figure 1.18).⁷ The longer-term progress in solar PV has been remarkable, with panel costs per watt of capacity down over 99% over the last 40 years (Goodall 2016, Ch 1). This certainly demonstrates the capacity of technology and the experience curve to surprise.⁸

As a result, wind and solar power now appear more or less competitive with fossil fuel power on a levelised cost basis. However, this measure does not take into account the additional costs associated with the intermittent nature of their supply. And while they have grown rapidly over the last couple of decades, they still only make a small contribution, supplying around 6% of global electricity in 2017 (IEA WEO 2018, Annex A, p. 528). This represents less than 2% of global useful energy, given that electricity currently supplies 27% of the world’s useful energy (IEA WEO 2018, Figure 7.10).

Hydro power is the showcase for noncarbon energy. It is already cost competitive and it also makes a worthwhile contribution (16% of global electricity supply). However, the scarcity of remaining sites suitable for development limits its potential as a substitute. In order to replace fossil fuel energy in the supply of electricity, substitutes will have to increase their share of a growing market.

Other noncarbon candidates such as nuclear power and biofuels have not achieved the same degree of progress on costs as wind and solar power, and therefore remain uncompetitive with fossil fuel energy. Thus, at this stage, a cost gap continues to exist between incumbent fossil fuel energy and the most scalable noncarbon substitutes (wind, solar, nuclear and biofuels).

In reality, however, this gap and the corresponding need for subsidy is smaller than might be expected on the face of it. This is because fossil fuel energy itself is effectively subsidised in most countries, to the extent that they do not charge for the social cost of the CO2 it emits. As explained, these emissions are increasing the concentration of CO2 in the atmosphere, causing global temperatures to rise. If they are not substantially reduced, then global temperatures will continue to rise, eventually to levels that can potentially cause significant economic damage.

As there seems little chance of avoiding at least some degree of economic damage from this source, policymakers have to consider the trade-off between future damage and the near-term costs of limiting it. In other words, there are two costs in the climate policy equation: the cost of damage and the cost of limiting it. The policy objective should therefore be to minimise the sum of these two costs. However, devising and implementing a least-cost policy such as this is easier said than done, given the complexities and uncertainties involved in the evaluation of costs and benefits.

One point of agreement in the debate (at least among economists) is the benefit of a universally-applied carbon price, either in the form of a tax on emissions, or as a cap and trade scheme in which the quantity of allowable emissions is limited through the issue (or auction) of permits that can then be traded (Nordhaus 2008 and 2013). This is considered the most efficient way of reducing carbon emissions. It corrects the market’s failure to charge for the social cost of emissions, thereby removing a negative externality. In the process, it delivers a pricing structure that penalises heavy emitters, rewards energy efficiency and conservation, and encourages investment and innovation in noncarbon energy. It harnesses the allocative power of markets, ensuring that all economic choices, by both producers and consumers, are informed by prices that reflect the social cost of emissions. It is relatively simple to administer (either as a tax or trading system), and it provides the best chance of maximising participation (in the form of a standard global carbon price). This last point is important because the level of participation is a crucial factor in the overall cost and effectiveness of abatement policy (Nordhaus 2008, Ch 6). Finally, the revenues it raises, either as a tax or from the auction of emission permits, can be used to further promote the transition (for instance, by supporting research and development) and also to compensate those worst affected by it.

The actual price of carbon should reflect the marginal social cost of emissions—in other words, it should reflect the present value of economic damage caused by each incremental ton of carbon emitted. At the moment, there is no way to calculate this accurately, given the present uncertainty about key relationships between emission levels, atmospheric concentrations, changes in temperature and the resultant economic damage. Moreover, as the damage is incurred well into the future, some form of discount has to be applied before it can be properly compared with the near-term cost of avoiding it.

Notwithstanding these impediments to precision and accuracy, the argument for a universally-applied carbon price is compelling. Unfortunately, it has proven politically impossible to implement in most countries so far, for a number of reasons: an aversion to new taxes and higher prices, insufficient information, a lack of future orientation, lobbying by vested interests and so on. (The carbon market in Europe is a noteworthy exception to this general rule.)

As governments have to confine their climate policies to those that are politically possible, most have resorted to selective programs of subsidy and regulation. While these have been politically easier to implement, they are partial in their coverage and effect. They are also less transparent, and more vulnerable to interference by local and national interests. Without comprehensive and systematic coverage, participation rates are low, and as a result the costs of adjustment are unevenly shared (free rider problem) and their effect on emission levels is limited. It should be no surprise, therefore, that global CO2 emissions from fossil fuels have continued to rise.

A final, crucial point needs to be made on the carbon price and the message it conveys. In the absence of a major acceleration in the replacement of fossil fuel energy, this price will most likely increase over time as the so-called carbon budget runs down and allowable emissions become increasingly scarce. The carbon budget refers to the remaining amount of CO2 that can be emitted before concentrations (and temperatures) reach levels associated with more uncertain and potentially more damaging outcomes. The scope for nonlinear responses in the climate and related economic damage increases beyond these threshold levels. In light of this, the cost of abatement might be viewed as an insurance premium that we have to pay in order to avoid the heightened uncertainty and potential for significantly greater damage beyond such tipping points.

The only scenario in which the stock of allowable emissions does not run down this way is the one in which emissions fall to levels that pose no risk to the climate. In other words, they fall sufficiently for atmospheric concentrations of CO2 to stabilise. (To achieve this, they would have to fall to levels at which there were no further net additions of CO2 to the atmosphere.) At this point they would no longer represent a negative externality and there would be no further need for a carbon price. Needless to say, we are currently nowhere near this point, as emissions are currently way above stabilisation levels.

Once we include the notion of a social cost of carbon (and a carbon price to reflect it), we have a simple framework in which to understand the current transition to noncarbon energy. If we have to pay a price for our carbon emissions, the cost of fossil fuel energy will increase. Moreover, it will continue to increase over time, along with the carbon price, as allowable emissions become increasingly scarce. This eventually leads to a situation in which the cost of fossil fuel energy exceeds that of noncarbon energy. At this point, noncarbon energy begins to replace fossil fuel energy without need of further inducement (subsidy, regulatory support and so on). In this respect, it can be considered as a backstop technology that will eventually replace the incumbent source of power.

To explain this a little further: a backstop technology is an alternative source of power. It is abundant, which means it can supply increasing amounts of power at a constant cost. However, this cost is initially higher than that of the dominant technology of the time. The basic dynamic is that the cost of the dominant technology rises, because it becomes scarce relative to growing demand, or (in the present case) because there are rising social costs associated with its use. At the same time, advances in the backstop technology are reducing its unit costs. Eventually, the cost of the dominant technology exceeds that of the backstop technology, which then begins to replace it. The previous transition to fossil fuel energy is a good example of this kind of dynamic (Allen 2009, Ch 4).

Of course, while optimal policies minimise the cost of transition, they do not remove it. A universal carbon price might be the optimal policy instrument, but it will still increase the overall cost of energy to society, especially while fossil fuels are the dominant source. And in the absence of a carbon price, energy costs are being increased by a raft of subsidies and regulations designed to reduce emissions. Either way, the cost of useful energy to society is going to be higher until such time as noncarbon energy becomes sufficiently cost-competitive to replace fossil fuel energy without the need for government support—whatever form it takes.

The basic problem with the current transition (from fossil fuel energy) is that governments are forcing the pace of replacement before noncarbon substitutes have become cost-competitive. This contrasts with the previous transition (to fossil fuel energy), when the commercial competitiveness of substitutes preceded and led the replacement process. Replacement back then was driven by the availability of lower-cost opportunities, whereas today it is being driven by concerns about climate change and is proceeding before lower-cost alternatives are available. The last transition lowered the cost of useful energy; the current one is increasing it (at least initially).

Transition to a higher-cost energy platform inevitably increases the cost of energy to end-users. It also lowers the underlying return on investment in the energy sector (to the extent that producers cannot pass on all the cost pressures they experience). Investment yields are further lowered by the fact that replacement, by its nature, adds to costs but not to productive capacity. Though in this respect it helps to some extent if replacement occurs in synch with a normal depreciation cycle.

Last but not least, the current replacement process will inevitably disrupt the giant fossil fuel industry, as loss of market share and duplication of capacity affect sales volumes and pricing power. So, yet another source of pressure on yields in the energy sector, especially while fossil fuels remain the dominant source.

When yields in the energy sector fall, more resources are needed to produce the same amount of useful energy. This causes displacement, as the additional resources required have to be diverted from the rest of the economy. Another way of saying this is that the transition imposes an opportunity cost on the economy, in the form of investment opportunities foregone in other sectors. This is the basis for the argument that the future benefits of transition (in the form of reduced damage from climate change) should be discounted at a commercial rate—because that is the rate of return on investment that is foregone when resources are diverted from elsewhere in the economy. The choice of discount rate is a crucial factor in the evaluation of transition policies, given that the benefits accrue in the relatively distant future. Such is the power of compound interest over long periods that it takes only a small change in the discount rate to have a major impact on the present value of those benefits.

We can conclude that the cost and displacement pressures involved in the current transition represent a serious economic challenge, especially given the enormous scale of the task. Global consumption of primary energy is over 25 times larger than it was at the start of the previous transition (to fossil fuels) two centuries ago (Smil 2010, Appendix; IEA WEO 2018, Table 1.1). Fossil fuels still supply 80% of this demand. In contrast, the most scalable noncarbon substitutes (wind and solar power, nuclear power, and biofuels) currently account for around 12% of global primary energy supply.

Thus, we are still in the early stages of an enormous undertaking: to reduce CO2 emissions to the point where atmospheric concentrations stabilise. As things stand, this will require a massive replacement program, costing several trillions of dollars (none of which will be adding to productive capacity). Without sufficient progress in low-carbon substitutes, we will also encounter increasing degrees of difficulty at each successive stage of the process. The first 20% reduction in emissions should be relatively easy to achieve. This largely involves the low-hanging fruit of savings through improved efficiency standards and more straightforward substitutions—such as replacing coal with natural gas in the generation of electricity. However, the next 20%, and the 20% after that, are where the real test lies. Replacement becomes especially difficult in applications where, as yet, there are no commercially (or, in some cases, even technically) viable substitutes for fossil fuel energy. In this respect, there will be some activities where the substitution of fossil fuel energy is expected to remain unviable for some time (such as in aviation and the manufacture of steel from iron ore).

At this stage, it appears that the central strategy for replacement involves the progressive electrification of economic activity (particularly in industry and transport), while at the same time progressively de-carbonising the supply of electricity. It will be interesting to see how deep into the replacement task this strategy can reach over the next couple of decades.

The initial commitments under the Paris Accord seem to be more or less in line with the first 20% or so reduction. This is not to say it will end there, but progress beyond this is going to rely on continuing advances in technology and a deeper commitment by the global community. Without sufficient progress in the right areas, we can expect cost and displacement pressures to intensify as the replacement process continues.

This creates the following predicament. Most economies have to keep growing to meet the needs and aspirations of those still on low incomes. As global economic growth and energy consumption are positively related, the demand for primary energy will also most likely keep rising.⁹ But this is at a time when the cost of useful energy is coming under pressure from the transition to lower-carbon sources. Societies therefore face some tough trade-offs between the competing objectives of economic growth and a more sustainable energy mix. This will remain the case until the new low-carbon platform becomes fully cost-competitive with the one it is replacing.

The main offset to transition pressures will be improved efficiency in all aspects of energy conversion. When the supply and cost of useful energy are under pressure, it makes sense to use each available unit as efficiently as possible (in other words, to do more with less). There is already a long history of success in this endeavour. For instance, most of the spectacular gains in productivity during the Industrial Revolution were due to advances in conversion efficiency (though, of course, it was the switch to fossil fuel energy that made most of these possible in the first place).

Hopefully, advances in the efficiency of energy conversion in general—and of noncarbon energy conversion in particular—will eventually remove transition pressures altogether. In this respect, governments have an important role to play in supporting research and development in the requisite innovations. Just as the unpaid social costs of CO2 emissions represent a negative externality, so the social benefits of innovations foregone due to lack of sufficient reward might be considered a positive externality (Nordhaus 2013, Ch 23). In some instances, the nature of research and development is such that without public support it is unlikely to occur. Costs may not be recoverable in the event of failure, or the rewards for success may not be sufficient due to non-excludability (Romer 1990). In other words, the rewards may not be sufficiently appropriable due to spillover effects. In such cases, governments should intervene to ensure that the required research and development is undertaken, especially where there is potential for worthwhile innovation in energy conversion.

Many of the best prospects for increased conversion efficiency reside in the continuing digital revolution. There certainly appears to be considerable potential for this in a wide range of production and consumption activities. It is safe to say that these and other improvements will continue to increase the overall payload efficiency of energy conversion, the broadest measure of which is GDP per unit of primary energy used.¹⁰

At some stage, the negative effects of this transition will end, as low-carbon substitutes become more competitive and also as the associated cost and displacement pressures find their way into the base of economic performance. Beyond this point, the transition will proceed on a purely commercial basis, without need of government support. Furthermore, the overall cost of energy to society will peak (or at least plateau).

Of course, the aim is to reach this desired turning point with a minimum of economic pain. In this regard we have seen how the optimal (or least-cost) policy has been politically difficult to implement. It is worth repeating here that all an optimal policy can do is minimise the costs involved—it cannot completely remove them.

What are the likely social and political ramifications of this transition? The history of energy conversion during the human era is a chronicle of ingenuity and the prosperity it has delivered. It is argued here that never before has this kind of ingenuity been so needed, because never before has so much been at stake. To begin with, we should at least aim to maintain the current levels of prosperity achieved on the fossil fuel energy platform. Nobody is interested in moving back to a less prosperous situation. Then there is the issue of inequality, given that not everyone is participating to the same extent in the current prosperity. In fact, two-thirds of humanity remain on low incomes. In particular, there is an obligation to meet the needs of those still mired in poverty. This is what creates the imperative for continuing growth in most economies. The social and political costs of transition will thus depend on the extent to which the prosperity enabled and supported by low-cost fossil fuel energy can be maintained on an alternative noncarbon energy platform.

Another important factor with respect to the likely social and political costs of transition will be the extent to which current levels of prosperity are in the base of expectations and aspirations. Expectations are influenced by experience—by what we are used to, and by what we consider attainable. For example, when steam engines first appeared, expectations were informed by the experience of a pre-industrial economy. The vast increase in productive capacity delivered by coal-fired power and the prosperity this brought to so many over the following century was certainly not in the base of expectations when this transition to fossil fuel energy began. The same can be said of expectations at the start of the next century, when the internal combustion engine and distributed electricity were about to extend the fossil fuel-based revolution in energy conversion, once again transforming productivity and prosperity.

In this sense, we should consider the assertion that there is, as yet, no modern equivalent of the nineteenth century steam engine at the present time. In other words, there is no proven new technology in energy conversion that is capable of transforming productivity to the extent that the steam engine did in the nineteenth century, or that the internal combustion engine and distributed electricity did in the twentieth century—at least, not at this stage. This situation might change. Perhaps there will be some major breakthroughs in energy conversion that transform our economic possibilities. Many cite the acceleration in technology and its scope to surprise. Let’s hope they are proven right. It is wise to be humble when forecasting the impact of technology. However, we should also remember the periods in history when technology did not keep up with (let alone outpace) society’s needs or expectations.

As we will learn, there are plenty of ‘irons in the fire’ regarding new and improved technologies (including digital technologies)—all of which provide hope for the continued growth and spread of prosperity in the longer term. Still, there are no guarantees that these will deliver the necessary solutions within the timeframes required to deal with the climate problem in a cost-effective manner. The immediate challenge, in this regard, is to replace a well-established and proven system of energy conversion with one that is not yet as competitive in terms of cost and reliability. We must expect a degree of cost and displacement pressure from such a large and disruptive process. Resistance to what seems the most effective policy instrument (a global carbon price) will only prolong these pressures.

Thus, at the present time, we have a comparatively high level of prosperity, powered by an unsustainable energy platform. Indeed, it can be argued that the prosperity delivered by cheap and abundant fossil fuel energy is now largely in the base of economic performance—just when we need to replace it. This level of prosperity is also in the base of expectations and aspirations—perhaps even more so, given how, in a connected world, these are increasingly informed by living standards in rich economies. In this regard, the expectations and hopes of many communities may be on a collision course with the pressures of transition to a less productive energy platform (at least initially).

In order to properly assess the economic impact of this energy transition we need to consider the broader economic context in which it is occurring. In this regard, the initial conditions are challenging. The estimated costs of investment and subsidy required to move to a lower-carbon platform over the next 2–3 decades appear fairly manageable on the face of it, amounting to a few percent of global GDP and global investment. However, this is at a time when large budget deficits and high (and rising) debt levels in most economies indicate that they are straining to sustain themselves, let alone grow. Very low interest rates are another sign of economic fragility. The current high degree of inequality in the distribution of wealth and income is a further constraint, as large segments of society are not well positioned to weather any form of cost or displacement pressure.

Policymakers thus have the formidable task of balancing the competing objectives of continued economic growth and a more sustainable energy mix. The trade-off between these will be most pronounced when transition pressures are at their most intense. Systems-level planning, cooperation and coordination—both at a national and an international level—will help minimise the costs involved. Of course, the great hope is that continuing advances in conversion efficiency (particularly of noncarbon energy) will ultimately remove these pressures (sooner rather than later), which brings us back to the importance of research and development. Transition will be all the more difficult without the advances it might supply.

1 The term power is used here as a verb, and in this context it means to energise (or activate) the machines that perform work. When scientists and engineers use the term power they are usually referring to the rate at which energy is used to energise a work process—that is, the rate at which energy is converted to work. This is effectively the amount of work done over time, most commonly measured in watts (joules per second).

2 Real GPD growth over the period is greater still if the GDP deflator is fully adjusted for the benefits of new and improved goods and services.

3 Primary energy refers to the energy content of sources in their original extracted form, before any downstream processing—such as coal at the mine gate or crude oil at the wellhead. The 80% currently provided by fossil fuel comes from oil (39%), coal (33%) and natural gas (28%).

4 Net energy yield refers to the number of units of energy that are produced from the investment of one unit of equivalent energy.

5 Cost pressures arise when higher production costs are passed on to end users. Displacement pressures occur when investment yields in the energy sector fall. This is because the additional resources needed to maintain the required supply of useful energy (when yields are lower) have to be diverted from other sectors in the economy.

6 These growth estimates are based on figures for global fossil fuel consumption (in 1870 and 1920) provided in the Appendix of Vaclav Smil’s book Energy Transitions (2010), Praeger; and from Our World in Data . Recent figures (for 2017) are sourced from IEA: WEO 2018, Table 1.1.

7 The levelised cost of energy (LCOE) is a unit cost measure, based on the total lifetime cost of an energy project (construction, operation, maintenance and decommissioning) divided by the total amount of energy (in this case, electricity) it produces and sells over its