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Wednesday, October 8, 2014

Energy Limits To Growth: Krugman Vs. Buchanan

In "Slow Steaming and the Supposed Limits to Growth", Paul Krugman slams the article "Economists are Blind to the Limits to Growth", by Mark Buchanan, a physicist who writes commentary for Bloomberg. Krugman complains that Buchanan is following a view that is common in the hard sciences - that physicists know more about economics than economists. Although I am no fan of mainstream economics, I think this complaint is largely valid - most business cycle economists can get away without obsessing about the "limits to growth" imposed by physics. That said, based on the analysis laid out in Sustained Growth On A Finite Planet, I show why I disagree with both sides of the dispute.

Energetic Limits To Economic Growth 

The key argument in the Buchanan article is:

Data from more than 200 nations from 1980 to 2003 fit a consistent pattern: On average, energy use increases [link to paper] about 70 percent every time economic output doubles. This is consistent with other things we know from biology. Bigger organisms as a rule use energy more efficiently than small ones do, yet they use more energy overall. The same goes for cities. Efficiencies of scale are never powerful enough to make bigger things use less energy.

He linked to the article,  "Energetic Limits To Economic Growth", in the Oxford Bioscience journal (with 11 authors!). I only looked at that paper quickly, but I feel that the analysis misses the point for developed economies.

Firstly, the period 1980-2003 was an era of low energy prices (in inflation-adjusted terms). Since energy was relatively cheap and abundant (the peak in global oil production occurred around 2008), there is no reason to expect economies to substitute away from energy-intensive goods and services. Going forward, relative pricing will punish profligate energy use.

Secondly, the sample includes developing economies. A wide disparity in energy use is a key differentiating factor between the developed and developing economies. For an absolutely poor country, it would need to increase energy usage if the objective is to attempt to reproduce the standard of living of the middle classes of the OECD countries. Such hopes will crash into the brick wall of peak energy output, and so I am not too optimistic about these countries' prospects.

He also notes the following:

Then there's the issue of climate change. Even if by some miracle we act to fix carbon-dioxide levels soon, that won't actually be a lasting solution. If energy consumption follows the historical trend, by 2150 or so the waste heat alone will warm the Earth as much as carbon dioxide is doing now. 
Like some in the Peak Oil camp, I am not worried about those long-run scenarios about carbon dioxide production. Oil production has peaked already, and limits are in sight for other fossil fuels as well. For example, although the tonnage of "coal" being extracted in the United States is still rising, the energy value of extracted coal peaked in 1998. Very simply, miners are being forced to extract brown rocks with ever-decreasing carbon content, as all of the valuable high energy content ores have already been mined out. Correspondingly, it is safe to say that present carbon emission trends will not continue until 2150.

Slow Steaming

Paul Krugman's take on Buchanan's piece showed some annoyance with the hard science view of economics.

Buchanan says that it’s not possible to have something bigger — which is apparently what he thinks economic growth has to mean — without using more energy, and declares that “I have yet to see an economist present a coherent argument as to how humans will somehow break free from such physical constraints.”
Of course, he’s never seen such a thing because he’s never looked. 
Krugman takes the example of "slow steaming" - ships use much less energy if they travel at a slower speed. If you doubled the number of ships, but halved their travel speed, you would be able to ship the same amount of goods in a year but consume less energy (other than the sizeable energy investment needed to build the ships). Energy consumption is not completely fixed; it is partially the result of choices. Rising energy costs will weigh decisions towards using less energy, but society may be able to produce the same amount of stuff, even without taking into account new technologies.

Short Term Versus Long Term

In the short term, Paul Krugman appears correct. As I discussed in my earlier article, aggregate productivity will only take a small hit from the increasing difficulty of securing energy as a result of the small number of people working in that sector, But this will only hold as long as it is possible to substitute away from energy-intensive activities. Sooner or later, activities with large fixed energy usage - particularly industrial farming - will face some hard decisions.

And Krugman's example is somewhat telling - water transport is inherently efficient. (It takes less energy to ship a container across the Pacific than it takes the truck to drive it from the dock a couple of hundred miles inland.) And we have the technology to drop fossil fuel consumption for water transport to zero - the return of wind-powered clipper ships.

Unfortunately, Paul Krugman lives on a continent where pretty much the entire land-based infrastructure is built around road transport. (Rail is used for long haul bulk transport in North America, but it is a novelty with regards to carrying passengers.) Absolutely nothing is being done to remedy the dependence upon cheap gasoline and diesel fuel, and hoping for things like greater fuel economy runs into the problem of the massive energy cost of replacing the existing fleet of vehicles. Looking at the paralysis of modern politics, it is safe to say that nothing will be done until there is an obvious inability to supply the needed gasoline - which is what happened in the 1970s.

In other words, the physicists will only be able to say "I told you so" about energy limits when it is already too late to do much about the problem.

(c) Brian Romanchuk 2014

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