Unit 2 Technology and incentives

2.11 Capitalism + carbon = hockey stick growth + climate change

The Industrial Revolution marked the transition from an economy in which photosynthesis is the source of most energy, so that land is a constraint on growth, to an energy-rich economy based on fossil fuels. The switch to coal was a necessary condition for the Industrial Revolution. By 1800, replacing the use of the energy stored in coal in England by energy from living trees would have required the use of one-third of the surface area of the country. By 1913, British coal production was equivalent to four times its land area.

The benefits for the people of countries escaping the Malthusian trap are clear from the historically unprecedented increases in per capita income illustrated by the hockey sticks (Figure 1.1). But equally unprecedented has been the rise in surface temperature of the earth (Figure 1.2b). This threatening side-effect results from the particular combination of technologies and institutions that propelled the continuous technological revolution, which we summarize as ‘carbon plus capitalism’.

In an EconTalk podcast, Martin Weitzman argues there is a substantial risk of a catastrophe from climate change.

Carbon plus capitalism has brought unprecedented increases in material wellbeing to billions, but most of the people of the world remain poor by the standards of the higher income countries. Climate change induced by burning carbon means that an ongoing reduction in global poverty cannot be accomplished by the same carbon plus capitalism that accounted for rising income in the now-rich countries.

Capitalism plus carbon: End of the road?

For 100,000 years or more, humans—like other animals—lived in ways that modified the biosphere, but did not substantially and irreversibly degrade its capacity to support life on the planet. Starting in the eighteenth century, humans learned how to use the energy available from nature (burning carbon) to transform the production of goods and services. The capitalist economy made the technological revolution a continuous feature of our lives.

In many countries, workers’ power and wages were enhanced through extension of the vote, prohibition of slavery and hiring children, and organization into trade unions and political parties. (Figure 2.18 explains how this happened in Britain.) Their living standards rose.

But rising labour costs provided ongoing incentives for firms to adopt labour-saving innovations using non-human energy from fossil fuels—leading to an impoverishment of nature.

A degraded and threatened environment cannot be reversed by the same mechanism that created this affluence. In raising their wages, workers were their own advocates. Their success in improving their living standards—by gaining higher wages—made it profitable for owners of firms to adopt a pattern of technological change in which less labour was used relative to other inputs, including natural resources.

You could imagine that a similar process might raise the price of natural resources, leading to nature-saving technical change. But the biosphere does not have the vote. Soon-to-be-extinct animals cannot form unions or political organizations to protect their interests, and the profit incentives to save them are not clear.

New terms, new tools: Stocks and flows

To understand how the process of climate change could be contained, let’s consider the underlying scientific process.

Burning fossil fuels for power generation and industrial use emits CO2 into the atmosphere. Greenhouse gases such as CO2 allow incoming sunlight to pass through the atmosphere, but trap reflected heat on the earth, leading to increases in atmospheric temperatures and changes in climate. Some CO2 also gets absorbed into the oceans, increasing the acidity of the oceans and killing marine life.

A quantity measured at a point in time, such as a firm’s stock of capital goods, or the amount of carbon dioxide in the atmosphere. Its units do not depend on time. See also: flow.
A quantity measured per unit of time, such as weekly income, or annual carbon emissions. See also: stock.

The amount of CO2 in the atmosphere is called the stock, while the amount being added per year is called the flow. To better understand what the terms stock and flow mean, consider Figure 2.19. The stock of CO2 is the amount in the bathtub.

A flow is a measure based on a time period, like the number of tons of CO2 per year. CO2 emissions are an inflow that adds to the amount of atmospheric greenhouse gases, while the natural decay of CO2 and its absorption (for example, by forests) are outflows that reduce the amount.

A key fact of climate science is that global warming results from the stock. It’s what’s in the tub that matters. The flow matters only because it will alter the stock. Figure 2.20 illustrates the movements in the stock of atmospheric CO2 and annual temperatures.

In this diagram, the stock of atmospheric CO2 (which is the cause of climate change) is represented as water in a bathtub. CO2 emissions (effect of burning carbon) are represented as water flowing into the tub and absorption of CO2 (for example, by forests) is represented as water flowing out of the tub. Natural decay of CO2 is represented as water evaporating from the tub.

Figure 2.19 A bathtub model: the stock of atmospheric CO2.

The increase in the stock of atmospheric CO2 is occurring because the outflows (natural decay, and absorption by forests and other carbon sinks) are far less than the new emissions that we add annually. Moreover, deforestation in the Amazon, Indonesia, and elsewhere is reducing the CO2 outflows while also adding to CO2 emissions. Forests are often replaced by agriculture, which produces further greenhouse gas emissions—including methane from livestock, and nitrous oxide from fertilizer overuse.

In this line chart, the horizontal axis shows years, ranging from 1750 to 2019, the primary vertical axis shows temperature in degrees Celsius, measured as the deviation from the 1961 to 1990 average, ranging from negative 0.7 to 1.0, and the secondary vertical axis shows atmospheric carbon dioxide in parts per million. Between 1750 and 1900, the temperature deviation fluctuated between negative 0.6 and negative 0.2. From 1990 onwards, the temperature deviation increased to reach a peak of 1.0 in 2019. Atmospheric carbon dioxide increased steadily from 280 parts per million in 1750 to 410 parts per million in 2019.

Figure 2.20 Global atmospheric concentration of carbon dioxide and global temperatures (1750–2019).

Pieter Tans, NOAA/GML, and Ralph Keeling, Scripps Institution of Oceanography. 2022. Trends in Atmospheric Carbon Dioxide; D. Gilfillan, G. Marland, T. Boden, and R. Andres, R. 2021. Global, Regional, and National Fossil-Fuel CO2 Emissions. Carbon Dioxide Information Analysis Center (CDIAC) Datasets. Accessed: September 2021.; Michael E. Mann, Zhihua Zhang, Malcolm K. Hughes, Raymond S. Bradley, Sonya K. Miller, Scott Rutherford, and Fenbiao Ni. 2008. ‘Proxy-based reconstructions of hemispheric and global surface temperature variations over the past two millennia’. Proceedings of the National Academy of Sciences 105 (36): pp. 13252–13257.; C. P. Morice, , J. J. Kennedy, N. A. Rayner, and P. D. Jones. 2012. Quantifying uncertainties in global and regional temperature change using an ensemble of observational estimates: The HadCRUT4 dataset. Journal of Geophysical Research 117. D08101, doi:10.1029/2011JD017187. Note: This data is the same as in Figures 1.2a and 1.2b. Temperature is average northern hemisphere temperature.

The natural decay of CO2 is extraordinarily slow. Of the carbon dioxide that humans have put in the atmosphere since the mass burning of coal that started in the Industrial Revolution, two-thirds will still be there a hundred years from now. More than a third will still be ‘in the tub’ a thousand years from now. The natural processes that stabilized greenhouse gases in pre-industrial times have been entirely overwhelmed by human economic activity. And the imbalance is accelerating.

A future without fossil fuels

The GDP hockey sticks in Unit 1 tell a powerful story of the entry of country after country onto the path of continuously rising average living standards—and of the many countries that have not yet experienced the transition to broad-based growth. The production of energy is currently responsible for 87% of global greenhouse gas emissions. For the 85% of the global population who live below the level considered poor in a high-income country, is a fossil fuel-based transition to that standard of living in their future?

The evidence from climate science says that the growth in world production that would be required to raise incomes this much (estimated to be more than four times the size of today’s total output) will have to be based on renewable energy combined with reduced energy input per unit of consumption.

Visit Our World in Data to read more about the world’s two energy problems.

How quickly this happens and at what cost depends critically on the policies that governments pursue; and these differ across countries. Figure 2.21 shows the link between rising living standards and CO2 emissions: countries where GDP per capita is higher tend to have higher CO2 emissions as well. This is to be expected because greater income per capita is the result of a higher level of production of goods and services per capita, involving greater use of fossil fuels. The upward-sloping ‘line of best fit’ shows the average emissions per capita for each level of GDP per capita. Low emissions by low-income countries signal energy poverty, not green energy or energy conservation.

But even among countries with similar per capita income, some emit much more than others. Compare the high emissions in the US, Canada, and Australia with the lower levels in France, Sweden, and Germany. Norway and Switzerland both have higher per capita incomes than the US but emit half as much CO2.

This suggests that it is possible to organize production to offset, in part, the tendency for increased emissions as income rises. In low-emitting countries like France and Sweden, a substantial share of electricity is generated by non-fossil fuel sources (92% and 99% respectively) and petrol prices are much higher than in the countries with high emissions like the US and South Africa (above the line). For the poor countries on the left of the figure, their move to higher incomes needs to be a more nearly horizontal one rather than along the ‘line of best fit’.

A transition to low-carbon electricity could occur simply by governments ordering it, but it would be more likely to happen—either by government order or by private decisions—if the energy from these sources is cheaper than from fossil fuels. Until well into the twenty-first century, electricity generated from renewables was far more expensive than from fossil fuels. Even in the absence of a carbon tax which will—as intended— raise the price of fossil fuel-based energy, prices have changed dramatically more recently. In most parts of the world, power from new renewable facilities is cheaper than from new fossil fuel ones.

In this scatterplot, the horizontal axis shows GDP per capita in 2018 measured in PPP constant 2011 international dollars, ranging from 0 to 80,000, and the vertical axis shows metric tons of carbon dioxide emissions per capita in 2018, ranging from 0 to 25. Data for all countries in the world are shown, with an upward-sloping line of best fit that starts at the origin. China, South Africa, Russia, Kazakhstan, Japan, Canada, Australia, Bahrain, Oman, the UAE, and the US are above the line of best fit, while Brazil, Uruguay, Spain, France, the UK, Germany, Sweden, the Netherlands, Switzerland, Norway, and Singapore are below the line of best fit.

Figure 2.21 Carbon dioxide emissions are higher in richer countries.

The World Bank. 2021. ‘World Development indicators’.; EPI. 2018. ‘Environmental Protection Index 2018’. Yale Center for Environmental Law and Policy (YCELP) and the Center for International Earth Science Information Network. Note: Three small very high-income countries (Kuwait, Luxembourg, and Qatar) are not shown.

The collapse in the price of renewable electricity generation since 1976 is illustrated vividly in Figure 2.22 by the data on the cost of photovoltaic cells for producing solar energy. This chart uses a different scale from other charts so far: it is a ratio (or equivalently, logarithmic) scale. Each step up the vertical axis corresponds to a doubling of the price, and each step along the horizontal axis multiplies the installed capacity by ten. The data points form close to a straight line: its slope tells us that a 10-fold increase in capacity roughly halves the cost.

In this scatterplot, the horizontal axis shows the cumulative installed solar PV capacity in megawatts, and ranges from 0 to 1,000,000. The horizontal axis is in ratio scale, with each increment being ten times the previous increment. The vertical axis shows solar PV module cost in 2019 US dollars, and ranges from 0.25 to 128. The vertical axis is in ratio scale, with each increment being twice the previous increment. The data is given in the following order: (year, cumulative capacity, cost). (1976, 106.1, 0.3) (1977, 80.6, 0.85 (1978, 56.2, 1.8) (1979, 47.7, 3.3) (1980, 35, 6.5) (1981, 26.5, 12.5) (1982, 22.3, 20) (1983, 19.1, 43) (1984, 17, 67) (1985, 14.9, 90) (1986, 11.1, 120) (1987, 8.5, 150) (1988, 7.5, 175) (1989, 8.2, 220) (1990, 8.8, 270) (1991, 8, 330) (1992, 7.2, 400)	(1993, 7.1, 450)	(1994, 6.4, 500) (1995, 5.8, 575) (1996, 6, 700) (1997, 6.4, 800) (1998, 5.7, 975) (1999, 5.1, 1250) (2000, 4.9, 1500) (2001, 4.8, 1750) (2002, 4, 2300) (2003, 4, 3000) (2004, 4.1, 4300) (2005, 4.2, 6000) (2006, 4.5, 8500) (2007, 4.1, 10300) (2008, 3.4, 20000)	(2009, 2.4, 30000) (2010, 2, 40279) (2011, 1.7, 72034)	(2012, 0.9, 101518)	(2013, 0.7, 135754)	(2014, 0.6, 171589)	(2015, 0.6, 217341) (2016, 0.6, 291079) (2017, 0.5, 383596) (2018, 0.4, 480984)	(2019, 0.4, 578553).

Figure 2.22 The price of photovoltaic cells (1976–2019).

F. Lafond, A. G. Bailey, J. D.Bakker, D.Rebois, R. Zadourian, P. McSharry, P., and J. D. Farmer. 2017. ‘How well do experience curves predict technological progress? A method for making distributional forecasts’.; International Renewable Energy Agency (IRENA) Resource. 2020. Global solar PV installed capacity and solar PV model prices.

Concentrating on the last ten years, Figure 2.23 compares the changes in the costs of generating electricity using renewables and fossil fuels. As we have discussed in this unit, it is the relative price of electricity generation over the lifetime of the power plant that affects decisions to switch to a new technology: the changes in ranking of wind, and especially solar (from the most expensive to the least) mean that by 2019, 72% of all new additions to capacity worldwide have been in renewables.

It was government policies that initiated the exponential technological improvement in solar energy illustrated in Figure 2.22. Similarly rapid innovation characterized wind energy and lithium-ion batteries. The combined effect of government interventions and competitive markets drove progress. For example, subsidies for solar energy began in the 1970s in several countries including Japan, Germany, the US, and China. The schemes created incentives for energy providers to use solar and private companies to compete for market share. Equally important was government research funding (mainly in the US) leading to scientific advances that were applied to develop new solar cell materials and panel designs more efficient at converting sunlight to electricity.

In this line chart, the horizontal axis shows two years: 2009 and 2019. The vertical axis shows the price of electricity in dollars per mega Watt per hour. The cost of generating electricity from different sources has changed over time. For each source, the first cost given was in 2009 and the second cost given was in 2019. Gas peaker: 275 dollars, 175 dollars. Nuclear: 123 dollars, 155 dollars. Solar thermal tower: 168 dollars, 141 dollars. Coal: 111 dollars, 109 dollars. Gas (combined cycle): 275 dollars, 175 dollars. Onshore wind: 135 dollars, 41 dollars. Solar photovoltaic:359 dollars, 40 dollars.

Figure 2.23 The price of renewable and non-renewable energy sources in 2009 and 2019.

The technological progress in renewables is a sign that a path to higher living standards without fossil fuels may be possible. But whether this is feasible on the scale required both to arrest climate change and make a serious dent in global poverty is doubtful.

What is not in doubt is the need to decouple growth from environmental destruction. The case of Sweden illustrates that this can happen. Figure 2.24 shows how GDP per capita has grown since 1995 alongside a decline in per capita energy use—whether measured by domestic energy use, or by a trade-adjusted measure that subtracts energy used to produce exports and adds energy used to produce imported goods.

In this line chart, the horizontal axis shows years from 1995 to 2020. The vertical axis shows the percentage change since 1995 of GDP per capita, domestic energy use per capita and consumption-based (trade adjusted) energy use per capita in Sweden. By 2020, GDP had changed by 52%, whereas both easures of energy use per capita had changed by negative 10%.

Figure 2.24 Changes in energy use and changes in GDP per capita in Sweden (1995–2019).

K. Stadler, R. Wood, T. Bulavskaya, T., et al. 2018.‘EXIOBASE 3: Developing a time series of detailed environmentally extended multi‐regional input‐output tables’. Journal of Industrial Ecology 22 (3): pp. 502–515.

Exercise 2.14 Global poverty

According to Our World in Data, the minimum necessary growth in world production that would reduce global poverty to the level of poverty in Denmark is 410%, meaning that the size of the global economy would have to quintuple.

Use the Our World in Data article containing this estimate to answer the following questions.

  1. Why did the author of the article choose Denmark?
  2. The section ‘How do living standards in Denmark and a poorer country compare?’ contains a chart that compares the living standards in Ethiopia and Denmark. Choose another country and use the World Bank’s Poverty and Inequality Platform to calculate the percentage of the population in that country who live on less than $30 per day, less than $20 per day, less than $10 per day, and less than $1.90 per day (using 2017 data). (Hint: To access data for a particular country, enter the country’s name into the text box at the top of the page, and use the slider to change the poverty line.)
  3. The article states that this estimate (410%) is the minimum amount that global GDP would need to increase. Explain why. (Hint: you may find the section ‘In which ways does a realistic scenario differ from the minimum scenario?’ helpful for this question.)

Exercise 2.15 GDP per capita and energy use

Choose three to five countries from this list: Australia, Austria, Belgium, Brazil, Bulgaria, Canada, China, Croatia, Cyprus, Czechia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, Mexico, Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, South Africa, South Korea, Spain, Switzerland, Turkey, United Kingdom, United States.

Use this Our World in Data visualization (on which Figure 2.24 is based) to view the GDP per capita and energy usage data for each of your chosen countries. Use this data to answer the following questions:

  1. For each country, describe how GDP per capita, domestic energy use per capita, and consumption-based energy per capita change over time.
  2. For which of your chosen countries does GDP per capita tend to move in the same direction as domestic or consumption-based energy use per capita? For which of your chosen countries does GDP per capita tend to move in the opposite direction?
  3. Suggest some reasons for your answers to Question 2. It may help to do some internet research on the kinds of policies that your chosen countries have adopted.

Exercise 2.16 Environmental quality and economic growth

Consider the labelled countries above the line of best fit (‘group I’) in Figure 2.21 and those below it (‘group II’).

  1. Explain in your own words what it means for a country to be in group I rather than in group II.
  2. What characteristics about the countries and the way they are governed do you think might explain their membership of group I or group II, respectively?
  3. Choose one country in each group. Find out about the environmental policies and political systems of your chosen countries using the World Bank Development Indicators, the Freedom in the World data, and your own research. What information from these sources helps you to explain the differences in environmental quality and economic growth between these countries?