Globalization and Economic Growth: Energy and Environmental Constraints

1. Globalization and Economic Growth: Energy and Environmental Constraints Sten Nilsson Deputy Director and Leader, Forestry Program IIASA, Laxenburg, Austria Seminar on the Globalization Challenges for Europe, 17 August 2006 Helsinki, Finland

2. S. Nilsson, 1980Energy Development ―Strategic Economic Choices, IEA

3. Globalization • Integration of economic activities via markets • Economic globalization • Economic growth through transmission of new technologies and policy changes

4. Problem • High energy costs will hamper overall economic growth • Globalization will drive environmental constraints, which in turn will hamper economic growth

5. Economic Growth • Sheer Growth → prerequisite for economic growth to be reconcilable with sustainable development

6. Environmental Development • Globalization will cause gaps between ecosystem service supply and demand • This will cause increased environmental constraints • Assumed to slow down economic growth

7. Energy DevelopmentCrude Oil Price History from 1861–2006 Source: M. Ströck, 2006, Released under the GFDL

8. Energy DevelopmentWorld Primary Energy Demand (IEA, 2005) • Total 16.3 billion toe • 50% more than today • 81% of supply as fossil fuels • 73% of the increase in developing countries

9. Energy DevelopmentGlobal Oil Consumption(conventional and unconventional reserves and resources) Source: Riahi and Keppo (2006)

10. Energy DevelopmentGlobal Natural Gas Consumption(conventional and unconventional reserves and resources) Source: Riahi and Keppo (2006)

11. Energy Development

12. High Energy Prices • Why ? • Rent seeking by oil companies and energy providers • Liberalization inefficient • In Europe: • Power system bound to fall short due to aging generation and transmission equipment • Physical constraints not removed • No institutional redesign • International trade driven by tariffs and taxes and not economic efficiency • Taxes • Lack of long-term energy policies

13. Empirical Relations Between Environment and Economic Growth • Mixed bag • Increased economic growth goes along with improved environmental qualities • Improved environment causes decreased economic growth • Environmental Kuznets Curve Yes and No • Neoclassic growth models • Environmental constraints reduce economic growth • Adaptive economic endogenous growth models • Environmental constraints improve environmental quality and increase economic growth

14. Empirical Relations Energy and Economic GrowthSummary of Causality Studies Between Consumption Energy and Long-term Economic Development

15. Empirical Relations Energy and Economic GrowthSummary of Analysis of Impact of Energy Prices on Economic Growth by Endogenous Economic Models and Econometrics

16. Conclusions • Developing economies more sensitive to increased energy prices than developed economies • Threshold value for sensitivity to energy prices which varies depending on development stage of economy • Increased energy prices will cause short-term economic disruptions but hardly any long-term negative impacts on economic growth

17. Climate and Economies • The cost of abatement of emissions is substantially lower than the cost of future climate change • Studies on the relation between CO2 emissions and economy • Depending on the structure and development of the economy countries have different abilities to absorb the impacts on the economy of reduced CO2 emissions. Some countries can do it without negative economic impacts and others will suffer substantially

18. What Can Governments Do? • Environment • R&D for environmentally friendly technologies and products • Energy • Most of the adjustments to take place in the private sector • Establish competitive energy markets • Develop long-term energy strategies • Stimulate new energy technologies • Let world energy prices pass through completely to domestic energy prices • Keep energy taxes and inflation under control