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The Economics of Climate Change

The Jevons Effect, the Khazzoom–Brookes Postulate and Recent IEA Assumptions – Is it time to Rewrite Economic Theory or Face Reality?   In...

Saturday, July 29, 2023

The Economics of Climate Change

The Jevons Effect, the Khazzoom–Brookes Postulate and Recent IEA Assumptions – Is it time to Rewrite Economic Theory or Face Reality? 

In his book “The Coal Question” published in 1865, British economist William Jevons observed that England’s consumption of coal substantially increased after James Watt developed the Watt steam engine. The Watt engine was a more efficient version of Thomas Newcomen’s earlier design. Thanks to Watt’s improvements, coal became a more cost-effective source of energy leading to an increased use of the Watt engine design in a wide range of industries. With greater industrial application came a greater demand for coal causing Jevons to note; "It is a confusion of ideas to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is the truth."

At the peak of the Industrial Revolution, many in Britain were concerned that the nation’s prized coal reserves were rapidly falling and some experts were of the opinion that improving technology would reduce coal consumption. Jevons argued that this view was incorrect as further increases in efficiency would tend to increase the use of coal. Hence, improving technology would tend to increase the rate at which Britan’s coal deposits, a finite resource, would be depleted, thus threatening the future energy security of the nation. Jevon’s thinking was later termed “the Jevons Effect”.


More Recent Research on the Jevons Effect


The Jevons Effect is probably the most widely known paradox when assessing environmental economics.  It is sometimes also called the rebound effect (or take-back effect) and it refers to the reduction in expected gains from new technologies (that increase the efficiency of use of a particular resource), because of behavioural or other systemic responses.

In more modern times (1980s), the then chief economist of the United Kingdom Energy Authority, Leonard Brookes revisited the Jevons Effect for the specific case of society's utilization of energy. Brookes argued that attempts to reduce energy consumption by increasing energy efficiency simply raised demand for energy in the economy as a whole. Independent research in the United States by Daniel Khazzoom reinforced the same hypothesis. In 1992, the economist Harry Saunders dubbed the work of Khazzoom and Brookes the “Khazzoom-Brookes Postulate”, a concept similar to that of the Jevons Effect. Saunders added to the existing research, stating that an increased level of energy efficiency has a tendency to increase energy consumption in two ways. First, it makes the use of energy relatively cheaper, thus encouraging increased use (the direct rebound effect). Secondly, increased energy efficiency increases real income and leads to increased economic growth, which then ramps up energy use for the whole economy.


Climate Change, the Jevons Effect and Why it Matters


In 2021, the International Energy Agency (IEA) published “Net Zero by 2050 – A Roadmap for the Global Energy Sector”. In this document, the content of which has been widely cited by politicians, media and others, it is projected that total energy supplied in the early 2020s of just over 600 Exajoules (EJ) will fall to 550 EJ in 2030, (i.e. 7% lower than in 2020). This is projected to occur despite significant increases in the global population (between about 2 and 3 billion people) because of a fall in energy intensity (the amount of energy used to generate a unit of Gross Domestic Product (GDP).  Figure 1 below, shows the IEA projections.

Based on its assumption of a projected fall in energy intensity, the IEA has, in the same publication, called for a halt in investments targeting the development of fossil fuel projects that have not been sanctioned as of 31 December 2021.

Consistent with the learnings from the Jevons Effect (more recently confirmed by the Khazzoom-Brookes Postulate), if energy is affordable (an objective of the Energy Trilemma – see Figure 3), then it is probable that human behaviour will adjust to demand energy at least the levels seen currently. Thus, the critical assumption made by the IEA in their 2021 document proposing pathways to a net zero world, may require review.

If demand is unlikely to drop as projected in the coming decades (Figure 1) then there will be a shortfall of supply causing whatever available primary energy sources to increase in price leaving those least able to afford higher cost levels, the most impacted.

Is such a scenario a theoretical aberration or could it manifest into a likely reality?


The Learnings of 2022


When conflict arose between Russia and the Ukraine in early 2022, Western Europe was faced with an energy security threat. At the initiation of conflict, Russia provided Western Europe with 35 percent of its gas supply. Curtailment of this supply as a punitive measure against the Russians without alternative replacement also meant that Western Europeans would face a starvation of energy. With political and economic chaos on the horizon and winter only a few months away, European governments were forced to urgently intervene in the Liquified Natural Gas (LNG) markets to mitigate a potential energy shortage in the European Union (EU).  LNG prices spiked as cargoes meant for the emerging economies from Thailand to Pakistan and other countries in Africa were redirected to European ports. Even more glaring, after several wealthy governments of first world nations made this energy grab, they then subsidised the actual cost of energy delivered to their citizens to protect the levels and quality of their livelihoods and minimally impacting economic activity.

This was not the case for those in the emerging economies. In the poorer countries, economic activity and livelihoods at many levels were impacted as energy prices soared and governments were unable to fulfil a fundamental obligation of delivering affordable and available energy.


Figure 2 shows price movements in EU Gas Import Prices. Clearly the response of the EU to the Russian / Ukraine war significantly impacted energy prices globally in mid 2022.

If we project forward to a 2050 world in which there:

·       will be 2 – 3 billion additional people, each striving to increase their standard of living to that of their European or American fellow global citizens, performing energy intensive activities;

·       would have been a prior period of continuous under-investment in traditional energy delivery systems; and

·       if the economic theories advanced by Jevons and more recently, Khazzoom-Brookes or Saunders have a basis,

then are we more likely to further increase the energy divide between the rich and the poor nations in the future.  The query then that must be raised is how this highly probable scenario (based on economic theory and real responses in 2022) is consistent with the much-touted UN objective of a “just transition”?


The Energy Trilemma – A Dream for Emerging Economies?


The Energy Trilemma (Figure 3) refers to the need to find balance between energy reliability/security, affordability and sustainability, and its impact on everyday lives.


Empirical evidence has clearly demonstrated that when first world nations face energy reliability / security concerns, as was the case in 2022 in Europe, noble global energy equity rights are quickly cast aside.  Instead, a desperate “grab” transpires resulting in price spikes until the richer nations replenish the storage facilities that will be evacuated to quench their energy thirst.

Indeed, in 2022 in the wake of the Russian-Ukrainian conflict and staring a winter of energy shortage, the European Union even modified the definitions of its green taxonomy urgently permitting the inclusion of nuclear and gas as “green” energy resources. Clearly it was a necessary step to avert a continental scale energy starvation catastrophe.

So, what is the solution?

The solution remains the same. A transition into a cleaner environment must be orderly and measured. It must be based on real, available and applicable technologies lest this accelerated journey leads to an alternative scenario; “A Probable Evolution into a Future Significant Energy Divide” is shown in Figure 4.

COP 28 – An Opportunity to Balance the Narrative

A “Probable Future Significant Energy Divide” is evolving. Emerging economies should not allow the learnings from 2022 go to waste whilst developed nations must understand that unless the emerging economies also chart a path to net zero, there is no viable, holistic climate change agenda for the planet.

When COP 27, held in the Egyptian resort of Sharm El-Sheikh between 6th November and 18th November 2022 concluded, one of the headline outcomes was the reaching of an agreement to compensate nations for loss and damage caused by climate change through the establishment of a fund. The new Loss and Damage Fund (LDF) agreed at COP27 represented a long and hard-fought win for small and vulnerable nation states and an important step towards climate justice. Loss and damage, in its broadest definition, encompasses all the negative impacts of climate change including extreme weather events like hurricanes and flooding, and “slow onset events” like rising temperatures and ocean acidification.

The sources of funds to underwrite “loss and damage” was left for COP 28 to formulate and finalize.

Whilst the LDF would be of great assistance to emerging economies in the aftermath of a climate related catastrophe, what should be the focus of a balanced narrative at COP 28 is the need to avert further evolution of a probable Significant Future Energy Divide. This can only be achieved if the principles of the Energy Trilemma as shown in Figure 3 are respected and vigorously pursued.

For now, the foundation of the Divide has been laid and if advanced further, will lead to painful outcomes for the poorest, in the not-too- distant future. It is the least developed nations which have contributed minimally to the climate change phenomenon being experienced today. Yet it is these very nations which are being asked to also carry a burden of urgently meeting temperature targets to avert a global climate disaster.

A Practical Way Ahead

To ensure long term availability, legacy sources of energy cannot be excluded from the energy mix. Instead, such sources should continue to be developed, with a priority on decarbonization as much as practicable, until projections for a net zero world need not rely on reductions in energy demand based on efficiencies and that defy economic theory such as the Jevons Effect. A sustainable economic future of the emerging economies will not be defined by reactively securing compensation from the LDF. Instead, it should be founded on proactively protecting adequate amounts of future energy supply to underpin stable and increasing levels of economic growth. Thus, emerging economies should use COP 28 to ensure the principles being balanced through the Energy Trilemma are strictly respected now and in the future by all so that everyone will have equal access in the future to what is likely to be a scare resource.


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