Energy and Economic Growth

The risky bet on solar and wind

How do we get economic growth? How is it that we can consume more, even though the available “resources” appear to be fixed?

Think of the platform for economic growth as a three-legged stool. It takes human ingenuity, good institutions, and energy.

The profit-and-loss system almost ensures economic growth. For a firm to stay in business, the value of its output has to be higher than the cost of its inputs. Progress means that firms get better at using inputs. They find a way to generate more value. We keep coming up with new ways to raise agricultural yields, for example. A reader who grows some wheat points out that he now gets 85 bushels per acre, when the norm in his part of the country used to be 15.

The book Superabundance, which I have remarked on before, says that over long periods of time, wages for low-skilled workers have gone up faster than commodity prices. Think of commodities and workers as inputs. We can infer that over these time periods technological progress was “biased” towards the workers. The demand for workers went up by more than the demand for commodities. One explanation for this is that we raised the demand for services—like health care, education, and entertainment—faster than the demand for consumer durables—like furniture and appliances.

The Three Legs

Ideas matter. They are what enable us to improve the value of output.

Institutions matter. A culture and political system that supports markets and the profit-and-loss system will unleash growth. A culture and political system that resents markets and represses capitalism will retard growth.

I think that abundant energy is the third leg of the growth stool. With sufficient energy, we can overcome scarcity of other resources. Because we can transport agricultural products, we can allocate land more efficiently. Locally-grown produce may be hip, but it is environmentally wasteful. We have lots of wilderness today because we have gotten away from locally-grown produce. See Nature Rebounds.

Low transportation cost makes substitution easier. If growing conditions for wheat deteriorate in one location, that can be dealt with either by growing more wheat somewhere else or by substituting away from wheat, toward corn or soybeans.

Can we conserve on energy the way we have conserved on land in farming? Of course, we keep finding ways to use energy more efficiently. But my intuition is that these are not important enough to cause a major decline in the energy intensity of production. That intuition is based on nothing more than a superficial familiarity with thinkers like Vaclav Smil.

Is abundant energy simply a consequence of the other two legs of the stool? Are ideas and institutions sufficient? Perhaps.

But it seems possible that at some point the cost of using fossil fuels will rise. According to the global warming alarmists, that cost is already high, just not recognized by the market.

Many supporters of green energy say that the cost of solar and wind power will fall, especially with the right policies. Supposedly, subsidies and carbon regulations will induce innovations, and once the green economy scales up solar and wind power will be cheap. This might be right. But I have my doubts.

I am no chemical engineer, but I am persuaded by those who say that fossil fuels have an advantage in terms of energy density. It is easier to have energy where you want it when you want it using fossil fuels.

A related point about solar and wind power is that they take up a lot of area. Peter Zeihan makes that point in his latest book. Matt Yglesias echoes it in a tweet that Tyler Cowen passed along.

One way to think of the switch to solar and wind power is that we will increase the demand for all of the resources that we saved by using fossil fuels, including labor, minerals, and land.

You might keep improving the efficiency of solar panels and windmills at capturing energy, but you still have to solve the problem of transportation and storage. How do you cheaply get electricity from solar and wind power to where it’s useful when it’s useful?

Noah Smith predicts that this will be the decade of the battery. Well, it’s not as if he is the first person to realize how vital batteries are to making practical use of solar and wind power. Anyone who reads MIT Technology Review will experience deja vu. If we don’t yet have the holy grail of batteries, it is not for lack of trying by companies featured in Technology Review in 2011, including an infamous failure.

I also wonder what the cost will be in terms of minerals. Mark Mills writes (WSJ),

Europe and the U.S. are furiously building dozens of gigafactories—Elon Musk’s term for massive EV battery factories. The upshot is that every $2 billion gigafactory will, over a decade of operation, purchase some $20 billion of battery minerals and materials. One might reasonably wonder: Purchase from where? And who benefits?

Bjorn Lomborg writes (WSJ),

Making batteries for electric cars also requires a massive amount of energy, mostly from burning coal in China. Add it all up and the International Energy Agency estimates that an electric car emits a little less than half as much CO2 as a gasoline-powered one.

The climate effect of our electric-car efforts in the 2020s will be trivial. If every country achieved its stated ambitious electric-vehicle targets by 2030, the world would save 231 million tons of CO2 emissions. Plugging these savings into the standard United Nations Climate Panel model, that comes to a reduction of 0.0002 degree Fahrenheit by the end of the century.

It seems doubtful that it is practical to scale existing battery technology. So I think we need radically different battery technology. But just because we need something does not mean we will get it. We have known for decades that a cure for cancer or a cure for obesity would be great to have, but such cures remain elusive.

I’m inclined to hope that nuclear power can be inexpensive. But there are scientists more qualified than me on both sides of that argument.

Since the “energy crisis” of the 1970s, we have found a lot more ways to recover oil. Oil from under the ocean. Fracking. Maybe we will continue to find reserves, but you would think at some point we will indeed have to find some energy source other than fossil fuels. If fossil fuels are still our dominant source of energy fifty years from now, my guess is that this will not be because of new innovations in extracting fossil fuels but because other energy sources (nuclear, solar, wind) have failed us.

Later this century, the energy leg of the growth stool could turn out to be wobbly.