5b: Intro to the Energy Transition

Transition II + ETM

Misha Velthuis

m.velthuis@uva.nl

Thursday 3 Oct 2024

Today

Transition II

Energy Transition Model

The big bets of the energy transition

Companies:

What technology to embrace? What investments to make?

States:

What industry to support? What development to boost?

Humanity:

What political economical system do we need?

… and risky bets for those with power

Big bet #1: use the market

Correcting an imperfect market

The market will guide us towards "optimal pollution".

Understanding the graph:

X-axis = emissions (let's say Mt carbon) (to the right = more emissions)
Y-axis = abatement (here: emission reduction) cost (let's say dollars per Mt carbon)

Understanding MAC curve going down:

At E0, it is easy to reduce pollution. Abatement costs are low (low hanging fruits).
As pollution goes down, abatement costs go up.

Understanding the MDC curve going up:

When there is little pollution, a bit of additional pollution is not immediately very harmful.
When there is already way too much of something, adding a bit more is highly damaging.

Where the lines cross: optimal pollution.

A company will reduce pollution until the marginal abatement costs are the same as its own marginal damage costs.

However, other people of course also experiencing damage. So the real MDC curve is higher. So the real optimal pollution is lower.

Market failure.

The government can step in to "internalize the externalities". To "bring back" the damage that others experience, to the actors creating the damage.

Two main ways: a tax or with "cap and trade". Effectively force companies to abate more, so that the market will end up in the social optimum.

Internalizing externalities

The government needs to prevent "transition failures"

Internalizing externalities:

Taxing carbon: you fix the price, but don't know how much CO2 will be emitted.
Capping and trading carbon: you fix the quantity that will be emitted, but you don't know the price.

Graph shows price volatility of carbon credits in the EU Emission Trading System.

Economic slowdown can cause oversupply of carbon credits.
Economists: that's the entire idea: when the economy is in rough weather, reduce pressure on companies. When the economy is doing well you can increase the pressure again.

Important: the social cost of carbon (discounted future damage of emitting marginal ton of CO2) is estimated around $1000/tCO2. The IPCC calculated that to reduce emissions to half the 1990 levels in 2023, would require a price of $100/tCO2. The current price in the EU ETS is 65 euro.

Other examples of so-called "transition failure" mentioned by ABN Amro:

When one sector decarbonizes, another sector can benefit from lower fossil fuel prices.
Vested interests

Graph: link

Other "transition failures"

Sectoral dependencies in electrification

Under-provision of grid capacity

Ultimately the (corrected) market knows how

Big bet #2: move away from the market

The market knows best?

Even if capitalism (and the market) is really good at ensuring that resources are used in the most efficient way, provided the externalities are internalized…

… how does it distribute the wealth?

"Technology lock-in refers to the situation in which the adoption of alternative technologies is not taking place even with the presence of high economic benefits to the adoption of these new technologies due to existence of obstacles such as vested interests and network effects." link

What are these "high economic benefits"? What are these "vested interests"?

What Altaghlibi from the ABN Amro probably means: a small group of people with an interest in fossil fuel companies resists policies that would benefit many of us (e.g. carbon pricing, carbon phase-out).

If that is a legitimate argument, then why don't we recognize that a small group of people is hoarding enormous amounts of wealth that could provide real "economic benefits" to a lot of people.

As you grow richer, the marginal utility of a euro decreases fast. A large-scale redistribution of wealth would lead to an enormous boost of happiness (reduction of misery).

The market brings efficiency (in a narrow sense: maximal output per input) but not "the best world possible".

If "affordability" is a concern (in pushing for the energy transition), then the best way to make it happen would be to redistribute wealth so that everyone has the capital necessary to make the transition.

The market knows best …

The people who control this money, for some reason do not appear to expect an end to the usage of fossil fuels.

The market apparently expects that externalities will not be properly internalized?

Remember this quote from Blondeel et al. (2021):

The Agency further notes that from 2021 onwards no new oil and gas fields, and no new coal mines (or extensions of existing ones) can be approved for development to if we are to reach global net-zero emissions by 2050 (IEA, 2021a).

Graph 1

Link to first graph (click here for interactive graph).

Fossil fuel investments are growing again.

Graph 2

Link to second graph.

Market capitalization of fossil fuel companies: shows expectations people with power and money.

See here for an overview of who is investing in fossil fuel assets.

Blondeel, M., Bradshaw, M. J., Bridge, G., & Kuzemko, C. (2021). The geopolitics of energy system transformation: A review. Geography Compass, 15(7), e12580.

"Correcting" what is fundamentally broken?

'Al Gore called climate change "an inconvenient truth", which he defined as an inescapable fact that we would prefer to ignore. Yet the truth about climate change is inconvenient only if we are satisfied with the status quo except for the small matter of warming temperatures. If however, we see the need for transformation quite apart from those warming temperatures, then the fact that our current road is headed toward a cliff is, in an odd way, convenient - because it tells us that we had better start making that sweeping turn, and fast.'

Klein, N. (2015). This changes everything: Capitalism vs. the climate. Simon and Schuster.

The money will protect the money

What we've seen so far is low hanging fruit …

Conclusion: the market will not save us

Escaping from the market?

Collective control

(Interactive graph)

Technology allows us to produce more with the same amount of labour (time).

Three scenarios:

Workers work the same amount of hours, and the extra production (as the result of the higher labour productivity) is shared with them.
Workers work the same amount of hours, and the extra production (as the result of the higher labour productivity) is not shared with them (kept by the owners of capital).^footnote1
The extra productivity allows workers to produce the same in less time. Production and consumption stays the same. The only difference is that workers work less.

Following the logic of degrowth, the planet (the energy transition) could really use 3. In reality, as the graph on the slide shows, we got 2.

In fact, truly following the logic of degrowth, the planet needs more than scenario 3. Production should not stay the same: much of it should actually should go down.

Workers should not only work less because we can produce and consume the same with less work. Workers should also work less, because many of us don't need to consume that much. Production needs to go down.

Some of those who will have to work less, cannot afford the loss of income. They will have to be compensated.

Tax wealth, implement Universal Basic Income, take (back) control of energy companies. (See e.g. this petition to nationalize energy companies in the UK).

Footnotes

Footnote 1: In reality, some of the gains of capital over labour are shared (back) with labour, for example through the returns on investment of pension funds. Still, at the end of the day, there is such a thing as the labour share (that has been steadily declining since at least the 1970s).

More weekend?

Bypassing capital

Still: risky bet #1

Perspective 1: The rule book: capitalize on cultural turmoil (often created by capitalism), to protect interests of capitalists.

Perspective 2: That's what you get when you politicize climate change. People like Namoi Klein are playing with fire.

"De NPO is van het padje af: NPO66. In plaats van eerlijke informatie en ontspanning is het vooral bezig met propaganda. We worden dagelijks getreiterd met klimaatpaniek en diversiteitspropaganda. De financiering wordt dan ook geheel beëindigd."

"The public broadcasting agency has lost it: NPO66 (reference to liberal party). Instead of honest information and entertainment, it loses itself in propaganda. Every day we are being bullied with climate panic and diversity propaganda. We will fully stop all public financing."

"Geen miljardenuitgaven meer aan links-liberaal ideologisch beleid als stikstof en klimaat. Geen open grenzen en onbetaalbare massa-immigratie meer."

"No more billions of spending on left-liberal ideological policy, like nitrogen and climate. No more open borders and unaffordable mass immigration."

Still: risky bet #2

Still: Risky bet #3

But what about: Decentralized control?

But what about: Citizen assemblies?

citizen assemblies.png

Large scale change is inevitable

Risky bets are inevitable

On that note…

Targets

EU	55% in 2030
Netherlands	49% in 2030
Our target	70% in 2040

Assignment description

Focus

Demand

Supply

Flexibility

Bonus: costs

Tips

Carefully read the information blocks

Double click the numbers next to sliders to type

Use "table view"

Lock useful graphs

See user docs

For today

Find a partner

Read the assignment

Open the model

Save a model

Play with the model

Make one "discovery" to share with the class

For Monday

Demand side ready (submit link to model)