All Three Sides of the Global Energy Challenge

It sometimes feels to me as if issues about energy are all being condensed down into climate change issues.

But energy policy debates should have three sides. Michael Greenstone delivered the AEA Distinguished Lecture on “The Economics of the Global Energy Challenge” in San Antonio in January. It’s now published in the AEA Papers and Proceedings (2024, 114: 1-30). As he explains it: “The global energy challenge is defined by three often conflicting goals that all societies are pursuing: inexpensive and reliable energy, clean air, and limiting damages from climate change.”

Greenstone emphasizes some basic arithmetic about global energy use. There is a close correlation between energy per capita use and a country’s per capita GDP: to put it another way, there are no counterexamples of a country that has become rich without a dramatic rise in energy use.

As a result, there are billions of people around the world living in low-income and middle-income countries whose aspirations for themselves and their descendants involve a dramatic rise in energy production and consumption. An average American uses about 13,000 kilowatt-hours of electricity per year. In comparison, Greenstone writes:

How pervasive is “low” energy consumption? 3.85 billion people live in countries with per capita electricity consumption below 1,500 kWh per capita annually. And 4.36 and 6.83 billion people live in countries with consumption below 2,500 kWh and 5,500 kWh per capita annually, respectively. The point is that there are billions of people who want higher energy consumption that helps to unlock higher living standards.

In comparison to the billions of people, the US population is 330 million. As I’ve pointed out before, the US now accounts for about 14% of global carbon emissions, while China accounts for 31% and India for 7% (and rising quickly). The nations of Africa now account for less than 4% of global carbon emissions, as do the nations of Central and South America. Greenstone cites one estimate, based on current trends, that energy demand in high-income countries will be basically flat over the next few decades, but energy demand for the rest of the world will triple.

I’m certainly not opposed to the US and other high-income countries seeking to reduce their carbon emissions. But looking ahead a few decades, the outcome for carbon emissions around the world is going to be determined by the development path of today’s low- and middle-income countries. The result is what Greenstone calls “cruel arithmetic:”

[T]he global energy challenge exposes climate change’s cruel arithmetic. For the OECD and non-OECD groups of countries, Figure 7, panel A reports their cumulative emissions of CO 2 in metric tons since the Industrial Revolution and their projected emissions of CO2e between 2021 and 2100. [The “e” after CO2 stands for “equivalent,” meaning that emissions of all other greenhouse gases, like methane, are being included as well, but measured in terms of carbon-equivalent effect on climate change.] Through 2020, OECD countries accounted for 955,151 billion metric tons of CO2 , which is roughly 56.2 percent of emissions to date; today’s wealthy countries are responsible for a majority of historical emissions and a disproportionate share when one accounts for their share of global population (17.3 percent in 2020). The projections for the remainder of the century tell a very different story: OECD countries are projected to account for another 746,192 billion metric tons of CO2e but the non-OECD countries’ projected cumulative emissions are much larger at 2,599,515 billion metric tons. …

However, the planet and its atmosphere only care about total emissions and have no interest in history or equality or any other metric. … Today’s OECD countries are only projected to emit 8 billion tons of CO2e at the end of the century, while non OECD countries are projected to emit 36 billion tons. So even if the OECD countries become carbon neutral by then … meeting the 2.0° C target requires the non-OECD countries to cut their end-of-century CO2 emissions by roughly 85 percent relative to their current baseline projections.

A policy which tells countries around the world not to have a dramatic rise in per capita energy use–that is, not to develop–seems like a non-starter. And for these countries, fossil fuels are projected to be the dominant source of energy (even if their share will decline somewhat) through the middle of the 21st century. Pretty much whatever happens with carbon emissions in the US and other high-income countries, the outcome will be determined by what happens in low- and middle-income countries. I’m not saying that’s fair or right, but as Greenstone notes, the level of carbon emissions doesn’t care about history or fairness.

I’ll add a few more points here:

1) Greenstone’s second point is about costs of conventional air pollution. One part of the case for aggressive reduction of fossil fuel use is its immediate health effects from conventional pollutants. In the United States, the estimates are that health pollution reduces life expectancy by about 0.3 years on average–more in places like southern California. But the health costs are much higher in other places. Here’s Greenstone:

It may be surprising, but air pollution is the greatest current external threat to human health globally, with the average person losing more than two years of life expectancy from air pollution. This loss is comparable to that from tobacco smoking and much greater than that from alcoholism, terrorism, war, and so on (Greenstone and Hasenkopf 2023). The air-pollution-induced loss of life expectancy varies widely around the globe, with relatively low levels in today’s wealthy countries and losses of four years or more in India, Bangladesh, Pakistan, and other parts of South Asia (Greenstone and Hasenkopf 2023). Energy production that limits local air pollution is typically more expensive largely because coal is bountiful and inexpensive compared to combining coal combustion with air pollution control devices or using alternative energy sources. In the context of the global energy challenge, it is noteworthy that the costs and benefits of policies that address air pollution externality largely occur within the same country.

Thus, if low- and middle-income countries take steps to reduce conventional air pollution from fossil fuels, it provides an additional reason to search out alternative sources of energy.

2) Greenstone is focused on the global picture, not the US situation. However, I’d note that the US and other high-income countries have their own version of his first theme, the inexpensive and reliable energy challenge. For the US, it’s not about a dramatic increase in overall energy production. Instead, the issue is that the US currently gets about 79% of its energy from fossil fuels (petroleum, natural gas, coal). If that share is to be dramatically reduced, then alternative energy sources are going to need to be dramatically expanded. There are hard questions here, like a potential expansion of nuclear electric power (now 8% of all US energy). Or if the primary part of the answer is going to be an expansion of solar (now about 2% of total US energy supply) and wind (4% of US total energy supply), then these are going to need to be expanded by multiples of five or ten, which would need to be combined an comparable rise in building the needed power transmission lines around the country and finding ways to store energy for night and when the wind isn’t blowing, which (with current technology) requires either a truly enormous expansion of battery capacity or some kind of back-up energy generation. All of this is against a backdrop where energy needs for server centers and applications like artificial intelligence are rising sharply.

3) For those interested in learning more about international dimensions of climate change policy, I can recommend the freely available symposium in the Summer 2023 issue of the Journal of Economic Perspectives (where I work as Managing editor). The papers are:

• “Are Developed Countries Outsourcing Pollution?” by Arik Levinson

• “Think Globally, Act Globally: Opportunities to Mitigate Greenhouse Gas Emissions in Low- and Middle-Income Countries,” by Rachel Glennerster and Seema Jayachandran

• “Carbon Border Adjustments, Climate Clubs, and Subsidy Races When Climate Policies Vary,” by Kimberly A. Clausing and Catherine Wolfram

• “Global Transportation Decarbonization,” by by David Rapson ⓡ Erich Muehlegger