By Roger Bezdek, President, Management Information Services, Inc.
First published in Cornerstone, Volume 4, Issue 2
The recently published book The Rise and Fall of American Growth, by Dr. Robert Gordon, has taken the policy establishment in Washington, D.C., by storm.An eminent economist at Northwestern University outside of Chicago, Gordon’s thesis is that the incredible technological innovations of the period 1870–1920 were a “one time in history” series of events that cannot be replicated. Innovations such as electricity, telephones, indoor plumbing, air conditioning, cars, airplanes, radio, sanitation, and refrigeration transformed the U.S. and the world. They were responsible for the extraordinary growth in GDP and incomes in the U.S. and globally over the past 150 years—especially the “golden period” of 1945–1970. According to Gordon, no other period in history has brought similar comparable progress, or is likely to again.
His controversial conclusion is that U.S. growth has been much slower since 1970 and will continue to be slow in the future. Thus, the U.S. and the rest of the world should become accustomed to productivity and growth rates of less than 1% annually instead of nearly 3%—a huge difference. Further, he contends that governments can take little action in terms of monetary, fiscal, tax, or other policies to measurably change this.
This is a pessimistic message with profound economic, social, and political implications. The debate Gordon has generated focuses on whether he is correct that the world faces an inevitable future of weak economic growth, or if the “techno-optimists”, such as Brynjolfsson and McAfee, predicting a bountiful future (robots, artificial intelligence, nanotech, space colonies, flying cars, etc.) are correct.
THE MISSING LINK
A critical issue not being discussed is that nowhere in Gordon’s book does he give credit to fossil fuels or coal for the economic miracle of the past 200 years. None of the disruptive, revolutionary economic and technological innovations he identifies would have been possible without abundant, reliable, affordable energy. This is especially true of the electricity generated from coal, which powered the 19and 20 centuries and will continue to power the 21 century, albeit likely at a lower percentage of the total energy mix in the U.S. and most other developed nations.
Gordon combined the historical UK/U.S. growth record with a forecast and overlaid a curve showing growth steadily increasing to the mid-20century and then declining to 0.2% annually by 2100 (see Figure 1). He translated these growth rates into corresponding levels of per capita income, which for the U.S. in 2007 was $44,800 (2005 US$). The per capita income for the UK in 1300 was $1150 (2005 US$), and it took five centuries for that to triple to $3450 (2005 US$) in 1800, and over a century to then double to $6350 (2005 US$) in 1906—his transition year from UK to U.S. data. Even with the slowdown in the growth rate after 1970, the forecast level implied in Figure 1 for 2100 is $87,000 (2005 US$), almost double that of 2007.
A key implication of Gordon’s work, which, unfortunately, he does not recognize, is the essential role of fossil fuels—especially coal—in this economic miracle over the past two centuries (see Figure 2). Between 1850 and 2010, the world population increased 5.5-fold; world energy consumption increased 50-fold; coal consumption increased over 700-fold; world per capita energy consumption increased eight-fold; and nearly all of the world’s increase in energy consumption was comprised of fossil fuels.
Comparing Figures 1 and 2 shows that without adequate supplies of accessible, reliable, and affordable fossil energy, little of the technological and economic progress of the past two centuries would have been possible.
Notably, even with Gordon’s pessimistic assumption that economic growth will decrease to 0.2% annually by 2100, the forecast line in Figure 1 rises rapidly. Further, although GDP is becoming more energy efficient in most countries, even modest economic growth will require large increases in energy supplies both in the U.S. and, especially, in developing nations. World economic growth over the past two centuries was powered largely by coal and other fossil fuels. This raises the question: What energy sources are required to enable the world to continue to increase income, wealth, productivity, and standards of living and to lift billions of people worldwide out of poverty?
FOSSIL FUELS AND COAL AS THE KEY TO FUTURE GROWTH
The answer to the question is that fossil fuels, including coal, will remain essential global energy sources. Population and income growth are the major drivers behind the growing demand for energy. World population is forecast to reach 8.8 billion by 2035, world GDP is forecast to double, and an additional 1.5 billion people will require access to energy.As the world economy grows, in excess of one-third more energy will be required over the next two decades to meet the increased level of demand. According to the International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA), fossil fuels, including coal, will continue to meet most of the world’s increasing energy needs over the next two decades. These fuels, which represented 81% of the 2010 primary fuel mix, will remain the dominant source of energy through to 2040 in all of the IEA scenarios and account for about 80% of total energy supply in 2040. The demand for coal is projected to increase substantially in both absolute and percentage terms over the next several decades. This provides the opportunity for continual global economic growth, increased incomes, higher living standards, and poverty reduction.
The electric power sector is forecast to remain among the most dynamic areas of growth among all energy markets. Electricity is the world’s fastest-growing form of end-use energy consumption, as it has been for many decades. Power systems have continued to evolve from isolated, noncompetitive grids to integrated national and even international markets. The strongest growth in electricity generation is forecast to occur among the developing, non-OECD nations. Increases in non-OECD electricity generation are expected to average 2.5% annually from 2012 to 2040, as rising living standards increase demand for home appliances and electronic devices, as well as for commercial services, including hospitals, schools, office buildings, and shopping malls. Developing countries will use the least expensive form of electricity that is available, which is usually generated from coal. Thus, we are witnessing the work of coal in action to help develop economies around the world, which is what Gordon missed in his book.
As shown in Figure 3, EIA forecasts that world net electricity generation will increase 70%, from 22 trillion kWh in 2012 to 37 trillion kWh in 2040.The world’s energy growth will continue to be in the power sector as the long-run trend toward global electrification continues. Figure 4 shows that the global share of energy used for power generation is forecast to increase from 28% in 1965 to 45% by 2035. More than a third of the growth in power generation takes place in regions where a large part of the population lacks modern access to electricity—India, other developing Asia, and Africa. These regions and countries are deploying coal for their electricity needs, thus coal will remain a key source for electricity production.
Indeed, greater utilization of fossil fuels may be required than is currently forecasted. For example, the IEA states that, even with the anticipated increase in economic growth and fossil fuel utilization, in 2030 nearly one billion people will be without electricity and 2.3 billion people will still be without clean cooking facilities.
In his concluding chapter, Gordon discusses various factors that may inhibit future global economic growth, including changing demographics, excessive debt levels, and faltering educational systems. He also identifies several policies that may increase economic growth, including less regulation. Unfortunately, none of the regulatory reforms he recommends deal with energy, energy access, or energy innovation. For example, he never discusses the harmful impact of the increasing widespread trends in the U.S. and globally toward constraining fossil fuel development, deployment, and utilization. He thus errs by failing to recognize the threat that increasing, harmful energy regulations could have on future fossil fuel production, energy costs, technological innovation, and economic growth.
Reliable and affordable energy alone may not be sufficient for creating the conditions for economic growth, but it is absolutely necessary.It is impossible to operate a factory, run a store, grow crops, or deliver goods to consumers without using some form of energy, and energy means fossil fuels both now and in the future.
Access to electricity is particularly crucial to human development as electricity is indispensable for basic industrial, commercial, and residential activities, and cannot easily be replaced by other forms of energy. Individuals’ access to electricity is one of the most clear and undistorted indications of a country’s energy poverty status.Long-run causality exists between electricity consumption and five basic human development indicators: per capita GDP, consumption expenditure, urbanization rate, life expectancy at birth, and the adult literacy rate. In addition, the higher the income of a country, the greater is its electricity consumption and the higher is its level of human development and, further, as income increases, the contribution of electricity consumption to GDP and consumption expenditure increases. Thus, electricity access is increasingly at the forefront of governments’ preoccupations, especially in the poorest countries, and Figure 3 shows that fossil fuels, including coal, will continue to be required to generate the world’s electricity.
There are strong energy, environmental, and financial rationales for upgrading coal-fired power plants to achieve higher efficiencies, reduced COemissions, lower criteria emissions, and increased flexibility. One technology for achieving this is carbon capture and storage (CCS), which can capture up to 90% of the CO produced by coal-fired power plants. The CO is captured at the plant and then transported by pipeline for storage in geological rock formations. Another way to achieve these objectives is to improve plant control systems, and recent advances in sensor hardware and control software have made control system upgrades feasible. According to the IEA Clean Coal Centre, state-of-the-art process control software can produce significant efficiency improvements, 20% lower NO emissions, and improved load dynamics and steam temperatures and result in rapid payback times for coal plant investments. Similarly, the U.S. Department of Energy has estimated that, applied to the U.S. coal fleet, incremental improvements in plant efficiency and reliability provided by control system upgrades will generate significant annual savings and reduced CO .
Robert Gordon has convincingly shown that the process of economic growth and increasing standards of living is not a given and that maintaining the economic progress that the world has become accustomed to may be much more difficult than is generally assumed. Gordon’s otherwise commendable book is marred by three serious flaws: He fails to identify the critical role of energy in past economic growth, he fails to appreciate the essential role of energy in future economic growth, and his recommendations for regulatory reform fail to identify the reforms necessary to prevent fossil fuels from being artificially constrained in the future.
The extraordinary world economic and technological progress over the past two centuries would not have been possible without the use of coal and other fossil fuels. Further, vast increased quantities of coal and fossil fuels will be required in the coming decades both to sustain continued economic progress and to lift billions of people out of poverty. Coal was the essential energy source of the 20century and it will continue that role in the 21 century. Just as the developed nations once relied on the most affordable and reliable energy to which they had access, the developing nations in the world are doing so. A major threat to continued global technological and economic progress is regulation that may restrict coal development and utilization resulting in billions of people continuing to be forced to live with energy deprivation and economic poverty.