Forestry Program

Globalization and Economic Growth: Energy and Environmental Constraints

Sten NilssonDeputy Director and Leader, Forestry Program

IIASA, Laxenburg, Austria

Seminar on the Globalization Challenges for Europe, 17 August 2006 Helsinki, Finland

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S. Nilsson, 1980

Energy Development ―

Strategic Economic Choices, IEA

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Globalization

Integration of economic activities via

markets

Economic globalization

Economic growth through transmission

of new technologies and policy changes

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Problem

High energy costs will hamper overall

economic growth

Globalization will drive environmental

constraints, which in turn will hamper

economic growth

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Economic Growth

Sheer Growth → prerequisite for

economic growth to be reconcilable

with sustainable development

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Environmental Development

Globalization will cause gaps between

ecosystem service supply and demand

This will cause increased environmental

constraints

Assumed to slow down economic

growth

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Energy Development Crude Oil Price History from 1861–2006

Source: M. Ströck, 2006, Released under the GFDL

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Energy Development World Primary Energy Demand (IEA, 2005)

Total 16.3 billion toe

50% more than today

81% of supply as fossil fuels

73% of the increase in developing countries

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Energy Development Global Oil Consumption

(conventional and unconventional reserves and resources)

Source: Riahi and Keppo (2006)

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Energy Development Global Natural Gas Consumption

(conventional and unconventional reserves and resources)

Source: Riahi and Keppo (2006)

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Energy Development

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High Energy PricesWhy ?Rent seeking by oil companies and energy providersLiberalization inefficientIn Europe: Power system bound to fall short due to aging

generation and transmission equipment Physical constraints not removed No institutional redesign International trade driven by tariffs and taxes and

not economic efficiency

TaxesLack of long-term energy policies

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Empirical Relations Between Environment and Economic Growth

Mixed bag Increased economic growth goes along with

improved environmental qualities Improved environment causes decreased economic

growth Environmental Kuznets Curve

Yes and No

Neoclassic growth models Environmental constraints reduce economic growth

Adaptive economic endogenous growth models Environmental constraints improve environmental

quality and increase economic growth

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Empirical Relations Energy and Economic Growth Summary of Causality Studies Between

Consumption Energy and Long-term Economic DevelopmentRegion Result Reference

Pakistan Total energy use does not affect economic growth; but electricity and petroleum use impact economic growth substantially.

Siddique (2004)

South Korea Energy conservation feasible without compromising with long-term economic growth. Oh & Lee (2004)

19 African Countries

Only 4 countries demonstrated a positive relation between energy consumption and economic growth. For 4 countries there was a negative impact on economic growth by increased energy consumption; for the other 11 countries no relation could be identified.

Wolde-Rufael (2005)

Australia No adverse impact on economic growth by introducing electricity conservation. Narayan & Smyth (2005)

11 Industrialized Countries

Energy conservation would reduce economic growth in USA, Canada, Belgium, Netherlands, and Switzerland; but not in the UK, Germany, Sweden, France, Italy and Japan.

Lee (2006)

17 African Countries

For 6 countries conservation of electricity can be made without jeopardizing economic growth; for 6 countries electricity conservation would harm economic growth.

Wolde-Rufael (2006)

4 Asian Developing Countries

Energy conservation would have limited adverse effect on economic growth in Indonesia and India but would impact the economic growth in Thailand and the Philippines.

Asafu-Adjaye (2000)

China Insufficient energy supply will substantially curb economic growth. Han et al. (2004)

New Zealand and Australia

Energy conservation will not have significant impact on economic growth in these 2 countries. The same is the case for Indonesia and India but there would be impacts in Thailand and the Philippines.

Fatai et al. (2004)

Turkey Electricity consumption substantially impacts the rate of economic growth. Attinay & Karagol (2005)

India Different models tested and conflicting results; but energy seems to act as an engine for economic growth in the short-run but in the long-run the causality goes from economic growth to energy consumption.

Paul & Bhattacharya (2004)

Taiwan Energy acts as an engine for economic growth. Lee & Chang (2005)

Singapore Oil-price shocks had only marginal impact on economic growth. Chang & Weng (2003)

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Empirical Relations Energy and Economic Growth Summary of Analysis of Impact of Energy Prices on

Economic Growth by Endogenous Economic Models and Econometrics

Region Result Reference

USA Oil-price stocks contribute to duration and depth of economic recessions but do not cause recessions

Hamilton (1983)

Industrialized Countries

No impacts on the aggregate economic performance Bohi (1989)

7 OECD Countries

Relatively large negative impact on economic output but insignificant response to price declines

Mork (1994)

USA Energy price shocks no significant impact on economic growth Gardner & Joutz (1996)

OECD/partly world

Oil price stocks caused some economic disruptions but the overall economic growth over past 30 years has been sustained

Birol & Keppler (2000)

Industrialized Countries

Continuously rising real energy prices tend to slow down economic growth Van Zon & Yetkiner (2003)

USA Energy conservation greater negative economic impact than earlier anticipated Kaufmann (2004)

World Recent energy price increases have slowed down the world GDP by 0.5% in the short term

IEA (2004)

USA (individual states)

Increased oil prices have small impact on state economies and reduction of oil taxes would have negative effect on a state’s overall economy

Decker & Wohar (2005)

44 Developed Countries

Rising energy prices having no long-term negative economic impact. In some cases they have a positive impact on economic growth.

Bretschger (2006)

World Oil price stocks have a marked but relatively short-lived economic negative impact (Huge error bands)

IMF (2006)

US/Canada/Japan

Economies have thresholds for increased energy prices. Below threshold no economic impact. Above threshold negative economic impact.

Huang et al. (2005)

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ConclusionsDeveloping economies more sensitive to increased energy prices than developed economies

Threshold value for sensitivity to energy prices which varies depending on development stage of economy

Increased energy prices will cause short-term economic disruptions but hardly any long-term negative impacts on economic growth

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Climate and EconomiesThe cost of abatement of emissions is substantially lower than the cost of future climate change

Studies on the relation between CO2 emissions

and economy

Depending on the structure and development of the economy countries have different abilities to absorb the impacts on the economy of reduced CO2 emissions. Some countries can do

it without negative economic impacts and others will suffer substantially

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What Can Governments Do?Environment R&D for environmentally friendly

technologies and products

Energy Most of the adjustments to take place in the

private sector Establish competitive energy markets Develop long-term energy strategies Stimulate new energy technologies Let world energy prices pass through

completely to domestic energy prices Keep energy taxes and inflation under control