Accelerated structural change: the forces that are
breaking global trends
Manuel Pinho 1
February 2018
We are witnessing accelerated structural change in many areas, which creates
uncertainty. To what extent is it different from previous episodes of rapid
transformation? What are the main drivers and at what pace it is unfolding?
What are the main uncertainties? Is it impacting all countries/ regions in the
same way? Is it producing a wave of populism and protectionism? Is the shift in
the global balance of power unstoppable?
Unlike other episodes of structural change, this one is driven not by one but by 6
forces that are operating at the same time. Technological change, the shift
eastwards of the economic center of gravity, the emergence o Globalization 3.0,
urbanization and the energy transition. It is unfolding very rapidly in all fronts
creating feedback loops. For example, China´s rapid resource- intensive GDP
growth produced a commodities super- cycle, which spurred a wave of
investment and technological change, raised climate awareness and prompted
new energy solutions, all along from super low cost variable renewable energies
to innovative transport models. Uncertainties abound, which is no surprise. It is
impacting different countries/ regions on different manners depending on their
development level, institutions, resource endowment, social bargain, etc. It
encompasses a shift if the center of gravity of the world economy to the East, in
2030 4 of the 5 largest economies in the world will be in Asia. Accelerated
structural change is compounded by the rise of China that is challenging an era of
Western dominance that had lasted for more than one century. Populism and
protectionism is rising in some countries, however this does not seem to
correspond to a general trend.
1 Adjunct professor, School of International and Public Affairs, Columbia University, Guest professor, International Business School, Beijing Foreign Studies University.
1
1. A fractured world in an era of prosperity
The world economic outlook is positive. The IMF revised its world 2017 GDP
growth estimate to 3.7 %, ½ percentage point higher than in 2016 and adjusted
upwards the growth forecast for 2018 and 2019 to 3.9%. 2 The growth of trade
volumes is estimated to have increased by more than 2 p.p. and for the first time
in many years the world economy is growing in a synchronized manner. Stock
markets are high and the unemployment is declining in most advanced
economies. In China and India, the 2 most populated countries in the world, GDP
is growing faster than expected. Interest rates remain close to zero and inflation
seems to be under control. Is this cyclical, structural or a combination of both?
This positive scenario has developed at the same time as important structural
transformations are unfolding. Indeed, the structure of the world economy is
changing at an unusually rapid pace, driven by the combined impact of 6 factors:
technological change, the shift eastwards of the world´s economic center of
gravity, a new stage of globalization, urbanization, climate awareness and an
energy transition. Given the scale and scope of this transformation it is no
surprise that it is creating fractures, raising uncertainty and meeting resistance.
Protectionism and populism have emerged in some countries, the most
important examples being the UK that voted for Brexit and the US. However, this
does not seem to represent a global trend given that at the same time, China (Xi
Jinping), India (Modi), Japan (Abe), France (Macron) and Germany (Merkel)
remain committed to developing global trade and reducing carbon emissions, for
example. The new US administration adoption of an “America first” stance
approach encompassing inter alia protectionism, tightening emigration laws and
pulling out of the Paris climate deal did not come from nowhere and is associated
to a large extent with the shift in the world´s balance of power and the social
bargain in the US.
2 http://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-january-2018
2
Important challenges and uncertainties remain. Globalization is facing
headwinds and the possibility that globalization may be stalling cannot be totally
ruled out. Skill- biased technological change and robots are eliminating jobs.
Inequality is rising from high levels by historical standards and the global middle
class is squeezed. The digital revolution, including social networks and artificial
intelligence, is increasingly raising security concerns. In addition to this, a new
order is emerging and experience shows that this process is seldom smooth.
From an historical viewpoint much attention has been given to past episodes of
transition from a dominant power to another one that highlight that this is
seldom a smooth process.
However, there are many reasons to be optimistic. The number of people that
live in absolute poverty has declined to 750 million, from 1, 800, 000 million in
1990, although it remains high in Sub Saharan Africa and South Asia. Life
expectation at birth rose from 65 years in 1990 to 72 in 2015 and the infant
mortality rate declined from 65 to 31 per 1,000 in the same period. The gap
between rich and poor countries has been reduced. Consumers are in the drivers
seat in many areas. Flows of information within countries and between countries
are increasing exponentially. New technologies and business models are creating
tremendous opportunities and making the life of million peoples around the
world much easier, not least they are permitting middle income and poor
countries to leapfrog in several areas. Climate awareness has risen and an energy
transition is under way, which will result in cleaner energy at a cost much lower
than expected and hopefully on the adoption of policies that will avoid
dangerous climate change.
2. Long term GDP growth
3
Several past episodes of structural change have been heralded as unique,
however the picture since the early 19th century remains one of sustained
growth in income per capita. 3
1500 1600 1700 1820 1870 1913 1950 1973 19980
1000
2000
3000
4000
5000
6000
World income per capita
Source: Maddison
World income per capita rose almost tenfold since the 1st Industrial Revolution
prompted by James Watt´s version of the steam engine and around sevenfold
since the late 19th century´s 2nd Industrial Revolution prompted by the internal
combustion engine and electricity. Never before the world had witnessed growth
of income per capita year after year and the Industrial Revolution marked a shift
from Malthusian growth to modern growth driven by technological progress,
more people and better-educated people. 4 main trends have emerged.
First, growth in income per capita has been sustained, i.e. it has taken place year
after year, thereby producing exponential growth. Since 1980, for example,
world GDP grew at an annual average rate of 3.6% p.a. and population by 1.9%.
This period was marked by the 2 largest recessions since World War 2, in 1982
and, more importantly in 2008, that were followed by surprisingly rapid,
although uneven, recoveries.
3 https://minneapolisfed.org/publications/the-region/the-industrial-revolution-past-and-future
4
19801983
19861989
19921995
19982001
20042007
20102013
20162019
2022-1
0
1
2
3
4
5
6
World GDP growth
Source: IMF
Second, the 19th century Industrial Revolution was also a demographic
revolution. World population rose from 1 billion in 1820 to7.5 billion, almost 1/3
of which lives in China and in India, the 2 most populated countries in the world.
0 1000 1500 1600 1700 1820 1870 1913 1950 1973 1998 20100
1000
2000
3000
4000
5000
6000
7000
8000
World Population
Source: Maddison
Third, the West was the main beneficiary, while the rest of the world lagged
behind until recently, which produced “divergence big time”- a large and
increasing gap between rich and poor countries. 4 The United States became
the largest economy in the world and, after World War II, the dominant
power.
4 http://documents.worldbank.org/curated/en/103231468766464256/pdf/multi0page.pdf
5
1500 1600 1700 1820 1870 1913 1950 1973 19980
5000
10000
15000
20000
25000
30000
The West and China
Western Europe United States China
Source: Maddison
Fourth, the Industrial Revolution was predominately an energy revolution based
on heat engines fueled initially by coal that permitted to use unprecedented
amounts of concentrated energy. 5
1820 1870 1900 1913 1940 1950 1973 1990 2008 20350
2000400060008000
1000012000140001600018000
World energy consumption, Mtoe
Fossil Fuels Other sources
To what extent these trends have changed? Technological change did not
stall; on the contrary it is accelerating driven by the digital revolution and its
combination with other technologies. Its benefits are reaching a large
number of people around the world. 6 billion people have access to mobile
phones and 3.2 billion are connected to the Internet. In contrast, important
changes are taking place with regard to demography, the world´s economic
balance of power, climate awareness and energy use.
5 Brynjolfsson, E., A. McAfee, The Second Machine age, Norton, 2016
6
World population growth decelerated markedly and the population is getting
older and more urban, the median age having risen from 24 to 29 years in
1990- 2015 and for the first time ever, more than half of the world´s
population lives in cities. 6 China became the largest economy in the world
and in 2030 4 of the 5 largest economies (China, India, Japan and Indonesia)
will be in Asia. CO2 emissions did not increase for 3 consecutive years and
available evidence indicates that the Paris climate agreement will survive the
US decision to pull out. An energy transition is under way, encompassing a
precipitous decline in the cost of variable renewable energies, energy
efficiency improvements and the emergence of new mobility solutions.
3. Extreme poverty and inequality
The 2 bleak spots are first the sluggish progress in reducing extreme poverty in
Sub Saharan Africa and South Asia, and second the rise in inequality, which both
contribute to a fragmented society.
The record in achieving the 2000- 2015 Millennium Development Goals is
globally impressive mostly as regards income targets. 7 Indeed, the number of
poor living with less than 1.9 $/ day declined by 1, 200 million in 1990- 2015.
1990 1999 2011 2012 20150
500
1000
1500
2000
2500
19591751
963 897702
Number of poor leaving with less than 1.9 $/ day
6 https://esa.un.org/unpd/wup/
7 http://pubdocs.worldbank.org/en/503001444058224597/Global-Monitoring-Report-2015.pdf
7
Source: World Bank
Progress in achieving the non- income targets has been more modest and gains
were uneven. Indeed, while progress in Asia was remarkable, in Sub Saharan it
remains at unacceptable high levels.
At the same time, global inequality within countries, as measured by the share of
the 10% richer in GDP, has risen markedly in the last 35 years and is reaching
the levels observed in the early 20th century. 8
19211928
19351942
19491956
19631970
19771984
19911998
20052012
0
0.1
0.2
0.3
0.4
0.5
0.6
Share of the 10% higher incomes
USFranceGermanyChinaUK
Source: World inequality Report 2018
According to the 2018 Oxfam report, 2017 witnessed the largest increase ever in
the number of billionaires and 82% of the growth in global wealth went to the
top 1%. 9 The 2018 Picketty Report shows that the early 80´s marked the end of a
more egalitarian period and that since then the share of the global top 10%
earners rose to the levels of the early 20th century and they captured twice of
the growth of global income as the 50% poorest. 10 However, there are marked
differences among countries resulting, for example, from inequality in the access
8 http://piketty.pse.ens.fr/files/ACPSZ2017NBERWP.pdf
9 https://www.oxfam.org/en/research/reward-work-not-wealth
10 http://wir2018.wid.world
8
to education and the progressivity of the tax system, which highlights that
inequality is also the result of societal choices. Among advanced economies, the
US stands out as the country where inequality is the highest and where it has
increased the most in several aspects.
Europe
China
Russia
US- Can
ada
Sub Sa
haran
Afri
caBra
zilIndia
Middle
East
010203040506070
Source: World Inequality Report 2018
4. The 6 drivers of change
In the early 21st century change accelerated. In retrospect, 2007 was a
watershed. The genome was mapped. The iPhone and Google street view were
launched. Amazon released Kindle. Facebook went public and Alibaba was listed
in the Hong Kong stock exchange. George Mitchell started the production of shale
gas in Texas. The current episode of global transformation has 3 specific
features.
First, it is not driven by one, but by six main forces operating at the same time:
digitalization, the dislocation Eastwards of the world´s center of gravity,
globalization 3.0, urbanization, increasing climate awareness and an energy
transition.
Second, it is unfolding at an extremely rapid pace. Examples are abundant. The I
Phone was launched only in 2007 and the I Cloud and Siri in 2011. Airbnb was
created in 2008 and became the largest hotel chain in the world without owning
one single hotel. Solar power was bid at below 30$/ Mwh in Chile, compared
9
with more than 100$/ Mwh paid to power generated in the Hinckley Point
nuclear reactor. All Volvo cars will be electric or hybrid as from next year.
Third, it is taking place at the same time that a new global order is emerging
where the Western dominance is being challenged by the rise of China as a
superpower and the shift of the economic center of gravity of the world to Asia.
The share of China, Japan, India and Korea in world GDP is already higher than
that of the US and the EU combined.
China, Japan, India, Korea; 32
US, EU; 31.3
Rest of the world; 36.7
Share in world GDP
5. Digital revolution
We are witnessing unfold a technological revolution based on digital hardware,
software and networks the nature of which is different: it is
Exponential ❨every year, the amount of integrated circuit computing power
that can be bought with 1 dollar doubles).
Digital ❨the marginal cost of scaling up production is zero and digital goods
are non rival) and
Combinatorial ❨for example drones are the result of the combination of data
processing, sensors and digital imaging technologies).
The speed of change, as witnessed for example by the increase in computer
power of the large digital platforms, is impressive.
10
2013Yahoo 2014 Baidu 2015 Alibaba 2016 Tencent0
10203040506070
Computing power, terabytes processed in one minute
Source: McKinsey
Think of a Honda Civic that costs 20, 000 dollars in the US. If the same principle
of integrated circuits applied to car manufacturing, a Honda Civic would cost
only 75 dollars in 2025. Although the digital revolution has already produced
many changes, its end is not near and in the US, 4 or the 5 and 6 of the 10 largest
companies by market cap are digital based.
Company Market cap billion of US dollars
1 Apple 688
2 Alphabet 528
3 Microsoft 455
4 Amazon 466
5 Berkshire Hathaway 418
6 Exxon Mobil 357
7 Johnson and Johnson 367
8 Facebook 344
9 JPMorgan Chase 341
1
0
Wells Fargo 323
Most people have smart phones, many of which have more capacity than the
supercomputers of the past. What’s App was launched in 2010 in the US and the
11
number of subscribers grew to 1.2 billion. One year later, We Chat was launched
in China, where it has reached rapidly 1 billion subscribers that spend on
average 60 minutes per day using this app. Siri was launched in 2010 and the I
Cloud one year later. The rate of adoption of new technologies is tremendously
fast and innovations can be easily replicated.
A visitor to China in 2010 would be surprised by the contrast between the
modernity of the country in terms of infrastructures and access to luxury goods
and how difficult it was to open a bank account, get a credit card and make
payments and he would try to figure out how this complex problem could be
solved. A few years later, a visit to a supermarket in Beijing shows that very few
people currently use currency and credit cards, most make payments with their
smart phones using we Chat- pay and Ali- pay. Amazon has 250 million clients,
while Ali Baba has 500 million; it ships 12 million packages per day, compared
with 3 million by Amazon. In 2016, it sold 18 billion $ in single´s day.11
The digital revolution combines with other technologies such as sensors,
artificial intelligence, 3 D imaging and robotics to turn everything upside down at
an amazing pace. In 1997, Deep Blue beat Gary Kasparov. In 2011, Watson
defeated Jeopardy´s champions. In 2016, Google´s Alpha defeated the Go´s world
champion. In 2017 and Alibaba´s Al outscored at Stanford top humans at a
language and comprehension test processing. Phantom IV, the top DJI mass
consumer drone manufactured in Shenzhen sells at less than 1, 000$. In 2012,
the first 3D- printed prosthetic jaw was implanted. And the best is yet to come
given the nature of the digital revolution.
6. Shift eastwards of the center of gravity
The economic center of gravity of the world is shifting eastwards. In retrospect,
1980, when economic reform was launched in China led by Deng Xiaoping, was
the turning point of the second half of the 20th century. The economic record of
11 https://www.cnbc.com/2016/11/11/singles-day-news-alibaba-poised-to-smash-records-at-worlds-largest-online-shopping-event.html
12
China since then is impressive and the speed at which the economic balance of
power has taken place has no precedents.
19801983
19861989
19921995
19982001
20042007
20102013
20162019
20220
5
10
15
20
25
GDP growth Share of world GDP
Source: IMF
Since 1980, the economy expanded at an annual average rate of 10% doubling in
size every 7 years and the share of the country in world GDP rose from less than
3 to more than 18%, overtaking the US as the largest economy in the world by
GDP expressed in PPP. However, income per capita remains at a level similar to
Brazil and Mexico and avoid falling in the middle- income trap remains a
challenge.
The importance of China cannot be understated. In 2014, it became the largest
economy in the world. It is the world´s largest energy consumer since 2008. In
2011- 2013 it used more cement than the US´s cumulative consumption in the
entire 20th century. Assuming that its GDP will grow at an average rate of 5%
until 2030 and in the US at the potential rate estimated by the CBO, in 2030 GDP
in China will be 30% higher than in the US. The idea of Western weakness is
evident and creates risks, the emergence of populism in the US and the UK being
a clear sign.
Industry still accounts for around 40% of GDP in China, compared with 19% in
the US, and 28% both in Germany and Japan. China is unusually open by the
standards of a large economy; it became the largest exporter and the second
largest importer in the world and holds the largest external reserves, by far. It
13
has been a strong beneficiary of globalization, however although net exports
have led GDP growth until the GFC, it is not the case anymore, as a result of the
rebalancing of the economy from industry, investment and exports towards
services and consumption, which are part of the so- called “new normal” of
“lower but higher quality growth”. China has the capacity to adapt to
protectionism much better than in the past. China produces roughly the double
of cars than the US. Its high- speed train network is 5 times the distance from
New York and Los Angeles and its companies have a 75% market share of the
equipment market. It accounts for 43% of the world´s EV production. It is
developing innovative transport sharing solutions. 12
China is rapidly shifting from manufacturing of low to higher value added
products based on a focused industrial policy, China 2025. It has a strong
scientific base, highly skilled resources, not least a large domestic consumer
market. 13 It ranks 2nd in the world by number of scientific articles 14 and first by
patents and trademarks. 15 Priorities include high- end biopharmaceuticals, new
transport solutions, integrated circuits and new generation IT and advanced
manufacturing and robotics.
Digital industries are a top priority. China has 3 world- class players, Alibaba,
Tencent and Baidu, is the undisputed global leader in mobile payments, has more
internet users that the US and the EU combined, holds the world record in
computing power and has the 2 fastest supercomputers and 150 out of the 500
fastest computers in the world. 16
12 https://www.mckinsey.com/global-themes/china/chinas-electric-vehicle-market-plugs-in
13 http://onlinelibrary.wiley.com/doi/-10.1002/app5.177/full
14 http://www.scimagojr.com/countryrank.php
15 http://www.wipo.int/edocs/pubdocs/en/wipo_pub_941_2016.pdf
16 https://www.mckinsey.com/~/media/McKinsey/Global%20Themes/China/Chinas%20digital%20economy%20A%20leading%20global%20force/MGI-Chinas-digital-economy-A-leading-global-force.ashx
14
China has impressive challenges ahead, all along from deregulating services,
reducing financial leverage, reducing pollution, inequality and the number of
people in rural areas. There are many uncertainties. However, its rise is a game
changer.
7. Globalization 3.0
Globalization is facing headwinds, mostly in the US, where it is blamed for being
responsible for the destruction of manufacturing jobs and the rise of inequality,
among many other evils. At the same time, there is a heated debate about
whether it is stalling. 17
The IMF refers to globalization as ″the increasing integration of economies
around the world, particularly through the movement of goods, services, and
capital across borders″. Globalization fueled prosperity since World War II, the
first decline in global inequality since the 19th century and lifting hundreds of
millions of people from poverty.
The world is in its 2nd globalization experiment, the first (1880- 1930) ended
with the Great Recession, which was followed by World War II and the second
dates from around 1980 to the present. The current liberalization experience has
3 distinct stages.
The first (Globalization 1.0, 1980- 2000), corresponds to a period of proactive
measures to liberalize trade, China´s accession to the WTO and opening up of
capital accounts. World trade, as measured by the share of imports in world GDP
rose from 15 to 24%.
17 https://drodrik.scholar.harvard.edu/files/dani-rodrik/files/populism_and_the_economics_of_globalization.pdf
15
The second (Globalization 2.0), from 2000 to 2008- 2012, was marked by the
acceleration of global supply chains, the phenomenal growth of China´s exports,
unprecedented exports of equipment goods by advanced economies to fuel China
´s industrialization, increasing capital flows until the GFC and a once in a
generation commodities super- cycle, the beneficiaries of which were the natural
resources exporters that became the fastest growing economies in the world,
together with China. Globalization 2.0 was intrinsically unstable and could not
last forever.
The beginning of the third (Globalization 3.0) was marked by the precipitous
decline in capital flows that followed the GFC, the end of the commodities super
cycle around 2012, the compression of global supply chains and the stagnation, if
not a decline, in the share of trade in world GDP. At the same time, cross border
data flows are increasing exponentially and paradoxically it may be argued that
the world has never been so connected. Indeed, the trend of global trade
slowdown and declining cross border financial flows has been offset by an
exponential increase of data flows permitted by the digital revolution.
. According to McKinsey, “cross-border data flows are increasing at rates
approaching 50 times those of last decade. Almost a billion social-networking
users have at least one foreign connection, while 2.5 billion people have email
accounts, and 200 billion emails are exchanged every day. About 250 million
people are currently living outside of their home country, and more than 350
million people are cross-border e-commerce shoppers— expanding
opportunities for small and medium-sized enterprises to become “micro-
multinationals.” 18
18 The global forces inspiring a global narrative of progress, McKinsey, 2017 http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-global-forces-inspiring-a-new-narrative-of-progress
16
19801983
19861989
19921995
19982001
20042007
20102013
0
5
10
15
20
25
30
35
Share of trade (imports) in world GDP
RealNominal
Source: World Bank
Numerous studies attempted to assess if the slowdown in world trade is cyclical
(lower world GDP growth) or structural (shorter value chains or protectionism). 19. Available evidence indicates that the slowdown of world trade predates the
GFC and that the main causes are the slowdown of imports of investment goods
due to cyclical reasons, compression of global value chains, the collapse of the
price of natural resources and a China- effect reflecting the rebalancing of its
economy towards consumption and services.
Several studies confirm that world trade growth in general, and exports by
China, had a positive impact in third countries by rising productivity in the
sectors exposed to more competition, reducing the cost of intermediate inputs,,
improving resource allocation and the quality of intermediate inputs and
lowering the price of consumers goods. 20 At the same time, recent studies show,
unsurprisingly, that the so-called China shock destroyed jobs in a few industries
19
Measuring and Analyzing the Impact of GVCs on Economic Development, https://www.brookings.edu/wp-content/uploads/2017/07/tcgp-17-01-china-gvcs-complete-for-web-0707.pdf#page=4&zoom=auto,-79,611 World Bank, 2017
20 https://piie.com/publications/working-papers/global-competition-and-rise-china
17
in the US. 21 That should not be taken as an argument against free trade but,
instead, as a case for more active policies to support labor mobility.
8. Urban world
The fourth driving force is urbanization. It is not only a shift from the West to the
East, but also that from rural areas to cities. For the first time ever, more than
half of the world population lives in cities. The speed of change is impressive.
Since 1990, the share of urban population in the world rose from 43 to 55% and
it is expected to reach 63% in 2030.
19501960
19701980
19902000
20102020
20302040
20500
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Urban areas Rural areas
Source: United Nations
Urban habitants get richer given that they have higher skills on average, they
have the opportunity to perform more specialized tasks and enjoy economies of
scale. The largest 600 cities account for 20 p.c. of the world population but more
than 50 p.c. of world GDP.
Their projected contribution to world GDP growth in 2010- 2025 is 65 p.c.
Among them, stand out the so- called Emerging 440, a group of medium and
large cities in developing counties of which 242 are in China.
21 https://economics.mit.edu/files/9811
18
The growth of the urban population in developing and middle- income countries
creates a tremendous opportunity to develop consumer spending and
investment in areas such as ports, airports and buildings.
In a period when accelerating technological change will destroy jobs, developing
and middle income countries enjoy the cushion provided by the increase in
consumption and investment from rapid urbanization.
Emerging 440; 47Other emerging large cities; 14
Emerging small cities; 13
Developed small cities; 5
600 cities expected to account for 60 p.c. of world GDP growth
Source: McKinsey
9. Climate awareness
The fifth force is climate awareness. There is undisputed evidence that the
climate is changing due to man- made causes, mostly by the release of carbon
from the combustion of fossil fuels and that this may produce effects that are
irreversible and difficult, if not impossible, to quantify. Climate change is a global
externality, the solution of which needs the contribution of all countries and it
does not require only halting the growth of carbon emissions: they must be
halved from current levels in the next decades. This was known in 1997 when
19
the Kyoto protocol was agreed; however progress in international climate
negotiations stalled given the high cost in adopting new technologies, mitigation
in climate jargon, not least by the lack of commitment of large emitters.
Recent data show that, surprisingly, carbon emissions are flat since 2014 as a
result of slower growth of energy consumption, stronger energy efficiency
improvements, development of clean energy sources and the switch from coal to
natural gas. This is positive; markets drive it more than by policies, however it is
clearly not enough.
19651972
19791986
19932000
20072014
0
10000
20000
30000
40000
50000
60000
70000
80000
Emissions by regionCarbon emissions in Asia Pacific MTCO2Carbon emissions in Africa MTCO2Carbon emissions in Middle East MTCO2Carbon emissions in Europe & Eurasia MTCO2Carbon emissions in S. & Cent. America MTCO2Carbon emissions in North America MTCO2Carbon emissions in World MTCO2
Axis Title
Source: Carbon budget
The carbon budget, the maximum amount of CO2 permitted to avoid global
temperature rising by more than 2 C is estimated at 1200- 1500 Gt for a 50%
degree of probability and just 1560- 975 Gt for a 80% degree of probability,
which compares with emissions of around 40 Gt/ year. 22 Time is of the essence.
After many years of slow progress, Paris COP 21 was an important step in the
right direction, although it has limitations. Paris COP 21 is essentially an energy
deal based on a bottom up approach and its success depends above all, contrary
22 https://www.carbontracker.org/reports/carbon-budgets-explained/
20
to common belief, mostly on developing countries. It is a step in the right
direction, although it has limitations. 23
The US pulling out from Paris COP 21 is not a welcome development, however it
is unlikely to derail the global commitment to address climate change. It is likely
to do more harm than good to the US.
10. The energy transition
Last but not least, energy is in a state of flux and the speed of change is
impressive. Since 2008, the cost of solar panels declined by 90% and oil
production in the US rose by the equivalent to more than Russia´s exports.
19651969
19731977
19811985
19891993
19972001
20052009
2013-
2000
4000
6000
8000
10000
12000
14000
US oil production
Source: BP
An energy transition is under way and this trend is unstoppable given that the
power is shifting to technology and demand, although supporting policies remain
extremely important. Climate change acted as a wake up call to raise the
awareness of the need to produce clean energy at an affordable cost and it
created an opportunity that is delivering unexpected positive results. The
precipitous decline in the cost of variable renewable energies (wind and solar),
not to mention the global decline in energy per unit of GDP and the discovery of
abundant natural gas were totally unexpected.
23 https://www.carbonbrief.org/paris-2015-tracking-country-climate-pledges
21
The one bleak spot is that progress notwithstanding 15% of the world
population still has no access to electricity and more than 40% to clean cooking
facilities. In Sub Saharan Africa, less than 40% of the population has access to
electricity.
The energy system is being turned upside down as a result of 4 forces. The US
became the undisputed leader of oil and gas production for many years. China,
by far the largest energy consumer in the world adopted a blue- sky policy based
on the rapid deployment of renewables and, more recently, of electric vehicles.
Variable renewable energies are becoming the cheapest source of electricity
generation and, combined with digital technologies and advances in energy
storage, are producing a decentralized electricity model. World energy
consumption is growing at a slower pace and demand for electricity has been
growing faster than that of primary energy.
The shale oil and gas revolution turned the US in the new Saudi Arabia. At the
same time, China became the largest investor in variable renewable energies, a
dominant force in solar equipment manufacturing, a serious investor in
electricity storage technologies and will shape, to a large extent, the future of
electric mobility.
The cost of variable renewable energies declined precipitously. Wind costs have
fallen 50 p.c. since 2009 and solar module costs by 80 p.c. since 2009.
Unsubsidized solar power was bid at below 28 dollars per kilowatt-hour in
countries with high solar exposure, onshore wind at 30 and offshore wind at 50,
which compares with 120 dollars in the Hinckley Point nuclear power plant in
the UK and is much lower than coal generation.
Overall, the growth rate of world energy demand has fallen by half. Energy
consumption is flat, or even declining, in advanced economies. In middle income,
including China, and developing countries it is growing slower as a result of the
combined effect of more rapid gains in energy efficiency and lower GDP growth.
Everything is becoming more efficient, all along from LED lighting, A+++
appliances and lower fuel consumption by cars.
22
1971 1976 1981 1986 1991 1996 2001 2006 2011 20160
500
1000
1500
2000
Primary energy consumption in World MTOE 5 years deltas
Source: BP
Super low cost variable renewables, digitalization and declining storage costs are
turning upside down the traditional utilities model and market design. The
transition will not be easy, as highlighted by the stranded assets in Germany´s
power sector and by the decline of the load factor of thermal generation and
curtailment of renewables in China. The future is difficult to predict given that it
depends to a large extent on 2 factors: the capacity to produce batteries at a
lower cost and the future of mobility. 24 25
Change is accelerating, as witnessed by the decline in the cost of batteries, a top
brand carmaker like Volvo announcing that it will stop using internal
combustion engines in 2019 and the French government that ICE´s will not be
allowed after 2040. 26 This will radically transform the energy system, as we
know it.
Conclusion
24 Back to the future, electric vehicles and oil demand, BP energy economics http://www.bp.com/content/dam/bp/pdf/speeches/2016/back-to-the-future-electric-vehicles-and-oil-demand.pdf
25 http://www.dieterhelm.co.uk/books/
26 Levelized cost of storage analysis 2.0, Lazard https://www.lazard.com/perspective/levelized-cost-of-storage-analysis-20/
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Structural change of the world economy is widespread and is progressing at high
speed as a result of extremely rapid technological change, the shift eastwards of
the economic center of gravity and the evolution of globalization, urbanization,
climate awareness and an energy transition. This creates immense opportunities
and at the same time produces deep uncertainty, raises challenges and requires
policies to support those left behind. At the same time that this transformation is
unfolding, the rules- based order that emerged from World war II is under
pressure, the US being challenged by the rise of China, which became the largest
economy in the world, although it remains a middle income country and is
confronted with serious challenges.
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