SHF2014丨Michael Grubb

Introduction

The organizer asked if I could offer somethoughts about how some of the ideas presented in my book Planetary Economicsmight apply in the context of Asian transformation and identifying new dynamicsfor Asia, the theme of this year’s Shanghai Forum. I want to offer thisconference three broad propositions. The first being that energy and associatedenvironmental impacts pose crucial challenges for Asian development. Secondly,some of the insights and understandings of the economic structure of thisproblem also might help in thinking about aspects of the development process.Finally, when you put those two things together, we can recall the old sayingthat every crisis or every challenge is also an opportunity for addressingmultiple problems. So the start is constituted of a great deal of pessimism, Ihope to conclude with some optimism.

Risks

First I would like to give a high-levelsummary of one basic lesson in the energy world is the international fuelmarket and particularly oil have been and always consist of volatilecommodities. Global oil demands after the oil shocks in 1970s actually prettymuch stabilized in most of the world except for Asia which has accounted formost of the growth in global oil demand. There is little dispute that the 1970soil shocks had a major impact on economic growth and there is not much disputethat there has been a correlation of major changes in oil prices and globalgrowth.

Then I would focus more upon the climatechange challenge, and a very basic question, a subject to numerous economicdebate for twenty years, is how serious is climate change and what are the costof CO2 emissions? I think a central point to offer here is it all depends onhow wide your scope is in terms of the kinds of the changes you are thinkingabout, how you see the future and how you treat risks and diversion. You canthink the world will only get a little warmer and that the sea level will risea bit or you think like certain scientist that climate change will lead tomajor structural changes. And the things we are trying to measure and thinkabout are what impacts climate change would have on markets, non-market costsand social stability. And what emerges is a pretty depressing conclusion thatthe costs could be very high. So the conclusion is: don’t believe anybody whosays they know what the social cost of carbon really is.

This challenge includes risk management atvery uncertain circumstances, and what is the real consequence of climatechange and how do we evaluate that, how do we act, how do we coordinateresponses? And a moral philosopher wrote an article called the Perfect MoralStorm because it combines questions about how we value not just ourselves butnature around us, other people and other countries, future generations. And wehaven’t been doing very well in solving the problem. The emissions have beenincreasing over the last decade faster than several decades before. We arecertainly finding more oil, but the marginal barrel is being sought under morecomplex environment through more sophisticated technology which is neither cheapnor necessarily secure. And when local pollution becomes more regional as a bigheadache and then affects in a global way, we just do not know who really haveto solve it.

Insights

As I suggested, in the second propositionthere are insights that could be quite useful more broadly. According toBashmakov, the amount of money that countries spend on energy has beensurprisingly constant as proportion of GDP for more than a century in mostcountries despite huge variations in the energy price. This results from thefact that higher prices are usually followed by less consumption, but why? Itcan be explained through factors as energy efficiency and innovation. Ineconomic models actors are optimizing so that there exists a best practicefrontier, in reality every entity is somewhat short of the frontier. Why do somany people waste energy in the real world? We don’t wake up asking ourselves“How am I going to optimize my energy efficiency today”, instead we showso-called satisfying behaviour.

So how fast and in what direction will thefrontier move? Can it move towards transforming behaviour to transform energysystems over time? To transform systems we need strategic investment to deliverinnovation and to cause the evolution of complex systems. Only half of economicgrowth can be explained by resource and capital accumulation, so what is thedark matter of economic growth? Two barriers explain this behaviour, one isthat policies, legal and cultural developments prevent actors from movingcloser to the best practice technology frontier, the other is the investmentand infrastructure and global institutions that help the frontier to movefaster.

Opportunities

Bringing these things together offersimportant opportunities for tackling multiple problems. And I would like tooffer three perspectives on the three domains. The first domain is the centuryof ‘western’ development and associated evolution of economic thought. Thisdomain includes the centrality of property rights and institutions and thedevelopment of markets in eras of abundant natural resources as economies ofscale. The second is the analysis from energy system dynamics and environmentwhich includes the evolution of complex networkbased technologies andinfrastructures, encroachment of ‘externalities’ and economies oflearning-by-doing and path-dependence. The final perspective is theintellectual perspective on Asian development where rapid development andglobalization intermingles the domains. In Asia all three domains are happeningalmost simultaneously, rapid globalization, and rapid catch up ad rapidinnovation. The faster the frontier moves the more it pushes decision makers tobe connected with the evolution of the new frontier.

In the middle of the century the globaleconomy could be anywhere. Innovation will have influence on that growth and isa big part of it. We are now dealing with the consequences of exertion ofresources. We have to deal with the structural choices of whether we wanthigher or lower carbon emissions. Will we choose higher capital costs but lowerpollution or will we chose the so-called brown economies with lower capitalcosts but higher pollution. Which we want, which we go for is a strategicchoice and mostly a key strategic choice that is facing the Asian economies.

Thank you.