Fossil fuels are vital to U.S. productivity
Fossil fuels are vital to U.S. productivityPer capita energy growth is critical to the U.S.; fossil fuels account for 85% of all energy consumed. If the Kyoto Protocol were ratified by the U.S. Senate, the required reduction in per capita energy would shackle productivity growthDr. John Moroney, Texas A & M University
INTRODUCTION The Clinton Administration is proposing that, by 2010, the U.S. cut fossil fuels consumption 15% from current usage. The Administration made this commitment in the Kyoto Protocol (KP), adopted December 1997 by representatives from the U.S., other industrialized nations and most countries that made up the Former Soviet Union. The goal of KP is to reduce global greenhouse gas emissions. Carbon dioxide (CO2) is the greenhouse gas most atmospheric scientists believe to be the major potential source of future global warming.1–4 A consensus view, reported in the 1995 Intergovernmental Panel on Climate Change, is that if the current rate of increase in atmospheric CO2 concentration were to continue (0.4% per yr), average global temperature could increase about 2.5°C in a century. This increase in global mean temperature, should it occur, might cause globally catastrophic environmental damage. The potential damage is highly uncertain. It cannot be predicted with any degree of reliability.5,6 However, the unsure possibility of global warming, caused chiefly by increasing atmospheric CO2, merits further scientific work. The U.S. emits about 23% of the world’s man-made CO2; and 99% of that CO2 comes from burning fossil fuels. That is why these fuels are the Administration’s KP targets. KP, as now drafted, contains a fatal flaw: The largest developing economies — China, India, Indonesia, Brazil and Mexico — have not agreed to limit their CO2 emissions growth. They cannot be expected to, because they must have more fossil fuels to spur economic growth. Their leaders cannot be expected to sacrifice tangible growth now for the chancy prospect of a cooler Earth in a hundred years. However, without their binding agreement to limit CO2 emissions, steps taken by U.S. and other industrialized countries to reduce emissions will not ensure a global reduction. No such agreement will take place. That is the fatal flaw. TRENDS IN TOTAL ENERGY CONSUMPTION Total U.S. energy consumption from fossil fuels, nuclear and hydroelectricity from 1950–1996 is shown in Fig. 1. It can be seen that total energy increased 2.6 fold, to 89.8 quadrillion Btu per yr from 34.0 quadrillion. Growth in consumption averaged 3.5%/yr during 1950–1972, but only 0.8%/yr from 1973 through 1996. There are two important reasons for sharper growth during 1950–1972: 1) real energy prices declined 30% during these years, and 2) real GDP grew more rapidly during 1950–1972 than during 1973–1996. However, matters changed abruptly between 1973 and 1982. Following the initial OPEC embargo on imports, real energy prices jumped 55% in 1974, then rose more gradually each year through 1978. Because of the Iraq-Iran War and cutbacks in OPEC oil exports, energy prices doubled between 1979 and 1981. Total energy consumption dipped from 1973 until 1975, rose until 1979, then dropped sharply from 1979 until 1983. Notice that energy consumption in 1986 was practically identical to energy use in 1973. Energy prices began to drift downward after 1981, then plunged during 1986. Total energy consumption grew about 21% between 1986 and 1996. Per capita energy use. Energy use per capita is also shown in Fig. 1. Note that it increased to 351.3 MMBtu in 1973 from 223.8 MMBtu in 1950. This amounts to an average increase of 2% per year. But between 1973 and 1982, rising energy prices caused energy use per capita to fall 14%, to 305.4 from 351.3 MMBtu. After 1986, as real energy prices fell, energy use per capita increased to 338.7 from 308.5 MMBtu, or 10%. Technological progress, energy per worker and capital per worker are essential determinants of productivity. Productivity growth is enhanced by growth in energy and capital per worker, but is diminished when either energy or capital per worker declines. Importance of energy. Why is energy so vitally important to the U.S.? The reasons are straightforward. To operate modern capital equipment requires commercial energy. Factories must have energy from gas, oil, coal or electricity. Otherwise, they are idle. Modern transportation — cars, trucks, buses, railroads, airplanes and ships — requires energy embodied in refined oil products, e.g., gasoline, diesel, jet and bunker fuel. Modern agricultural equipment cannot run without diesel fuel. To maintain comfortable homes, hospitals and offices requires gas, oil or electricity. Fossil fuels permeate our lives. This author examined energy and physical capital-formation roles in U.S. productivity growth from 1950 until 1984.7 These 35 years were marked by two distinct epochs. Epoch 1 is from 1950 through 1972, years of falling real energy prices, steady growth in energy and utilized capital per worker hour, and rapid productivity growth of 2.6%/yr. Epoch 2 is from 1973 through 1984. During most of this period, energy prices increased, energy per worker hour declined and productivity growth dropped to only 1.0%/yr. In 1996, the U.S. consumed 89.8 quadrillion Btu of energy from fossil fuels, hydropower and nuclear-generated electricity, and 92.8 quadrillion Btu from all sources.8 Of this total, 78.8 quadrillion Btu (85%) came from fossil fuels. In 1990, the U.S. consumed 84.2 quadrillion Btu of energy from all sources. Fossil fuels made up 72.0 quadrillion Btu, or 85.5% of the total. The KP calls for the U.S. to reduce CO2 emissions to 93% of the 1990 rate sometime during the years 2008–2012. For analysis, 2010 was chosen as the target year. To determine cost of meeting the KP target, the following two assumptions were made: U.S. reduces its CO2 emissions to 93% of the 1990 rate, and the only way to reduce CO2 emissions is to reduce fossil fuel usage. The latter assumption is 99% correct, because fossil fuels account for 99% of U.S. CO2 emissions. ACTUAL FOSSIL FUEL CUTS To analyze the energy reduction called for by KP requires five steps:
Results of this exercise are shown in Table 1. Total energy consumption in 1996 was 92.8 quadrillion Btu. Fossil fuels constitute 85% of the total (78.8/92.8=85%). KP requires no reduction in renewable or nuclear energy. So, to cut CO2 emissions to 93% of 1990 levels commits the U.S. to reduce from 78.8 quads in 1996 to 66.9 quads in 2010. This amounts to a 15% cutback in fossil fuels from 1996 (11.9/78.8=15%). It also amounts to a 13% cutback in overall energy between now and 2010 (11.9/92.8=13%).
ENERGY PER WORKER Although KP requires a 15% cutback in fossil fuels and a 13% reduction in total energy by 2010, it results in an even larger cutback in energy per worker because population and labor force continue to grow. To analyze the reduction in energy per worker implied by KP, growth in population and labor force from 1996 to 2010 must be projected. Both are assumed to grow at 1% per yr. Using U.S. Census Bureau population estimates for 1990 (249.4 million) and 1996 (265.3 million), projected population in 2010 is 305 million, Table 2.
Divide actual energy consumption in 1990 and 1996, Table 1, by actual 349.9 MMBtu per person in 1996. Next, divide energy consumption in 2010 required by KP, Table 1, by projected population in 2010 (305 million), to find that energy per capita would be 265.4 MMBtu, shown in Table 2. KP, combined with labor-force growth, would require a reduction of 84.5 million Btu per person compared with 1996, a cutback of 28% per worker. If this 28% were to occur smoothly between 1996 and 2010, reduction in energy per worker would be 1.8% per yr.
KYOTO PROTOCOL PROJECTIONS What would be the effect on productivity of this 1.8% annual reduction in energy per worker? To answer that, a macroeconomic productivity equation, developed by the author, was used.7 The central idea is that real GDP per worker (macroeconomic productivity) depends on utilized capital per worker, energy per worker and technological progress. The productivity growth equation is:
Productivity growth without Kyoto. To project annual productivity growth from 1996 until 2010 with no restrictions placed on energy, assume that utilized capital per worker increases at 2.0% annually (as it did from 1950 until 1984), and that energy per worker increases at 1.3% annually (as it did from 1950 until 1984). Substituting these numbers into the productivity growth equation gives:
No restrictions on energy consumption, growth of capital per worker or technological progress yields a 2.0% annual growth of real GDP per worker from 1996 until 2010. Productivity growth with Kyoto. To project productivity growth with a 1.8% annual decrease in energy per worker required by KP, but retaining all other assumptions, yields:
The reduction in energy per worker implied by KP would reduce annual productivity growth to 1.1% from 2.0%, or 0.9%/yr. Several things about this projection should be stressed. First, it has no energy shocks, but instead a steady annual reduction in energy per worker. Second, it assumes steady technological progress at 1.3% annually. Some might think this too optimistic during a 1.8% annual reduction in energy per worker. If a lot of energy-intensive capital must be scrapped, they are probably right. Third, it assumes that utilized capital per worker continues to grow at 2.0% per year. If much energy-intensive capital must be scrapped, net utilized capital stock may actually decrease. If so, gross investment in new energy-efficient capital will have to be much greater than it is now. Finally, it implies that Btu per unit of capital declines quite rapidly at 3.8% per year. Such a strong decrease would require much higher gross investment in energy-efficient capital stocks. The difference between projected productivity growth of 1.1% with KP and 2.0% without it implies major differences in U.S. living standards by the year 2010. With productivity growth of 1.1%/yr, U.S. living standards would be 17% higher in 2010 than in 1996; but with productivity growth of 2.0%/yr, living standards would be 32% higher in 2010. The conclusion is clear: A 1.8% annual reduction in energy use per capita would lead to living standards in 2010 that are 15% lower than they would have been with no restrictions on fossil fuels. IMPACT ON DIFFERENT ECONOMIC SECTORS KP cuts in fossil fuels would permeate the economy. Impact would be especially strong in manufacturing and transportation sectors, since they rely heavily on fossil fuels, and less severe for residential households and commercial business. Table 3 shows total energy usage in these sectors in 1996.
As shown in Fig. 2, 66% of electricity is generated by fossil fuels, mostly coal and relatively small volumes of gas. Nuclear energy produces 21% of America’s electricity; renewable resources (mostly hydropower) produce the remaining 13%. A cut in fossil fuels, especially coal, would reduce electricity supply and increase its price. An increase in nuclear or hydroelectricity is unlikely by 2010. Fossil fuels burned to generate electricity do not appear as direct fossil fuel consumption in other sectors. Instead, they are consumed indirectly as electricity used by all other sectors of the economy. What follows are calculations of direct and indirect use of fossil fuels, embodied in each sector’s electricity consumption. Fig. 3 shows that about 76% of residential energy comes from fossil fuels and 24% from other sources, chiefly electricity generated by nuclear and hydropower. A 15% reduction in fossil fuels would represent an 11.5% cutback in residential energy supply. As Fig. 4 illustrates, about 75% of commercial energy is derived from fossil fuels, and roughly 25% from other energy types, mainly nuclear and hydropower. A 15% cut in fossil fuels would mean an 11.3% decrease in energy supplied to the commercial sector. In the industrial sector, 84% of its energy relies on fossil fuels with only 16% attributable to other types of energy, Fig. 5. A 15% decrease in fossil fuels used by industry would be a major energy loss. The U.S. transportation sector includes automobiles, light trucks, buses, heavy commercial trucks, trains, airplanes, ships and barges. This sector depends on fossil fuels for 99.2% of its energy, with 96.2% from refined liquid-petroleum products, Fig. 6. A 15% fossil-fuels reduction would mean a 15% cutback in energy to American transportation industries. They would endure such cutbacks more intensely than most others. CONCLUSIONS The U.S. consumes more energy from fossil fuels than any other country. It does so because fossil fuels have historically been cheap in the U.S., and still are. Since the U.S. relies heavily on fossil fuels, it emits more CO2 than any other country. About 99% of U.S. CO2 emissions come from fossil fuels. America’s only means to reduce CO2 emissions is to curtail fossil fuel consumption. To meet current terms of the Kyoto Protocol would require the U.S. to cut fossil fuels 15% by 2010. The resulting 12 quadrillion-Btu loss could not be offset by increased renewable or nuclear energy by 2010. The 13% reduction in total energy, combined with 1% annual labor-force growth, implies an overall decrease in energy per worker of 28% by 2010. If the 28% decrease were to occur smoothly for 14 years, (1996 to 2010) the decrease in energy per worker would be 1.8% per year. This 1.8% annual decrease in energy per worker would reduce annual growth in real GDP per worker to 1.1% from 2.0%. This reduction in productivity growth is the price for KP. This decrease in productivity growth would cause U.S. living standards to be 15% lower in 2010 than they would be without any restrictions on fossil fuel usage. That is why KP would be a bad deal for the U.S. ACKNOWLEDGMENT
LITERATURE CITED 1 Intergovernmental Panel on Climate Change (IPCC), "Climate change 1994: Radiative forcing of climate change and an evaluation of the IPCC IS92 emission scenarios," Cambridge University Press, 1995. 2 Intergovernmental Panel on Climate Change (IPCC), "Climate change, 1995," Cambridge University Press, 1996. 3 North, G. R. and M. J. Stevens, "Detecting climate signals in the surface temperature record," Journal of Climate, Vol. 11, April 1998, pp. 563–577. 4 Wigley, T. M. L., "Past and projected climate change; what have we done and how rapidly can we influence the future?" in Final report: An institute on the economics of the climate resource, edited by K. A. Miller and R. K. Parkin, National Center for Atmospheric Research, Boulder, Colorado, June 1995, pp. 63–90. 5 Nordhaus, W., "An optimal transition path for controlling greenhouse gases," Science, Vol. 258, November 1992, pp. 1315–1319. 6 Nordhaus, W., Managing the global commons: The economics of climate change, MIT Press: Cambridge, Massachusetts, 1994. 7 Moroney, J. R., "Energy, capital, and technological change in the United States," Resources and Energy, Vol. 14, 1992, pp. 363–380. 8 DeGolyer and MacNaughton, Twentieth century petroleum statistics, 1997, DeGolyer and MacNaughton: Dallas, Texas, 1997. 9 Jorgenson, D. W. and P. Wilcoxen, "Reducing U.S. carbon dioxide emissions: The cost of different goals," in Energy, growth, and the environment, J. R. Moroney, editor, JAI Press: Greenwich, Connecticut, 1992.  The author
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his article shows why
lower productivity growth would follow curtailment of fossil fuels. A 15% reduction in U.S.
fossil fuels consumption by 2010 would cut productivity growth by almost 1% per year. This
lower productivity growth would cut U.S. average standard of living by 15% in 2010 compared to
what it would have been without fuel restrictions. Industrial and transportation sectors would
bear the heaviest burden because they use oil and natural gas so intensively.
John
R. Moroney is professor of economics at Texas A&M
University and Schmidt international professor in the A.B. Freeman School of Business, Tulane
University. He is president of MERA, an economics and energy-research consulting firm. Mr.
Moroney received a BA in natural sciences and economics from Southern Methodist University,
1960, and a PhD in economics from Duke University, 1964. Before joining Texas A&M as
department head in 1981, he was on the faculties of Tulane University and Massachusetts
Institute of Technology. He has been a consultant to the National Academy of Sciences, the
National Academy of Engineering and the National Science Foundation.
