Economics And Energy

First Edition, 2011

ISBN 978-93-81157-41-1

© All rights reserved.

Published by: The English Press 4735/22 Prakashdeep Bldg, Ansari Road, Darya Ganj, Delhi - 110002 Email: [email protected] 

Table of Contents Chapter 1- Energy Economics Chapter 2 - Ecological Economics Chapter 3 - Environmental Economics Chapter 4 - Green Economics Chapter 5 - Natural Resource Economics Chapter 6 - Energetics Chapter 7 - Economics of Global Warming Chapter 8 - Electricity Market Chapter 9 - Cost of Electricity by Source Chapter 10 - Eroei & Thermoeconomics

Chapter- 1

Energy Economics

Energy economics is a broad scientific subject area which includes topics related to supply and use of energy in societies. Due to diversity of issues and methods applied and shared with a number of academic disciplines, energy economics does not present itself as a self contained academic discipline, but it is an applied subdiscipline of economics. From the list of main topics of economics, some relate strongly to energy economics: • • • • • • •

Econometrics Environmental economics Finance Industrial organization Microeconomics Macroeconomics Resource economics

Energy economics also draws heavily on results of energy engineering, geology, political sciences, ecology etc. Recent focus of energy economics includes the following issues: • • • • • • • • • • • • •

Climate change and climate policy Risk analysis and security of supply Sustainability Energy markets and electricity markets - liberalisation, (de- or re-) regulation Demand response Energy and economic growth Economics of energy infrastructure Environmental policy Energy policy Energy derivatives Forecasting energy demand Elasticity of supply and demand in energy market Energy elasticity

Some institutions of higher education (universities) recognise energy economics as a viable career opportunity, offering this as a curriculum. The University of Cambridge, Massachusetts Institute of Technology and the Vrije Universiteit Amsterdam are the top three research universities, and Resources for the Future the top research institute. There are numerous other research departments, companies and professionals offering energy economics studies and consultations.

History Energy related issues have been actively present in economic literature since the 1973 oil crisis, but have their roots much further back in the history. As early as 1865, W.S. Jevons expressed his concern about the eventual depletion of coal resources in his book The Coal Question. One of the best known early attempts to work on the economics of exhaustible resources (incl. fossil fuel) was made by H. Hotelling, who derived a price path for non-renewable resources, known as Hotelling's rule. Energy economics concerns the application of economic theory and methods to issues of energy supply, energy demand, energy markets, and energy policy, as well as the interactions between energy and other issues (e.g., environment, finance).

Ecological economics Ecological economics is a transdisciplinary field of academic research that aims to address the interdependence and coevolution of human economies and natural ecosystems over time and space. It is distinguished from environmental economics, which is the mainstream economic analysis of the environment, by its treatment of the economy as a subsystem of the ecosystem and its emphasis upon preserving natural capital.

Environmental economics Environmental economics is a subfield of economics concerned with environmental issues. Environmental economics undertakes theoretical or empirical studies of the economic effects of national or local environmental policies around the world. Particular issues include the costs and benefits of alternative environmental policies to deal with air pollution, water quality, toxic substances, solid waste, and global warming. Many of these environmental issue originate at least in part from energy use.

Natural resource economics Natural resource economics deals with the supply, demand, and allocation of the Earth's natural resources. One main objective of natural resource economics is to better understand the role of natural resources in the economy in order to develop more sustainable methods of managing those resources to ensure their availability to future

generations. Resource economists study interactions between economic and natural systems, with the goal of developing a sustainable and efficient economy.

Energetics Energetics is the scientific study of energy flows and storages under transformation. Because energy flows at all scales, from the quantum level, to the biosphere and cosmos, energetics is therefore a very broad discipline, encompassing for example thermodynamics, chemistry, biological energetics, biochemistry and ecological energetics.

Thermoeconomics Thermoeconomics, also referred to as 'biophysical economics', is a school of heterodox economics that applies the laws of thermodynamics to economic theory. Thermoeconomics can be thought of as the statistical physics of economic value. Thermoeconomics is based on the proposition that the role of energy in biological evolution should be defined and understood through the second law of thermodynamics but in terms of such economic criteria as productivity, efficiency, and especially the costs and benefits (or profitability) of the various mechanisms for capturing and utilizing available energy to build biomass and do work.

EROEI EROEI (Energy Returned on Energy Invested), sometimes referred to as EROI (Energy Return On Investment), is the ratio of the amount of usable energy acquired from a particular energy resource to the amount of energy expended to obtain that energy resource. Emergy is a somewhat related measure of the quantity and nature of the energy that went into making a product or service.

Chapter- 2

Ecological Economics

The three pillars of sustainability.

Three circles enclosed within one another showing how both economy and society are subsets of our planetary ecological system. This view is useful for correcting the misconception, sometimes drawn from the previous "three pillars" diagram, that portions of social and economic systems can exist independently from the environment. Ecological economics is a transdisciplinary field of academic research that aims to address the interdependence and coevolution of human economies and natural ecosystems over time and space. It is distinguished from environmental economics, which is the mainstream economic analysis of the environment, by its treatment of the economy as a subsystem of the ecosystem and its emphasis upon preserving natural capital. One survey of German economists found that ecological and environmental economics are different schools of economic thought, with ecological economists

emphasizing "strong" sustainability and rejecting the proposition that natural capital can be substituted by human-made capital. Ecological economics was founded in the works of Kenneth E. Boulding, Nicholas Georgescu-Roegen, Herman Daly, Robert Costanza, and others. The related field of green economics is, in general, a more politically applied form of the subject. The identity of ecological economics as a field has been described as fragile, with no generally accepted theoretical framework and a knowledge structure which is not clearly defined. According to ecological economist Malte Faber, ecological economics is defined by its focus on nature, justice, and time. Issues of intergenerational equity, irreversibility of environmental change, uncertainty of long-term outcomes, and sustainable development guide ecological economic analysis and valuation. Ecological economists have questioned fundamental mainstream economic approaches such as cost-benefit analysis, and the separability of economic values from scientific research, contending that economics is unavoidably normative rather than positive (empirical). Positional analysis, which attempts to incorporate time and justice issues, is proposed as an alternative. Ecological economics includes the study of the metabolism of society, that is, the study of the flows of energy and materials that enter and exit the economic system. This subfield may also be referred to as biophysical economics, bioeconomics, and has links with the applied science of industrial symbiosis. Ecological economics is based on a conceptual model of the economy connected to, and sustained by, a flow of energy, materials, and ecosystem services. Analysts from a variety of disciplines have conducted research on the economy-environment relationship, with concern for energy and material flows and sustainability, environmental quality, and economic development.

Nature and ecology

Environmental Scientist sampling water. A simple circular flow of income diagram is replaced in ecological economics by a more complex flow diagram reflecting the input of solar energy, which sustains natural inputs and environmental services which are then used as units of production. Once consumed, natural inputs pass out of the economy as pollution and waste. The potential of an

environment to provide services and materials is referred to as an "environment's source function", and this function is depleted as resources are consumed or pollution contaminates the resources. The "sink function" describes an environment's ability to absorb and render harmless waste and pollution: when waste output exceeds the limit of the sink function, long-term damage occurs.:8 Some persistent pollutants, such as some organic pollutants and nuclear waste are absorbed very slowly or not at all; ecological economists emphasize minimizing "cumulative pollutants".:28 Pollutants affect human health and the health of the climate. The economic value of natural capital and ecosystem services is accepted by mainstream environmental economics, but is emphasized as especially important in ecological economics. Ecological economists may begin by estimating how to maintain a stable environment before assessing the cost in dollar terms.:9 Ecological economist Robert Costanza led an attempted valuation of the global ecosystem in 1997. Initially published in Nature, the article concluded on $33 trillion with a range from $16 trillion to $54 trillion (in 1997, total global GDP was $27 trillion). Half of the value went to nutrient cycling. The open oceans, continental shelves, and estuaries had the highest total value, and the highest per-hectare values went to estuaries, swamps/floodplains, and seagrass/algae beds. The work was criticized by articles in Ecological Economics Volume 25, Issue 1, but the critics acknowledged the positive potential for economic valuation of the global ecosystem.:129 The Earth's carrying capacity is another central question. This was first examined by Thomas Malthus, and more recently in an MIT study entitled Limits to Growth. Although the predictions of Malthus have not come to pass, some limit to the Earth's ability to support life are acknowledged. In addition, for real GDP per capita to increase real GDP must increase faster than population growth. Diminishing returns suggest that productivity increases will slow if major technological progress is not made. Food production may become a problem, as erosion, an impending water crisis, and soil salinity (from irrigation) reduce the productivity of agriculture. Ecological economists argue that industrial agriculture, which exacerbates these problems, is not sustainable agriculture, and are generally inclined favorably to organic farming, which also reduces the output of carbon.:26 Global wild fisheries are believed to have peaked and begun a decline, with valuable habitat such as estuaries in critical condition.:28 The aquaculture or farming of piscivorous fish, like salmon, does not help solve the problem because they need to be fed products from other fish. Studies have shown that salmon farming has major negative impacts on wild salmon, as well as the forage fish that need to be caught to feed them. Since animals are higher on the trophic level, they are less efficient sources of food energy. Reduced consumption of meat would reduce the demand for food, but as nations develop, they adopt high-meat diets similar to the United States. Genetically modified food (GMF) a conventional solution to the problem, have problems – Bt corn produces its own Bacillus thuringiensis, but the pest resistance is believed to be only a matter of time.:31 The overall effect of GMF on yields is contentious, with the USDA and FAO

acknowledging that GMFs do not necessarily have higher yields and may even have reduced yields. Global warming is now widely acknowledged as a major issue, with all national scientific academies expressing agreement on the importance of the issue. As the population growth intensifies and energy demand increases, the world faces an energy crisis. Some economists and scientists forecast a global ecological crisis if energy use is not contained – the Stern report is an example. The disagreement has sparked a vigorous debate on issue of discounting and intergenerational equity. GLOBAL GEOCHEMICAL CYCLES CRITICAL FOR LIFE

Nitrogen cycle

Water cycle

Carbon cycle

Oxygen cycle

Ethics Mainstream economics has attempted to become a value-free 'hard science', but ecological economists argue that value-free economics is generally not realistic. Ecological economics is more willing to entertain alternative conceptions of utility, efficiency, and cost-benefits such as positional analysis or multi-criteria analysis. Ecological economics is typically viewed as economics for sustainable development, and may have goals similar to green politics.

Schools of thought Various competing schools of thought exist in the field. Some are close to resource and environmental economics while others are far more heterodox in outlook. An example of the latter is the European Society for Ecological Economics. An example of the former is the Swedish Beijer International Institute of Ecological Economics.

Differentiation from mainstream schools

In ecological economics, natural capital is added to the typical capital asset analysis of land, labor, and financial capital. Ecological economics uses tools from mathematical economics, but may apply them more closely to the natural world. Whereas mainstream economists tend to be technological optimists, ecological economists are inclined to be technological pessimists. They reason that the natural world has a limited carrying capacity and that its resources may run out. Since destruction of important environmental resources could be practically irreversible and catastrophic, ecological economists are inclined to justify cautionary measures based on the precautionary principle. The most cogent example of how the different theories treat similar assets is tropical rainforest ecosystems, most obviously the Yasuni region of Ecuador. While this area has substantial deposits of bitumen it is also one of the most diverse ecosystems on Earth and some estimates establish it has over 200 undiscovered medical substances in its genomes - most of which would be destroyed by logging the forest or mining the bitumen. Effectively, the instructional capital of the genomes is undervalued by both classical and neoclassical means which would view the rainforest primarily as a source of wood, oil/tar and perhaps food. Increasingly the carbon credit for leaving the extremely carbonintensive ("dirty") bitumen in the ground is also valued - the government of Ecuador set a price of US$350M for an oil lease with the intent of selling it to someone committed to never exercising it at all and instead preserving the rainforest. Bill Clinton, Paul Martin and other former world leaders have become closely involved in this project which includes lobbying for the issue of International Monetary Fund Special Drawing Rights to recognize the rainforest's value directly within the framework of the Bretton Woods institutions. If successful this would be a major victory for advocates of ecological economics as the new mainstream form of economics.

History and development Early interest in ecology and economics dates back to the 1960s and the work by Kenneth Boulding and Herman Daly, but the first meetings occurred in the 1980s. It began with a 1982 symposium in Sweden which was attended by people who would later be instrumental in the field, including Robert Costanza, Herman Daly, Charles Hall, AnnMari Jansson, Bruce Hannon, H.T. Odum, and David Pimentel. Most were ecosystem ecologists or mainstream environmental economists, with the exception of Daly. In 1987, Daly and Costanza edited an issue of Ecological Modeling to test the waters. A book titled Ecological Economics by Juan Martinez-Alier was published later that year. 1989 saw the foundation of the International Society for Ecological Economics and first publication of its journal Ecological Economics by Elsevier. Robert Costanza was the first president of the society and first editor of the journal which is currently edited by Richard Howarth. European conceptual founders include Nicholas Georgescu-Roegen (1971), William Kapp (1944) and Karl Polanyi (1950). Some key concepts of what is now ecological economics are evident in the writings of E.F. Schumacher, whose book Small Is Beautiful – A Study of Economics as if People Mattered (1973) was published just a few years before the first edition of Herman Daly's comprehensive and persuasive Steady-State

Economics (1977). Other figures include ecologists C.S. Holling, H.T. Odum and Robert Costanza, biologist Gretchen Daily and physicist Robert Ayres. CUNY geography professor David Harvey explicitly added ecological concerns to political economic literature. This parallel development in political economy has been continued by analysts such as sociologist John Bellamy Foster. The antecedents can be traced back to the Romantics of the 1800s as well as some Enlightenment political economists of that era. Concerns over population were expressed by Thomas Malthus, while John Stuart Mill hypothesized that the "stationary state" of an economy might be something that could be considered desirable, anticipating later insights of modern ecological economists, without having had their experience of the social and ecological costs of the dramatic post-World War II industrial expansion. As Martinez-Alier explores in his book the debate on energy in economic systems can also be traced into the 1800s e.g. Nobel prize-winning chemist, Frederick Soddy (1877–1956). Soddy criticized the prevailing belief of the economy as a perpetual motion machine, capable of generating infinite wealth — a criticism echoed by his intellectual heirs in the now emergent field of ecological economics. The Romanian economist Nicholas Georgescu-Roegen (1906–1994), who was among Daly's teachers at Vanderbilt University, provided ecological economics with a modern conceptual framework based on the material and energy flows of economic production and consumption. His magnum opus, The Entropy Law and the Economic Process (1971), has been highly influential. Articles by Inge Ropke (2004, 2005) and Clive Spash (1999) cover the development and modern history of ecological economics and explain its differentiation from resource and environmental economics, as well as some of the controversy between American and European schools of thought. An article by Robert Costanza, David Stern, Lining He, and Chunbo Ma responded to a call by Mick Common to determine the foundational literature of ecological economics by using citation analysis to examine which books and articles have had the most influence on the development of the field.

Topics Methodology The primary objective of ecological economics (EE) is to ground economic thinking and practice in physical reality, especially in the laws of physics (particularly the laws of thermodynamics) and in knowledge of biological systems. It accepts as a goal the improvement of human well-being through development, and seeks to ensure achievement of this through planning for the sustainable development of ecosystems and societies. Of course the terms development and sustainable development are far from lacking controversy. Richard Norgaard argues traditional economics has hi-jacked the development terminology in his book Development Betrayed.

Well-being in ecological economics is also differentiated from welfare as found in mainstream economics and the 'new welfare economics' from the 1930s which informs resource and environmental economics. This entails a limited preference utilitarian conception of value i.e., Nature is valuable to our economies, that is because people will pay for its services such as clean air, clean water, encounters with wilderness, etc. Ecological economics is distinguishable from neoclassical economics primarily by its assertion that the economy is embedded within an environmental system. Ecology deals with the energy and matter transactions of life and the Earth, and the human economy is by definition contained within this system. Ecological economists argue that neoclassical economics has ignored the environment, at best considering it to be a subset of the human economy. The neoclassical view ignores much of what the natural sciences have taught us about the contributions of nature to the creation of wealth e.g., the planetary endowment of scarce matter and energy, along with the complex and biologically diverse ecosystems that provide goods and ecosystem services directly to human communities: micro- and macroclimate regulation, water recycling, water purification, storm water regulation, waste absorption, food and medicine production, pollination, protection from solar and cosmic radiation, the view of a starry night sky, etc. There has then been a move to regard such things as natural capital and ecosystems functions as goods and services. However, this is far from uncontroversial within ecology or ecological economics due to the potential for narrowing down values to those found in mainstream economics and the danger of merely regarding Nature as a commodity. This has been referred to as ecologists 'selling out on Nature'. There is then a concern that ecological economics has failed to learn from the extensive literature in environmental ethics about how to structure a plural value system.

Allocation of resources Resource and neoclassical economics focus primarily on the efficient allocation of resources, and less on two other fundamental economic problems which are central to ecological economics: distribution (equity) and the scale of the economy relative to the ecosystems upon which it is reliant. Ecological Economics also makes a clear distinction between growth (quantitative increase in economic output) and development (qualitative improvement of the quality of life) while arguing that neoclassical economics confuses the two. Ecological economists point out that, beyond modest levels, increased per-capita consumption (the typical economic measure of "standard of living") does not necessarily lead to improvement in human well-being, while this same consumption can have harmful effects on the environment and broader societal well-being.

Strong versus weak sustainability

Ecological economics challenges the conventional approach towards natural resources, claiming that it undervalues natural capital by considering it as interchangeable with human-made capital—labor and technology. The potential for the substitution of man-made capital for natural capital is an important debate in ecological economics and the economics of sustainability. There is a continuum of views among economists between the strongly neoclassical positions of Robert Solow and Martin Weitzman, at one extreme and the ‘entropy pessimists’, notably Nicholas Georgescu-Roegen and Herman Daly, at the other. Neoclassical economists tend to maintain that man-made capital can, in principle, replace all types of natural capital. This is known as the weak sustainability view, essentially that every technology can be improved upon or replaced by innovation, and that there is a substitute for any and all scarce materials. At the other extreme, the strong sustainability view argues that the stock of natural resources and ecological functions are irreplaceable. From the premises of strong sustainability, it follows that economic policy has a fiduciary responsibility to the greater ecological world, and that sustainable development must therefore take a different approach to valuing natural resources and ecological functions.

Energy economics A key concept of energy economics is net energy gain, which recognizes that all energy requires energy to produce. To be useful the energy return on energy invested (EROEI) has to be greater than one. The net energy gain from production coal, oil and gas has declined over time as the easiest to produce sources have been most heavily depleted. Ecological economics generally rejects the view of energy economics that growth in the energy supply is related directly to well being, focusing instead on biodiversity and creativity - or natural capital and individual capital, in the terminology sometimes adopted to describe these economically. In practice, ecological economics focuses primarily on the key issues of uneconomic growth and quality of life. Ecological economists are inclined to acknowledge that much of what is important in human wellbeing is not analyzable from a strictly economic standpoint and suggests an interdisciplinary approach combining social and natural sciences as a means to address this. Thermoeconomics is based on the proposition that the role of energy in biological evolution should be defined and understood through the second law of thermodynamics, but also in terms of such economic criteria as productivity, efficiency, and especially the costs and benefits (or profitability) of the various mechanisms for capturing and utilizing available energy to build biomass and do work. As a result, thermoeconomics are often discussed in the field of ecological economics, which itself is related to the fields of sustainability and sustainable development.

Exergy analysis is performed in the field of industrial ecology to use energy more efficiently. The term exergy, was coined by Zoran Rant in 1956, but the concept was developed by J. Willard Gibbs. In recent decades, utilization of exergy has spread outside of physics and engineering to the fields of industrial ecology, ecological economics, systems ecology, and energetics.

Energy accounting and balance An energy balance can be used to track energy through a system, and is a very useful tool for determining resource use and environmental impacts, using the First and Second laws of thermodynamics, to determine how much energy is needed at each point in a system, and in what form that energy is a cost in various environmental issues. The energy accounting system keeps track of energy in, energy out, and non-useful energy versus work done, and transformations within the system. Scientists have written and speculated on different aspects of energy accounting.

Environmental services A study was carried out by Costanza and colleagues to determine the 'price' of the services provided by the environment. This was determined by averaging values obtained from a range of studies conducted in very specific context and then transferring these without regard to that context. Dollar figures were averaged to a per hectare number for different types of ecosystem e.g. wetlands, oceans. A total was then produced which came out at 33 trillion US dollars (1997 values), more than twice the total GDP of the world at the time of the study. This study was criticized by pre-ecological and even some environmental economists - for being inconsistent with assumptions of financial capital valuation - and ecological economists - for being inconsistent with an ecological economics focus on biological and physical indicators. The whole idea of treating ecosystems as goods and services to be valued in monetary terms remains controversial to some. A common objection is that life is precious or priceless, but this demonstrably degrades to it being worthless under the assumptions of any branch of economics. Reducing human bodies to financial values is a necessary part of every branch of economics and not always in the direct terms of insurance or wages. Economics, in principle, assumes that conflict is reduced by agreeing on voluntary contractual relations and prices instead of simply fighting or coercing or tricking others into providing goods or services. In doing so, a provider agrees to surrender time and take bodily risks and other (reputation, financial) risks. Ecosystems are no different than other bodies economically except insofar as they are far less replaceable than typical labour or commodities. Despite these issues, many ecologists and conservation biologists are pursuing ecosystem valuation. Biodiversity measures in particular appear to be the most promising way to reconcile financial and ecological values, and there are many active efforts in this regard. The growing field of biodiversity finance began to emerge in 2008 in response to many

specific proposals such as the Ecuadoran Yasuni proposal or similar ones in the Congo. US news outlets treated the stories as a "threat" to "drill a park" reflecting a previously dominant view that NGOs and governments had the primary responsibility to protect ecosystems. However Peter Barnes and other commentators have recently argued that a guardianship/trustee/commons model is far more effective and takes the decisions out of the political realm. Commodification of other ecological relations as in carbon credit and direct payments to farmers to preserve ecosystem services are likewise examples that permit private parties to play more direct roles protecting biodiversity. The United Nations Food and Agriculture Organization achieved near-universal agreement in 2008 that such payments directly valuing ecosystem preservation and encouraging permaculture were the only practical way out of a food crisis. The holdouts were all English-speaking countries that export GMOs and promote "free trade" agreements that facilitate their own control of the world transport network: The US, UK, Canada and Australia.

Externalities Ecological economics is founded upon the view that the neoclassical economics (NCE) assumption that environmental and community costs and benefits are mutually canceling "externalities" is not warranted. Juan Martinez Alier, for instance shows that the bulk of consumers are automatically excluded from having an impact upon the prices of commodities, as these consumers are future generations who have not been born yet. The assumptions behind future discounting, which assume that future goods will be cheaper than present goods, has been criticized by Fred Pearce and by the recent Stern Report (although the Stern report itself does employ discounting and has been criticized by ecological economists). Concerning these externalities, Paul Hawken argues that the only reason why goods produced unsustainably are usually cheaper than goods produced sustainably is due to a hidden subsidy, paid by the non-monetized human environment, community or future generations. These arguments are developed further by Hawken, Amory and Hunter Lovins in "Natural Capitalism: Creating the Next Industrial Revolution".

Ecological-Economic Modeling Mathematical modeling is a powerful tool that is used in ecological economic analysis. Various approaches and techniques include : evolutionary, input-output, neo-Austrian modeling, entropy and thermodynamic models, multi-criteria, and agent-based modeling, the environmental Kuznets curve. Systems Dynamics and GIS are tools used in spatial dynamic landscape simulation modeling.

Chapter- 3

Environmental Economics

Environmental economics is a subfield of economics concerned with environmental issues. Quoting from the National Bureau of Economic Research Environmental Economics program:

“

[...] Environmental Economics [...] undertakes theoretical or empirical studies of the economic effects of national or local environmental policies around the world [...]. Particular issues include the costs and benefits of alternative environmental policies to deal with air pollution, water quality, toxic substances, solid waste, and global warming.

”

Topics and concepts Central to environmental economics is the concept of market failure. Market failure means that markets fail to allocate resources efficiently. As stated by Hanley, Shogren, and White (2007) in their textbook Environmental Economics: "A market failure occurs when the market does not allocate scarce resources to generate the greatest social welfare. A wedge exists between what a private person does given market prices and what society might want him or her to do to protect the environment. Such a wedge implies wastefulness or economic inefficiency; resources can be reallocated to make at least one

person better off without making anyone else worse off." Common forms of market failure include externalities, non excludability and non rivalry. Externality: the basic idea is that an externality exists when a person makes a choice that affects other people that are not accounted for in the market price. For instance, a firm emitting pollution will typically not take into account the costs that its pollution imposes on others. As a result, pollution in excess of the 'socially efficient' level may occur. A classic definition influenced by Kenneth Arrow and James Meade is provided by Heller and Starrett (1976), who define an externality as “a situation in which the private economy lacks sufficient incentives to create a potential market in some good and the nonexistence of this market results in losses of Pareto efficiency.” In economic terminology, externalities are examples of market failures, in which the unfettered market does not lead to an efficient outcome. Common property and non-exclusion: When it is too costly to exclude people from access to an environmental resource for which there is rivalry, market allocation is likely to be inefficient. The challenges related with common property and non-exclusion have long been recognized. Hardin's (1968) concept of the tragedy of the commons popularized the challenges involved in non-exclusion and common property. "commons" refers to the environmental asset itself, "common property resource" or "common pool resource" refers to a property right regime that allows for some collective body to devise schemes to exclude others, thereby allowing the capture of future benefit streams; and "open-access" implies no ownership in the sense that property everyone owns nobody owns. The basic problem is that if people ignore the scarcity value of the commons, they can end up expending too much effort, over harvesting a resource (e.g., a fishery). Hardin theorizes that in the absence of restrictions, users of an open-access resource will use it more than if they had to pay for it and had exclusive rights, leading to environmental degradation. See, however, Ostrom's (1990) work on how people using real common property resources have worked to establish self-governing rules to reduce the risk of the tragedy of the commons. Public goods and non-rivalry: Public goods are another type of market failure, in which the market price does not capture the social benefits of its provision. For example, protection from the risks of climate change is a public good since its provision is both non-rival and non-excludable. Non-rival means climate protection provided to one country does not reduce the level of protection to another country; non-excludable means it is too costly to exclude any one from receiving climate protection. A country's incentive to invest in carbon abatement is reduced because it can "free ride" off the efforts of other countries. Over a century ago, Swedish economist Knut Wicksell (1896) first discussed how public goods can be under-provided by the market because people might conceal their preferences for the good, but still enjoy the benefits without paying for them. GLOBAL GEOCHEMICAL CYCLES CRITICAL FOR LIFE

Nitrogen Cycle

Water Cycle

Carbon Cycle

Oxygen Cycle

Valuation Assessing the economic value of the environment is a major topic within the field. Use and indirect use are tangible benefits accruing from natural resources or ecosystem services. Non-use values include existence, option, and bequest values. For example, some people may value the existence of a diverse set of species, regardless of the effect of the loss of a species on ecosystem services. The existence of these species may have an option value, as there may be possibility of using it for some human purpose (certain plants may be researched for drugs). Individuals may value the ability to leave a pristine environment to their children. Use and indirect use values can often be inferred from revealed behavior, such as the cost of taking recreational trips or using hedonic methods in which values are estimated based on observed prices. Non-use values are usually estimated using stated preference methods such as contingent valuation or choice modelling. Contingent valuation typically takes the form of surveys in which people are asked how much they would pay to observe and recreate in the environment (willingness to pay) or their willingness to accept (WTA) compensation for the destruction of the environmental good. Hedonic pricing examines the effect the environment has on economic decisions through housing prices, traveling expenses, and payments to visit parks.

Solutions Solutions advocated to correct such externalities include: •

Environmental regulations. Under this plan the economic impact has to be estimated by the regulator. Usually this is done using cost-benefit analysis. There is a growing realization that regulations (also known as "command and control" instruments) are not so distinct from economic instruments as is commonly asserted by proponents of environmental economics. E.g.1 regulations are enforced by fines, which operate as a form of tax if pollution rises above the threshold prescribed. E.g.2 pollution must be monitored and laws enforced, whether under a pollution tax regime or a regulatory regime. The main difference an environmental economist would argue exists between the two methods, however, is the total cost of the regulation. "Command and control" regulation often applies uniform emissions limits on polluters, even though each firm has different costs for emissions reductions. Some firms, in this system, can abate inexpensively, while others can only abate at high cost. Because of this, the total abatement has some expensive and some inexpensive efforts to abate. Environmental economic regulations find the cheapest emission abatement efforts first, then the more expensive methods second. E.g. as said earlier, trading, in the quota system, means a firm only abates if doing so would cost less than paying someone else to make the same reduction. This leads to a lower cost for the total abatement effort as a whole.

•

Quotas on pollution. Often it is advocated that pollution reductions should be achieved by way of tradeable emissions permits, which if freely traded may ensure that reductions in pollution are achieved at least cost. In theory, if such tradeable quotas are allowed, then a firm would reduce its own pollution load only if doing so would cost less than paying someone else to make the same reduction. In practice, tradeable permits approaches have had some success, such as the U.S.'s sulphur dioxide trading program or the EU Emissions Trading Scheme, and interest in its application is spreading to other environmental problems.

•

Taxes and tariffs on pollution/Removal of "dirty subsidies." Increasing the costs of polluting will discourage polluting, and will provide a "dynamic incentive," that is, the disincentive continues to operate even as pollution levels fall. A pollution tax that reduces pollution to the socially "optimal" level would be set at such a level that pollution occurs only if the benefits to society (for example, in form of greater production) exceeds the costs. Some advocate a major shift from taxation from income and sales taxes to tax on pollution - the so-called "green tax shift."

•

Better defined property rights. The Coase Theorem states that assigning property rights will lead to an optimal solution, regardless of who receives them, if transaction costs are trivial and the number of parties negotiating is limited. For example, if people living near a factory had a right to clean air and water, or the factory had the right to pollute, then either the factory could pay those affected by

the pollution or the people could pay the factory not to pollute. Or, citizens could take action themselves as they would if other property rights were violated. The US River Keepers Law of the 1880s was an early example, giving citizens downstream the right to end pollution upstream themselves if government itself did not act (an early example of bioregional democracy). Many markets for "pollution rights" have been created in the late twentieth century. The assertion that defining property rights is a solution is controversial within the field of environmental economics and environmental law and policy more broadly; in Anglo-American and many other legal systems, one has the right to carry out any action unless the law expressly proscribes it. Thus property rights are already assigned (the factory that is polluting has a right to pollute).

Relationship to other fields Environmental economics is related to ecological economics but there are differences. Most environmental economists have been trained as economists. They apply the tools of economics to address environmental problems, many of which are related to so-called market failures—circumstances wherein the "invisible hand" of economics is unreliable. Most ecological economists have been trained as ecologists, but have expanded the scope of their work to consider the impacts of humans and their economic activity on ecological systems and services, and vice-versa. This field takes as its premise that economics is a strict subfield of ecology. Ecological economics is sometimes described as taking a more pluralistic approach to environmental problems and focuses more explicitly on long-term environmental sustainability and issues of scale. Environmental economics is viewed as more pragmatic in a price system; ecological economics as more idealistic in its attempts not use money as a primary arbiter of decisions. These two groups of specialists sometimes have conflicting views which may be traced to the different philosophical underpinnings. Another context in which externalities apply is when globalization permits one player in a market who is unconcerned with biodiversity to undercut prices of another who is creating a "race to the bottom" in regulations and conservation. This in turn may cause loss of natural capital with consequent erosion, water purity problems, diseases, desertification, and other outcomes which are not efficient in an economic sense. This concern is related to the subfield of sustainable development and its political relation, the anti-globalization movement. Environmental economics was once distinct from resource economics. Natural resource economics as a subfield began when the main concern of researchers was the optimal commercial exploitation of natural resource stocks. But resource managers and policymakers eventually began to pay attention to the broader importance of natural resources (e.g. values of fish and trees beyond just their commercial exploitation;, externalities associated with mining). It is now difficult to distinguish "environmental" and "natural resource" economics as separate fields as the two became associated with sustainability.

Many of the more radical green economists split off to work on an alternate political economy. Environmental economics was a major influence for the theories of natural capitalism and environmental finance, which could be said to be two sub-branches of environmental economics concerned with resource conservation in production, and the value of biodiversity to humans, respectively. The theory of natural capitalism (Hawken, Lovins, Lovins) goes further than traditional environmental economics by envisioning a world where natural services are considered on par with physical capital. The more radical Green economists reject neoclassical economics in favour of a new political economy beyond capitalism or communism that gives a greater emphasis to the interaction of the human economy and the natural environment, acknowledging that "economy is three-fifths of ecology" - Mike Nickerson. These more radical approaches would imply changes to money supply and likely also a bioregional democracy so that political, economic, and ecological "environmental limits" were all aligned, and not subject to the arbitrage normally possible under capitalism.

Professional bodies The main academic and professional organizations for the discipline of Environmental Economics are the Association of Environmental and Resource Economists (AERE) and the European Association for Environmental and Resource Economics (EAERE). The main academic and professional organization for the discipline of Ecological Economics is the International Society for Ecological Economics (ISEE) and The Green Economics Institute for Green Economics [greeneconomics.org.uk] is its international Professional body.

Chapter- 4

Green Economics

A green economy is one that results in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities - United Nations Environment Programme (UNEP) (2010). A green economy is a economy or economic development model based on sustainable development and a knowledge of ecological economics. Its most distinguishing feature from prior economic regimes is direct valuation of natural capital and nature's services as having economics value and a full cost accounting regime in which costs externalized onto society via ecosystems are reliably traced back to, and accounted for as liabilities of, the entity that does the harm or neglects an asset.

"green" economists and economics A green economics loosely defined is any theory of economics by which an economy is considered to be component of the ecosystem in which it resides (after Lynn Margulis). A holistic approach to the subject is typical, such that economic ideas are commingled with any number of other subjects, depending on the particular theorist. Proponents of feminism, postmodernism, the ecology movement, peace movement, Green politics, green anarchism and anti-globalization movement have used the term to describe very different ideas, all external to some equally ill-defined "mainstream" economics. The use of the term is further ambiguated by the political distinction of Green parties which are formally organized and claim the capital-G "Green" term as a unique and distinguishing mark. It is thus preferable to refer to a loose school of "'green economists"' who generally advocate shifts towards a green economy, biomimicry and a fuller accounting for biodiversity. Some economists view green economics as a branch or subfield of more established schools. For instance, as classical economics where the traditional land is generalized to natural capital and has some attributes in common with labor (providing nature's services to man) and physical capital (since natural capital assets like rivers directly substitute for man-made ones such as canals). Or, as Marxist economics with nature represented as a form of lumpen proletariat, an exploited base of non-human workers providing surplus value to the human economy. Or as a branch of neoclassical economics in which the price

of life for developing vs. developed nations is held steady at a ratio reflecting a balance of power and that of non-human life is very low. An increasing consensus around the ideas of nature's services, natural capital, full cost accounting and interspecies ethics could blur distinctions between the schools and redefine them all as variations of green economics. As of 2010 the Bretton Woods institutions (notably the World Bank and IMF (via its "Green Fund" initiative) responsible for global monetary policy have stated a clear intention to move towards biodiversity valuation and a more official and universal biodiversity finance.

Definition of a green economy Karl Burkart defines a green economy as based on six main sectors: • • • • • •

Renewable energy (solar, wind, geothermal, marine including wave, biogas, and fuel cell) Green buildings (green retrofits for energy and water efficiency, residential and commercial assessment; green products and materials, and LEED construction) Clean transportation (alternative fuels, public transit, hybrid and electric vehicles, carsharing and carpooling programs) Water management (Water reclamation, greywater and rainwater systems, lowwater landscaping, water purification, stormwater management) Waste management (recycling, municipal solid waste salvage, brownfield land remediation, Superfund cleanup, sustainable packaging) Land management (organic agriculture, habitat conservation and restoration; urban forestry and parks, reforestation and afforestation and soil stabilization)

The Global Citizens Center, led by Kevin Danaher, defines green economy in terms of a "triple bottom line," an economy concerned with being: 1. Environmentally sustainable, based on the belief that our biosphere is a closed system with finite resources and a limited capacity for selfregulation and self-renewal. We depend on the earth’s natural resources, and therefore we must create an economic system that respects the integrity of ecosystems and ensures the resilience of life supporting systems. 2. Socially just, based on the belief that culture and human dignity are precious resources that, like our natural resources, require responsible stewardship to avoid their depletion. We must create a vibrant economic system that ensures all people have access to a decent standard of living and full opportunities for personal and social development. 3. Locally rooted, based on the belief that an authentic connection to place is the essential pre-condition to sustainability and justice. The Green Economy is a global aggregate of individual communities meeting the needs of its citizens through the responsible, local production and exchange of goods and services.

Other issues Green economy includes green energy generation based on renewable energy to substitute for fossil fuels and energy conservation for efficient energy use. The green economy is considered being able to both create green jobs, ensure real, sustainable economic growth, and prevent environmental pollution, global warming, resource depletion, and environmental degradation. Because the market failure related to environmental and climate protection as a result of external costs, high future commercial rates and associated high initial costs for research, development, and marketing of green energy sources and green products prevents firms from being voluntarily interested in reducing environment-unfriendly activities (Reinhardt, 1999; King and Lenox, 2002; Wagner, 203; Wagner, et al., 2005), the green economy is considered needing government subsidies as market incentives to motivate firms to invest and produce green products and services. The German Renewable Energy Act, legislations of many other EU countries and the American Recovery and Reinvestment Act of 2009, all provide such market incentives. However, there are still incompatibilities between the UN global green new deal call and the existing international trade mechanism in terms of market incentives. For example, the WTO Subsidies Agreement has strict rules against government subsidies, especially for exported goods. Such incompatibilities may serve as obstacles to governments' responses to the UN Global green new deal call. WTO needs to update its subsidy rules to account for the needs of accelerating the transition to the green, low-carbon economy. Research is urgently needed to inform the governments and the international community how the governments should promote the green economy within their national borders without being engaged in trade wars in the name of the green economy and how they should cooperate in their promotional efforts at a coordinated international level.

Chapter- 5

Natural Resource Economics

Natural resource economics deals with the supply, demand, and allocation of the Earth's natural resources. One main objective of natural resource economics is to better understand the role of natural resources in the economy in order to develop more sustainable methods of managing those resources to ensure their availability to future generations. Resource economists study interactions between economic and natural systems, with the goal of developing a sustainable and efficient economy.

Areas of discussion Natural resource economics is a transdisciplinary field of academic research within economics that aims to address the connections and interdependence between human economies and natural ecosystems. Its focus is how to operate an economy within the ecological constraints of earth's natural resources. Resource economics brings together and connects different disciplines within the natural and social sciences connected to broad areas of earth science, human economics, and natural ecosystems. Economic models must be adapted to accommodate the special features of natural resource inputs. The traditional curriculum of natural resource economics emphasized fisheries models, forestry models, and minerals extraction models (i.e. fish, trees, and ore). In recent years, however, other resources, notably air, water, the global climate, and "environmental resources" in general have become increasingly important to policy-making. Academic and policy interest has now moved beyond simply the optimal commercial exploitation of the standard trio of resources to encompass management for other objectives. For example, natural resources more broadly defined have recreational, as well as commercial values. They may also contribute to overall social welfare levels, by their mere existence. The economics and policy area focuses on the human aspects of environmental problems. Traditional areas of environmental and natural resource economics include welfare theory, pollution control, resource extraction, and non-market valuation, and also

resource exhaustibility, sustainability, environmental management, and environmental policy. Research topics could include the environmental impacts of agriculture, transportation and urbanization, land use in poor and industrialized countries, international trade and the environment, climate change, and methodological advances in non-market valuation, to name just a few. Natural resource economics also relates to energy, and is a broad scientific subject area which includes topics related to supply and use of energy in societies. Thermoeconomists argue that economic systems always involve matter, energy, entropy, and information. Thermoeconomics is based on the proposition that the role of energy in biological evolution should be defined and understood through the second law of thermodynamics but in terms of such economic criteria as productivity, efficiency, and especially the costs and benefits of the various mechanisms for capturing and utilizing available energy to build biomass and do work. As a result, natural resource economics are often discussed in the field of ecological economics, which itself is related to the fields of sustainability and sustainable development. Hotelling's rule is a 1931 economic model of non-renewable resource management by Harold Hotelling. It shows that efficient exploitation of a nonrenewable and nonaugmentable resource would, under otherwise stable economic conditions, lead to a depletion of the resource. The rule states that this would lead to a net price or "Hotelling rent" for it that rose annually at a rate equal to the rate of interest, reflecting the increasing scarcity of the resource. Nonaugmentable resources of inorganic materials (i.e. minerals) are uncommon; most resources can be augmented by recycling and by the existence and use of substitutes for the end-use products (see below). Vogely has stated that the development of a mineral resource occurs in five stages: (1) The current operating margin (rate of production) governed by the proportion of the reserve (resource) already depleted. (2) The intensive development margin governed by the trade-off between the rising necessary investment and quicker realization of revenue. (3) The extensive development margin in which extraction is begun of known but previously uneconomic deposits. (4) The exploration margin in which the search for new deposits (resources) is conducted and the cost per unit extracted is highly uncertain with the cost of failure having to be balanced against finding usable resources (deposits) that have marginal costs of extraction no higher than in the first three stages above. (5) The technology margin which interacts with the first four stages. The Gray-Hotelling (exhaustion) theory is a special case, since it covers only Stages 1–3 and not the far more important Stages 4 and 5. Simon has stated that the supply of natural resources is infinite (i.e. perpetual) These conflicting views will be substantially reconciled by considering resource-related topics in depth in the next section, or at least minimized.

Perpetual resources vs. exhaustibility

Background and introduction The perpetual resource concept is a complex one because the concept of resource is complex and changes with the advent of new technology (usually more efficient recovery), new needs, and to a lesser degree with new economics (i.e. changes in prices of the material, changes in energy costs, etc.). On the one hand, a material (and its resources) can enter a time of shortage and become a strategic and critical material (an immediate exhaustibility crisis), but on the other hand a material can go out of use, its resource can proceed to being perpetual if it was not before, and then the resource can become a paleoresource when the material goes almost completely out of use (i.e. resources of arrowhead-grade flint). Some of the complexities influencing resources of a material include the extent of recyclability, the availability of suitable substitutes for the material in its end-use products, plus some other less important factors. The Federal Government suddenly became compellingly interested in resource issues on December 7, 1941, shortly after which Japan cut the U.S. off from tin and rubber and made some other materials very difficult to obtain, such as tungsten. This was the worst case for resource availability, becoming a strategic and critical material. After the war a government stockpile of strategic and critical materials was set up, having around 100 different materials which were purchased for cash or obtained by trading off U.S. agricultural commodities for them. In the longer term, scarcity of tin later led to completely substituting aluminum foil for tin foil and polymer lined lined steel cans and aseptic packaging substituting for tin electroplated steel cans. Resources change over time with technology and economics; more efficient recovery leads to a drop in the ore grade needed. The average grade of the copper ore processed has dropped from 4.0% copper in 1900 to 1.63% in 1920, 1.20% in 1940, 0.73% in 1960, 0.47% in 1980, and 0.44% in 2000. Cobalt had been in an iffy supply status ever since the Belgian Congo (world's only significant source of cobalt) was given a hasty independence in 1960 and the cobaltproducing province seceded as Katanga, followed by several wars and insurgencies, local government removals, railroads destroyed, and nationalizations. This was topped off by an invasion of the province by Katangan rebels in 1978 that disrupted supply and transportation and caused the cobalt price to briefly triple. While the cobalt supply was disrupted and the price shot up, nickel and other substitutes were pressed into service. Following this, the idea of a "Resource War" by the Soviets became popular. Rather than the chaos that resulted from the Zairean cobalt situation, this would be planned, a strategy designed to destroy economic activity outside the Soviet bloc by the acquisition of vital resources by noneconomic means (military?) outside the Soviet bloc (Third World?), then withholding these minerals from the West. An important way of getting around a cobalt situation or a "Resource War" situation is to use substitutes for a material in its end-uses. Some criteria for a satisfactory substitute are (1) ready availability domestically in adequate quantities or availability from contiguous

nations, or possibly from overseas allies, (2) possessing physical and chemical properties, performance, and longevity comparable to the material of first choice, (3) wellestablished and known behavior and properties particularly as a component in exotic alloys, and (4) an ability for processing and fabrication with minimal changes in existing technology, capital plant, and processing and fabricating facilities. Some suggested substitutions were alunite for bauxite to make alumina, molybdenum and/or nickel for cobalt, and aluminum alloy automobile radiators for copper alloy automobile radiators. Materials can be eliminated without material substitutes, for example by using discharges of high tension electricity to shape hard objects that were formerly shaped by mineral abrasives, giving superior performance at lower cost, or by using computers/satellites to replace copper wire (land lines). An important way of replacing a resource is by synthesis, for example, industrial diamonds and many kinds of graphite, although a certain kind of graphite could be almost replaced by a recycled product. Most graphite is synthetic, for example, graphite electrodes, graphite fiber, graphite shapes (machined or unmachined), and graphite powder. Another way of replacing or extending a resource is by recycling the material desired from scrap or waste. This depends on whether or not the material is dissipated or is available as a no longer usable durable product. Reclamation of the durable product depends on its resistance to chemical and physical breakdown, quantities available, price of availability, and the ease of extraction from the original product. For example, bismuth in stomach medecine is hopelessly scattered (dissipated) and therefore impossible to recover while bismuth alloys can be easily recovered and recycled. A good example where recycling makes a big difference is the resource availability situation for graphite, where flake graphite can be recovered from a renewable resource called kish, a steelmaking waste created when carbon separates out as graphite within the kish from the molten metal along with slag. After it is cold, the kish can be processed. Several other kinds of resources need to be introduced. If strategic and critical materials are the worst case for resources, unless mitigated by substitution and/or recycling, one of the best is an abundant resource. An abundant resource is one whose material has so far found little use, such as using high-aluminous clays or anorthosite to produce alumina, and magnesium before it was recovered from seawater. An abundant resource is quite similar to a perpetual resource. The reserve base is the part of an identified resource that has a reasonable potential for becoming economically available at a time beyond when currently proven technology and current economics are in operation. Identified resources are those whose location, grade, quality, and quantity are known or estimated from specific geologic evidence. Reserves are that part of the reserve base that can be economically extracted at the time of determination; reserves should not be used as a surrogate for resources because they are often distorted by taxation or the owning firm's public relations needs.

Comprehensive natural resource models

Harrison Brown and associates stated that humanity will process lower and lower grade "ore". Iron will come from low-grade iron-bearing material such as raw rock from anywhere in an iron formation, not much different from the input used to make taconite pellets in North America and elsewhere today. As coking coal reserves decline, pig iron and steel production will use non-coke-using processes (i.e. electric steel). The aluminum industry could shift from using bauxite to using anorthosite and clay. Magnesium metal and magnesia consumption (i.e. in refractories), currently obtained from seawater, will increase. Sulfur will be obtained from pyrites, then gypsum or anhydrite. Metals such as copper, zinc, nickel, and lead will be obtained from manganese nodules or the Phosphoria formation (sic!). These changes could occur irregularly in different parts of the world. While Europe and North America might use anorthosite or clay as raw material for aluminum, other parts of the world might use bauxite, and while North America might use taconite, Brazil might use iron ore. New materials will appear (note: they have), the result of technological advances, some acting as substitutes and some with new properties. Recycling will become more common and more efficient (note: it has!). Ultimately, minerals and metals will be obtained by processing "average" rock. Rock, 100 tonnes of "average" igneous rock, will yield eight tonnes of aluminum, five tonnes of iron, and 0.6 tonnes of titanium. The USGS model based on crustal abundance data and the reserve-abundance relationship of McKelvey, is applied to several metals in the Earth's crust (worldwide) and in the U.S. crust. The potential currently recoverable (present technology, economy) resources that come closest to the McKelvey relationship are those that have been sought for the longest time, such as copper, zinc, lead, silver, gold and molybdenum. Metals that do not follow the McKelvey relationship are ones that are byproducts (of major metals) or haven't been vital to the economy until recently (titanium, aluminum to a lesser degree). Bismuth is an example of a byproduct metal that doesn't follow the relationship very well; the 3% lead reserves in the western U.S. would have only 100 ppm bismuth, clearly too low-grade for a bismuth reserve. The world recoverable resource potential is 2,120 million tonnes for copper, 2,590 million tonnes for nickel, 3,400 million tonnes for zinc, 3,519 BILLION tonnes for aluminum, and 2,035 BILLION tonnes for iron. Diverse authors have further contributions. Some think the number of substitutes is almost infinite, particularly with the flow of new materials from the chemical industry; identical end products can be made from different materials and starting points. Plastics can be good electrical conductors. Since all materials are 100 times weaker than they theoretically should be, it ought to be possible to eliminate areas of dislocations and greatly strengthen them, enabling lesser quantities to be used. To summarize, "mining" companies will have more and more diverse products, the world economy is moving away from materials towards services, and the population seems to be levelling, all of which implies a lessening of demand growth for materials; much of the materials will be recovered from somewhat uncommon rocks, there will be much more coproducts and byproducts from a given operation, and more trade in minerals and materials.

Trend towards perpetual resources

As radical new technology impacts the materials and minerals world more and more powerfully, the materials used are more and more likely to have perpetual resources. There are already more and more materials that have perpetual resources and less and less materials that have nonrenewable resources or are strategic and critical materials. Some materials that have perpetual resources such as salt,stone, magnesium, and common clay were mentioned previously. Thanks to new technology, synthetic diamonds were added to the list of perpetual resources, since they can be easily made from a lump of carbon. Another form of carbon, synthetic graphite, is made in large quantities (graphite electrodes, graphite fiber) from carbon precursors such as petroleum coke or a textile fiber. A firm named Liquidmetal Technologies, Inc. is utilizing the removal of dislocations in a material with a technique that overcomes performance limitations caused by inherent weaknesses in the crystal atomic structure. It makes amorphous metal alloys, which retain a random atomic structure when the hot metal solidifies, rather than the crystalline atomic structure (with dislocations) that normally forms when hot metal solidifies. These amorphous alloys have much better performance properties than usual; for example, their zirconium-titanium Liquidmetal alloys are 250% stronger than a standard titanium alloy. The Liquidmetal alloys can supplant many high performance alloys. Exploration of the ocean bottom in the last fifty years revealed manganese nodules and phosphate nodules in many locations. More recently, polymetallic sulfide deposits have been discovered and polymetallic sulfide "black muds" are being presently deposited from "black smokers" The cobalt scarcity situation of 1978 has a new option now: recover it from manganese nodules. A Korean firm plans to start developing a manganese nodule recovery operation in 2010; the manganese nodules recovered would average 27% to 30% manganese, 1.25% to 1.5% nickel, 1% to 1.4% copper, and 0.2% to 0.25% cobalt (commercial grade) Nautilus Minerals Ltd. is planning to recover commercial grade material averaging 29.9% zinc, 2.3% lead, and 0.5% copper from massive ocean-bottom polymetallic sulfide deposits using an underwater vacuum cleaner-like device that combines some current technologies in a new way. Partnering with Nautilus are Tech Cominco Ltd. and Anglo-American Ltd., world-leading international firms. There are also other robot mining techniques that could be applied under the ocean. Rio Tinto is using satellite links to allow workers 1500 kilometers away to operate drilling rigs, load cargo, dig out ore and dump it on conveyor belts, and place explosives to subsequently blast rock and earth. The firm can keep workers out of danger this way, and also use fewer workers. Such technology reduces costs and offsets declines in metal content of ore reserves. Thus a variety of minerals and metals are obtainable from unconventional sources with resources available in huge quantities. Finally, what is a perpetual resource? The ASTM definition for a perpetual resource is "one that is virtually inexhaustible on a human time-scale". Examples given include solar energy, tidal energy, and wind energy, to which should be added salt, stone, magnesium, diamonds, and other materials mentioned above. A study on the biogeophysical aspects of sustainability came up with a rule of prudent practice that a resource stock should last

700 years to achieve sustainability or become a perpetual resource, or for a worse case, 350 years. If a resource lasting 700 or more years is perpetual, one that lasts 350 to 700 years can be called an abundant resource, and is so defined here. How long the material can be recovered from its resource depends on human need and changes in technology from extraction through the life cycle of the product to final disposal, plus recyclability of the material and availability of satisfactory substitutes. Specifically, this shows that exhaustibility does not occur until these factors weaken and play out: the availability of substitutes, the extent of recycling and its feasibility, more efficient manufacturing of the final consumer product, more durable and longer-lasting consumer products, and even a number of other factors. The most recent resource information and guidance on the kinds of resources that must be considered is covered on the Resource Guide-Update

Transitioning: perpetual resources to paleoresources Perpetual resources can transition to being a paleoresource. A paleoresource is one that has little or no demand for the material extracted from it; an obsolescent material, humans no longer need it. The classic paleoresource is an arrowhead-grade flint resource; no one makes flint arrowheads or spearheads anymore—making a sharpened piece of scrap steel and using it is much simpler. Obsolescent products include tin cans, tin foil, the schoolhouse slate blackboard, and radium in medical technology. Radium has been replaced by much cheaper Cobalt 60 and other radioisotopes in radiation treatment. Noncorroding lead as a cable covering has been replaced by plastics. The gypsum building plasters that used to cover interior walls in a building have been replaced by drywall and its predecessors. This can be shown statistically: the tonnage of building plasters sold stayed the same from 1922 to 1962, while the tonnage of prefabricated building products (drywall) was multiplied almost 25 times in the same time period. Pennsylvania anthracite is another material where the trend towards obsolescence and becoming a paleoresource can be shown statistically. Production of anthracite was 70.4 million tonnes in 1905, 49.8 million tonnes in 1945, 13.5 million tonnes in 1965, 4.3 million tonnes in 1985, and 1.5 million tonnes in 2005. The amount used per person was 84 kg per person in 1905, 7.1 kg in 1965, and 0.8 kg in 2005. Compare this to the USGS anthracite reserves of 18.6 billion tonnes and total resources of 79 billion tonnes; the anthracite demand has dropped so much that these resources are more than perpetual. Since anthracite resources are so far into the perpetual resource range and demand for anthracite has dropped so far, is it possible to see how anthracite might become a paleoresource? Probably by customers continuing to disappear (i.e. convert to other kinds of energy for space heating), the supply network atrophy as anthracite coal dealers can't retain enough business to cover costs and close, and mines with too small a volume to cover costs also close. This is a mutually reinforcing process: customers convert to other forms of cleaner energy that produce less pollution and carbon dioxide, then the coal

dealer has to close because of lack of enough sales volume to cover costs. The coal dealer's other customers are then forced to convert unless they can find another nearby coal dealer. Finally the anthracite mine closes because it doesn't have enough sales volume to cover its costs.

Chapter- 6

Energetics

Energetics is the scientific study of energy under transformation. Because energy flows at all scales, from the quantum level to the biosphere and cosmos, energetics is a very broad discipline, encompassing for example thermodynamics, chemistry, biological energetics, biochemistry and ecological energetics. Where each branch of energetics begins and ends is a topic of constant debate. For example, Lehninger (1973, p. 21) contended that when the science of thermodynamics deals with energy exchanges of all types, it can be called energetics.

Aims In general, energetics is concerned with seeking principles that accurately describe the useful and non-useful tendencies of energy flows and storages under transformation. 'Principles' are understood here as phenomena which behave like historical invariants under multiple observations. When some critical number of people have observed such invariance, such a principle is usually then given the status of a 'fundamental law' of science. Like in all science, whether or not a theorem or principle is considered a fundamental law appears to depend on how many people agree to such a proposition. The ultimate aim of energetics therefore is the description of fundamental laws. Philosophers of science have held that the fundamental laws of thermodynamics can be treated as the laws of energetics, (Reiser 1926, p. 432). Through the clarification of these laws energetics aims to produce reliable predictions about energy flow and storage transformations at any scale; nano to macro.

History Energetics has a controversial history. Some authors maintain that the origins of energetics can be found in the work of the ancient Greeks, but that the mathematical formalisation began with the work of Leibniz. Liet.-Col. Richard de Villamil (1928) said that Rankine formulated the Science of Energetics in his paper Outlines of the Science of

Energetics published in the Proceedings of the Philosophical Society of Glasgow in 1855. W. Ostwald and E. Mach subsequently developed the study and in the late 1800s energetics was understood to be incompatible with the atomic view of the atom forwarded by Boltzmann's gas theory. Proof of the atom settled the dispute but not without significant damage. In the 1920s Lotka then attempted to build on Boltzmann's views through a mathematical synthesis of energetics with biological evolutionary theory. Lotka proposed that the selective principle of evolution was one which favoured the maximum useful energy flow transformation. This view subsequently influenced the further development of ecological energetics, especially the work of Howard T. Odum. De Villamil attempted to clarify the scope of energetics with respects to other branches of physics by contriving a system that divides mechanics into two branches; energetics (the science of energy) and "pure", "abstract" or "rigid" dynamics (the science of momentum). According to Villamil energetics can be mathematically characterised by scalar equations, and rigid dynamics by vectorial equations. In this division the dimensions for dynamics are space, time and mass, and for energetics, length, time and mass (Villamil 1928, p. 9). This division is made according to fundamental presuppositions about the properties of bodies which can be expressed according to how one answers to following two questions: 1. Are particles rigidly fixed together? 2. Is there any machinery for stopping moving bodies? In Villamil's classification system, dynamics says yes to 1 and no to 2, whereas energetics says no to 1 and yes to 2. Therefore, Villamil's in system, dynamics assumes that particles are rigidly fixed together and cannot vibrate, and consequently must all be at zero temperature. The conservation of momentum is a consequence of this view, however it is considered valid only in logic and not to be a true representation of the facts (Villamil, p. 96). In contrast energetics does not assume that particles are rigidly fixed together, particles are therefore free to vibrate, and consequently can be at non-zero temperatures.

Principles of energetics

Ecological analysis of CO2 in an ecosystem As a general statement of energy flows under transformation, the principles of energetics include the first four laws of thermodynamics which seek a rigorous description. However the precise place of the laws of thermodynamics within the principles of energetics is a topic currently under debate. If the ecologist Howard T. Odum was right, then the principles of energetics take into consideration a hierarchical ordering of energy forms, which aims to account for the concept of energy quality, and the evolution of the universe. Albert Lehninger (1973, p. 2) called these hierarchical orderings the

“

... successive stages in the flow of energy through the biological macrocosm

”

Odum proposed 3 further energetic principles and one corollary that take energy hierarchy into account. The first four principles of energetics are related to the same numbered laws of thermodynamics, and are expanded upon in that article. The final four principles are taken from the ecological energetics of H.T. Odum. •

Zeroth principle of energetics

If two thermodynamic systems A and B are in thermal equilibrium, and B and C are also in thermal equilibrium, then A and C are in thermal equilibrium. •

First principle of energetics The increase in the internal energy of a system is equal to the amount of energy added to the system by heating, minus the amount lost in the form of work done by the system on its surroundings.

•

Second principle of energetics The total entropy of any isolated thermodynamic system tends to increase over time, approaching a maximum value.

•

Third principle of energetics As a system approaches absolute zero of temperature all processes cease and the entropy of the system approaches a minimum value or zero for the case of a perfect crystalline substance.

•

Fourth principle of energetics There seem to be two opinions on the fourth principle of energetics: The Onsager reciprocal relations are sometimes called the fourth law of thermodynamics. As the fourth law of thermodynamics Onsager reciprocal relations would constitute the fourth principle of energetics. o In the field of ecological energetics H.T. Odum considered maximum power, the fourth principle of energetics. Odum also proposed the Maximum empower principle as a corollary of the maximum power principle, and considered it to describe the propensities of evolutionary self-organization. Fifth principle of energetics o

•

The energy quality factor increases hierarchically. From studies of ecological food chains, Odum proposed that energy transformations form a hierarchical series measured by Transformity increase (Odum 2000, p. 246). Flows of energy develop hierarchical webs in which inflowing energies interact and are transformed by work processes into energy forms of higher quality that feedback amplifier actions, helping to maximise the power of the system" — (Odum 1994, p. 251) •

Sixth principle of energetics Material cycles have hierarchical patterns measured by the emergy/mass ratio that determines its zone and pulse frequency in the energy hierarchy. (Odum 2000,

p. 246). M.T. Brown and V. Buranakarn write, "Generally, emergy per mass is a good indicator of recycle-ability, where materials with high emergy per mass are more recyclable".

Chapter- 7

Economics of Global Warming

Definitions Here, the phrase “climate change” is used to describe a change in the climate, measured in terms of its statistical properties, e.g., the global mean surface temperature. In this context, “climate” is taken to mean the average weather. Climate can change over period of time ranging from months to thousands or millions of years. The classical time period is 30 years, as defined by the World Meteorological Organization. The climate change referred to may be due to natural causes, e.g., changes in the sun's output, or due human activities, e.g., changing the composition of the atmosphere. Any human-induced changes in climate will occur against the “background” of natural climatic variations. Here, the phrase “global warming” refers to the change in the Earth's global average surface temperature. Measurements show a global temperature increase of 1.4 °F (0.78 °C) between the years 1900 and 2005. Global warming is closely associated with a broad spectrum of other climate changes, such as increases in the frequency of intense rainfall, decreases in snow cover and sea ice, more frequent and intense heat waves, rising sea levels, and widespread ocean acidification.

Climate change science This section describes the science of climate change in relation to economics (Munasinghe et al., 1995:39-41): •

Greenhouse gases: o These gases have been linked with current climate change and may result in further climate change in the future. Greenhouse gases (GHGs) are stock pollutants, and not flow pollutants. This means that it is the concentration of GHGs in the atmosphere that is important in determining climate change impacts, rather than the flow of GHGs into the atmosphere.

The stocks of different GHGs in the atmosphere depreciate at various rates, e.g., the atmospheric lifetime of carbon dioxide is over 100 years. If the atmospheric lifetime of the GHG is a year or longer, then the winds have time to spread the gas throughout the lower atmosphere, and its absorption of terrestrial infrared radiation occurs at all latitudes and longitudes (US NRC, 2001:10). It is the flows from all the GHG sources of all nations that contribute to the stock of long-lived GHGs in the atmosphere. Inertia: The emissions of GHGs in any one year represent a relatively small fraction of the total global stock, meaning that the system as a whole has great inertia. If emissions were to be reduced to zero, it would take decades to centuries for stock levels to decline significantly. The time required for stocks to depreciate depends on the physical process of GHG removal. The stocks of GHGs with relatively short atmospheric lifetimes, such as methane, depreciate more quickly than the stocks of GHGs with longer atmospheric lifetimes, e.g., HFCs. Impact data: Predictions of the physical impacts of climate change are based on the work of climate scientists. Only once (or if) further climate change occurs, will the true social and economic impacts of climate change be known. (Note: The preceding sentence is from 1995. Climate change is acknowledged by mainstream science to exist, to be continuing and to be highly likely to be largely caused by human activity) o

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Scenarios Socioeconomic scenarios are used by analysts to make projections of future GHG emissions and to assess future vulnerability to climate change (Carter et al., 2001:151). Producing scenarios requires estimates of future population levels, economic activity, the structure of governance, social values, and patterns of technological change. Economic and energy modelling (such as via the World3 or the POLES models) can be used to analyse and quantify the effects of such drivers. Emissions scenarios One type of emissions scenario is called a "global future" scenario. These scenarios can be thought of as stories of possible futures. They allow the description of factors that are difficult to quantify, such as governance, social structures, and institutions. Morita et al. (2001:137-142) assessed the literature on global futures scenarios. They found considerable variety among scenarios, ranging from variants of sustainable development, to the collapse of social, economic, and environmental systems. No strong patterns were found in the relationship between economic activity and GHG emissions. Economic growth was found to be compatible with increasing or decreasing GHG emissions. In the latter case, emissions growth is mediated by increased energy efficiency, shifts to non-fossil energy sources, and/or shifts to a post-industrial (servicebased) economy.

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Development trends: In producing scenarios, an important consideration is how social and economic development will progress in developing countries (Fisher et al., 2007:176). If, for example, developing countries were to follow a development pathway similar to the current industrialized countries, it could lead to a very large increase in emissions. GHG emissions and economic growth: Emissions do not only depend on the growth rate of the economy. Other factors are listed below: o Structural changes in the production system. o Technological patterns in sectors such as energy. o Geographical distribution of human settlements and urban structures. This affects, for example, transportation requirements. o Consumption patterns: e.g., housing patterns, leisure activities, etc. o Trade patterns: the degree of protectionism and the creation of regional trading blocks can affect availability to technology.

Trends and projections Emissions The Kaya identity expresses the level of energy related CO2 emissions as the product of four indicators (Rogner et al., 2007, p. 107): • • • •

Carbon intensity. This is the CO2 emissions per unit of total primary energy supply (TPES) Energy intensity. This is the TPES per unit of gross domestic product (GDP) GDP per capita (GDP/cap) Population

GDP/capita and population growth were the main drivers of the increase in global emissions during the last three decades of the 20th century. At the global scale, declining carbon and energy intensities have been unable to offset these effects, and consequently, carbon emissions have risen. •

Projections: o Without additional policies to cut GHG emissions (including efforts to reduce deforestation), they are projected to increase between 25% and 90% by 2030 relative to their 2000 levels (Rogner et al., 2007:111). Two thirds to three quarters of the increase in CO2 emissions are projected to come from developing countries, although the average per capita CO2 emissions in developing country regions will remain substantially lower than those in developed country regions. o By 2100, projections range from a 40% reduction to an increase in emissions of 250% above their levels in 2000. Atmospheric concentrations

of GHG emissions are unlikely to stabilize this century without major policy changes.

Concentrations Rogner et al. (2007:102) reported that the then-current estimated total atmospheric concentration of long-lived GHGs was around 455 ppm CO2-eq (range: 433-477 ppm CO2-eq). The effects of aerosol and land-use change changes reduced the physical effect (the radiative forcing) of this to 311 to 435 ppm CO2-eq, with a central estimate of about 375 ppm CO2-eq. •

SRES Projections: At the time they were developed, the range of global emissions projected across all forty of the SRES scenarios covered the 5th% to 95th% percentile range of the emission scenarios literature (Morita et al., 2001:146). The forty SRES scenarios are classified into six groups, with an illustrative scenario for each group. Under these six illustrative scenarios, the projected concentration of CO2 in the year 2100 ranges from 540 to 970 ppm (IPCC, 2001b:8). Uncertainties over aspects of climate science, such as the GHG removal process of carbon sinks, mean that the total projected concentration ranges from 490 to 1,260 ppm. This compares to a pre-industrial (taken as the year 1750) concentration of about 280 ppm, and a concentration of about 368 ppm in the year 2000.

Cost-benefit analysis Standard cost-benefit analysis can be applied to the problem of climate change (Goldemberg et al., 1996:24,31-32). This requires (1) the valuation of costs and benefits using the willingness to pay as a measure of value, and (2) a criterion for accepting or rejecting proposals: (1) The valuation of costs and benefits of climate change is difficult because some climate change impacts are difficult value, e.g., ecosystems and human health. It is also impossible to know the preferences of future generations, which affects the valuation of costs and benefits (DeCanio, 2007:4). (2) The standard criterion is the compensation principle. According to the compensation principle, so long as those benefitting from a particular project compensate the losers, and there is still something left over, then the result is an unambiguous gain in welfare. If there are no mechanisms allowing compensation to be paid, then it is necessary to assign weights to particular individuals. One of the mechanisms for compensation is impossible for this problem: mitigation might benefit future generations at the expense of current generations, but there is no way that future generations can compensate current generations for the costs of mitigation (DeCanio, 2007:4). On the other hand, should future generations bear most of the costs of climate change, compensation to them would not be possible (Goldemberg et al.,

1996:32). Another transfer for compensation exists between regions and populations. If, for example, some countries were to benefit from future climate change but others lose out, there is no guarantee that the winners would compensate the losers. Risk In a cost-benefit analysis, an acceptable risk means that the benefits of a climate policy outweigh the costs of the policy (Halsnæs et al., 2007). The standard rule used by public and private decision makers is that a risk will be acceptable if the expected net present value is positive. The expected value is the mean of the distribution of expected outcomes (Goldemberg et al., 1996, p. 25). In other words, it is the average expected outcome for a particular decision. This criterion has been justified on the basis that: • •

a policy's benefits and costs have known probabilities economic agents (people and organizations) can diversify their own risk through insurance and other markets.

On the first point, probabilities for climate change are difficult to calculate. Also, some impacts, such as those on human health and biodiversity, are difficult to value. On the second point, it has been suggested that insurance could be bought against climate change risks. In practice, however, there are difficulties in implementing the necessary policies to diversify climate change risks.

Risk One of the ways of assessing climate change policy is through risk management (Fisher et al., 2007; Yohe, 2010). The approach considers the problem as one where decisions are improved on a continual basis. This is called the "act-learn-act" approach (Arrow et al., 1996, p. 67). For instance, actions in the "act" stage might include decisions over investments in adaptation, mitigation, and research to reduce uncertainties. In the "learn" stage, the efficiency of these investments is then evaluated. CCSP (2009, p. 59) suggested two related decision-making management strategies that might be particularly appealing when faced with high uncertainty. The first were resilient strategies. This seeks to identify a range of possible future circumstances, and then choose approaches that work reasonably well across all the range. The second were adaptive strategies. The idea here is to choose strategies that can be improved as more is learned as the future progresses. CCSP (2009) contrasted these two approaches with the cost-benefit approach, which seeks to find an optimal strategy. An example of a strategy that is based on risk is portfolio theory. This suggests that a reasonable response to uncertainty is to have a wide portfolio of possible responses. In the case of climate change, mitigation can be viewed as an effort to reduce the chance of climate change impacts (Goldemberg et al., 1996, p. 24). Adaptation acts as insurance against the chance that unfavourable impacts occur. The risk associated with these

impacts can also be spread. As part of a policy portfolio, climate research can help when making future decisions. Technology research can help to lower future costs. Optimal choices and risk aversion The optimal result of decision analysis depends on what criterion is chosen to define what "optimal" is (Arrow et al., 1996, pp. 62–63. In a decision analysis based on cost-benefit analysis, the optimal policy is evaluated in economic terms. The optimal result of costbenefit analysis maximizes net benefits. Another type of decision analysis is costeffectiveness analysis. This is similar to cost-benefit analysis, except that the assessed benefit, or policy target, is set outside of the analysis. The actual choice of a criterion for deciding the optimal result of decision analysis is a subjective decision. The choice of criterion is made outside of the analysis. One of the influences on this choice on this is attitude to risk. Risk aversion describes how willing or unwilling someone is to take risks. Evidence indicates that most, but not all, individuals prefer certain outcomes to uncertain ones. Risk-averse individuals prefer decision criteria that reduce the chance of the worst possible outcome, while risk-seeking individuals prefer decision criteria that maximize the chance of the best possible outcome. In terms of returns on investment, if society as a whole is risk-averse, we might be willing to accept some investments with negative expected returns, e.g., in mitigation (Goldemberg et al., 1996, p. 24). Such investments may help to reduce the possibility of future climate damages or the costs of adaptation.

International insurance Traditional insurance works by transferring risk to those better able or more willing to bear risk, and also by the pooling of risk (Goldemberg et al., 1996, p. 25). Since the risks of climate change are, to some extent, correlated, this reduces the effectiveness of pooling. However, there is reason to believe that different regions will be affected differently by climate change. This suggests that pooling might be effective. Since developing countries appear to be potentially most at risk from the effects of climate change, developed countries could provide insurance against these risks. Authors have pointed to several reasons why commercial insurance markets cannot adequately cover risks associated with climate change (Arrow et al., 1996, p. 72). For example, there is no international market where individuals or countries can insure themselves against losses from climate change or related climate change policies. Financial markets for risk There are several options for how insurance could be used in responding to climate change (Arrow et al., 1996, p. 72). One response could be to have binding agreements between countries. Countries suffering greater-than-average climate-related losses would be assisted by those suffering less-than-average losses. This would be a type of mutual

insurance contract. Another approach would be to trade "risk securities" among countries. These securities would amount to betting on particular climate outcomes. These two approaches would allow for a more efficient distribution of climate change risks. They would also allow for different beliefs over future climate outcomes. For example, it has been suggested that these markets might provide an objective test of the honesty of a particular country's beliefs over climate change. Countries that honestly believe that climate change presents little risk would be more prone to hold securities against these risks.

Impacts Distribution of impacts Climate change impacts can be measured as an economic cost (Smith et al., 2001:936941). This is particularly well-suited to market impacts, that is impacts that are linked to market transactions and directly affect GDP. Monetary measures of non-market impacts, e.g., impacts on human health and ecosystems, are more difficult to calculate. Other difficulties with impact estimates are listed below: •

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Knowledge gaps: Calculating distributional impacts requires detailed geographical knowledge, but these are a major source of uncertainty in climate models. Vulnerability: Compared with developing countries, there is a limited understanding of the potential market sector impacts of climate change in developing countries. Adaptation: The future level of adaptive capacity in human and natural systems to climate change will affect how society will be impacted by climate change. Assessments may under- or overestimate adaptive capacity, leading to under- or overestimates of positive or negative impacts. Socioeconomic trends: Future predictions of development affect estimates of future climate change impacts, and in some instances, different estimates of development trends lead to a reversal from a predicted positive, to a predicted negative, impact (and vice versa).

In a literature assessment, Smith et al. (2001:957-958) concluded, with medium confidence, that: • •

climate change would increase income inequalities between and within countries. a small increase in global mean temperature (up to 2 °C by 2100, measured against 1990 levels) would result in net negative market sector impacts in many developing countries and net positive market sector impacts in many developed countries.

With high confidence, it was predicted that with a medium (2-3 °C) to high level of warming (greater than 3 °C), negative impacts would be exacerbated, and net positive impacts would start to decline and eventually turn negative. Aggregate impacts Aggregating impacts adds up the total impact of climate change across sectors and/or regions (IPCC, 2007a:76). In producing aggregate impacts, there are a number of difficulties, such as predicting the ability of societies to adapt climate change, and estimating how future economic and social development will progress (Smith et al., 2001:941). It is also necessary for the researcher to make subjective value judgements over the importance of impacts occurring in different economic sectors, in different regions, and at different times. Smith et al. (2001) assessed the literature on the aggregate impacts of climate change. With medium confidence, they concluded that a small increase in global average temperature (up to 2 °C by 2100, measured against 1990 levels) would result in an aggregate market sector impact of plus or minus a few percent of world GDP. Smith et al. (2001) found that for a small to medium (2-3 °C) global average temperature increase, some studies predicted small net positive market impacts. Most studies they assessed predicted net damages beyond a medium temperature increase, with further damages for greater (more than 3 °C) temperature rises.

Adaptation and vulnerability IPCC (2007a) defined adaptation (to climate change) as "[initiatives] and measures to reduce the vulnerability of natural and human systems against actual or expected climate change effects" (p. 76). Vulnerability (to climate change) was defined as "the degree to which a system is susceptible to, and unable to cope with, adverse effects of climate change, including climate variability and extremes" (p. 89).

Autonomous and planned adaptation Autonomous adaptation are adaptations that are reactive to climatic stimuli, and are done as a matter of course without the intervention of a public agency. Planned adaptation can be reactive or anticipatory, i.e., undertaken before impacts are apparent. Some studies suggest that human systems have considerable capacity to adapt autonomously (Smit et al., 2001:890). Others point to constraints on autonomous adaptation, such as limited information and access to resources (p. 890). Smit et al. (2001:904) concluded that relying on autonomous adaptation to climate change would result in substantial ecological, social, and economic costs. In their view, these costs could largely be avoided with planned adaptation.

Costs and benefits

A literature assessment by Adger et al. (2007:719) concluded that there was a lack of comprehensive, global cost and benefit estimates for adaptation. Studies were noted that provided cost estimates of adaptation at regional level, e.g., for sea-level rise. A number of adaptation measures were identified as having high benefit-cost ratios.

Adaptive capacity Adaptive capacity is the ability of a system to adjust to climate change. Smit et al. (2001:895-897) described the determinants of adaptive capacity: • • • • •

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Economic resources: Wealthier nations are better able to bear the costs of adaptation to climate change than poorer ones. Technology: Lack of technology can impede adaptation. Information and skills: Information and trained personnel are required to assess and implement successful adaptation options. Social infrastructure Institutions: Nations with well-developed social institutions are believed to have greater adaptive capacity than those with less effective institutions, typically developing nations and economies in transition. Equity: Some believe that adaptive capacity is greater where there are government institutions and arrangements in place that allow equitable access to resources.

Smit et al. (2001) concluded that: •

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countries with limited economic resources, low levels of technology, poor information and skills, poor infrastructure, unstable or weak institutions, and inequitable empowerment and access to resources have little adaptive capacity and are highly vulnerable to climate change (p. 879). developed nations, broadly speaking, have greater adaptive capacity than developing regions or countries in economic transition (p. 897).

Enhancing adaptive capacity Smit et al. (2001:905) concluded that enhanced adaptive capacity would reduce vulnerability to climate change. In their view, activities that enhance adaptive capacity are essentially equivalent to activities that promote sustainable development. These activities include (p. 899): • • • • • •

improving access to resources reducing poverty lowering inequities of resources and wealth among groups improving education and information improving infrastructure improving institutional capacity and efficiency

Goklany (1995) concluded that promoting free trade - e.g., through the removal of international trade barriers - could enhance adaptive capacity and contribute to economic growth.

Regions With high confidence, Smith et al. (2001:957-958) concluded that developing countries would tend to be more vulnerable to climate change than developed countries. Based on then-current development trends, Smith et al. (2001:940-941) predicted that few developing countries would have the capacity to efficiently adapt to climate change. •

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Africa: In a literature assessment, Boko et al. (2007:435) concluded, with high confidence, that Africa's major economic sectors had been vulnerable to observed climate variability. This vulnerability was judged to have contributed to Africa's weak adaptive capacity, resulting in Africa having high vulnerability to future climate change. It was thought likely that projected sea-level rise would increase the socio-economic vulnerability of African coastal cities. Asia: Lal et al. (2001:536) reviewed the literature on adaptation and vulnerability. With medium confidence, they concluded that climate change would result in the degradation of permafrost in boreal Asia, worsening the vulnerability of climatedependent sectors, and affecting the region's economy. Australia and New Zealand: Hennessy et al. (2007:509) reviewed the literature on adaptation and vulnerability. With high confidence, they concluded that in Australia and New Zealand, most human systems had considerable adaptive capacity. With medium confidence, some Indigenous communities were judged to have low adaptive capacity. Europe: In a literature assessment, Kundzewicz et al. (2001:643) concluded, with very high confidence, that the adaptation potential of socioeconomic systems in Europe was relatively high. This was attributed to Europe's high GNP, stable growth, stable population, and well-developed political, institutional, and technological support systems. Latin America: In a literature assessment, Mata et al. (2001:697) concluded that the adaptive capacity of socioeconomic systems in Latin America was very low, particularly in regard to extreme weather events, and that the region's vulnerability was high. Polar regions: Anisimov et al. (2001, pp. 804–805) concluded that: o within the Antarctic and Arctic, at localities where water was close to melting point, socioeconomic systems were particularly vulnerable to climate change. o the Arctic would be extremely vulnerable to climate change. Anisimov et al. (2001) predicted that there would be major ecological, sociological, and economic impacts in the region. Small islands: Mimura et al. (2007, p. 689) concluded, with very high confidence, that small islands were particularly vulnerable to climate change. Partly this was attributed to their low adaptive capacity and the high costs of adaptation in proportion to their GDP.

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Coasts and low-lying areas: According to Nicholls et al. (2007, p. 336), societal vulnerability to climate change is largely dependent on development status. Developing countries lack the necessary financial resources to relocate those living in low-lying coastal zones, making them more vulnerable to climate change than developed countries. With high confidence, Nicholls et al. (2007, p. 317) concluded that on vulnerable coasts, the costs of adapting to climate change are lower than the potential damage costs. Industry, settlements and society: o At the scale of a large nation or region, at least in most industrialized economies, the economic value of sectors with low vulnerability to climate change greatly exceeds that of sectors with high vulnerability (Wilbanks et al., 2007, p. 366). Additionally, the capacity of a large, complex economy to absorb climate-related impacts, is often considerable. Consequently, estimates of the aggregate damages of climate change ignoring possible abrupt climate change - are often rather small as a percentage of economic production. On the other hand, at smaller scales, e.g., for a small country, sectors and societies might be highly vulnerable to climate change. Potential climate change impacts might therefore amount to very severe damages. o Wilbanks et al. (2007, p. 359) concluded, with very high confidence, that vulnerability to climate change depends considerably on specific geographic, sectoral and social contexts. In their view, these vulnerabilities are not reliably estimated by large-scale aggregate modelling.

Mitigation Mitigation of climate change involves actions that are designed to limit the amount of long-term climate change (Fisher et al., 2007:225). Mitigation may be achieved through the reduction of GHG emissions or through the enhancement of sinks that absorb GHGs, e.g., forests.

International public goods The atmosphere is an international public good, and GHG emissions are an international externality (Goldemberg et al., 1996:21, 28, 43). A change in the quality of the atmosphere does not affect the welfare of all individuals equally. In other words, some individuals may benefit from climate change, while others may lose out. This uneven distribution of potential climate change impacts, plus the uneven distribution of emissions globally, make it difficult to secure a global agreement to reduce emissions (Halsnæs et al., 2007:127).

Policies

National Both climate and non-climate policies can affect emissions growth. Non-climate policies that can affect emissions are listed below (Bashmakov et al., 2001:409-410): • •

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Market-orientated reforms can have important impacts on energy use, energy efficiency, and therefore GHG emissions. Price and subsidy policies: Many countries provide subsidies for activities that impact emissions, e.g., subsidies in the agriculture and energy sectors, and indirect subsidies for transport. Market liberalization: Restructuring of energy markets has occurred in several countries and regions. These policies have mainly been designed to increase competition in the market, but they can have a significant impact on emissions.

There are a number of policies that might be used to mitigate climate change, including (Bashmakov et al., 2001:412-422): • • • • • • •

Regulatory standards, e.g., technology or performance standards. Market-based instruments, such as emissions taxes and tradable permits. Voluntary agreements between public agencies and industry. Informational instruments, e.g., to increase public awareness of climate change. Use of subsidies and financial incentives, e.g., feed-in tariffs for renewable energy (Gupta et al., 2007:762). Removal of subsidies, e.g., for coal mining and burning (Barker et al., 2001:567568). Demand-side management, which aims to reduce energy demand through energy audits, product labelling, etc.

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The Kyoto Protocol to the UNFCCC sets out legally binding emission reduction commitments for the "Annex B" countries (Verbruggen, 2007, p. 817). The Protocol defines three international policy instruments ("Flexibility Mechanisms") which can be used by the Annex B countries to meet their emission reduction commitments. According to Bashmakov et al. (2001:402), use of these instruments could significantly reduce the costs for Annex B countries in meeting their emission reduction commitments. Other possible policies include internationally coordinated carbon taxes and/or regulation (Bashmakov et al., 2001:430).

Cost estimates According to a literature assessment by Barker et al. (2007:622), mitigation cost estimates depend critically on the baseline (in this case, a reference scenario that the alternative scenario is compared with), the way costs are modelled, and assumptions about future government policy. Fisher et al. (2007) estimated macroeconomic costs in

2030 for multi-gas mitigation (reducing emissions of carbon dioxide and other GHGs, such as methane) as between a 3% decrease in global GDP to a small increase, relative to baseline. This was for an emissions pathway consistent with atmospheric stabilization of GHGs between 445 and 710 ppm CO2-eq. In 2050, the estimated costs for stabilization between 710 and 445 ppm CO2-eq ranged between a 1% gain to a 5.5% decrease in global GDP, relative to baseline. These cost estimates were supported by a moderate amount of evidence and much agreement in the literature (IPCC, 2007b:11,18). Macroeconomic cost estimates made by Fisher et al. (2007:204) were mostly based on models that assumed transparent markets, no transaction costs, and perfect implementation of cost-effective policy measures across all regions throughout the 21st century. According to Fisher et al. (2007), relaxation of some or all these assumptions would lead to an appreciable increase in cost estimates. On the other hand, IPCC (2007b:8) noted that cost estimates could be reduced by allowing for accelerated technological learning, or the possible use of carbon tax/emission permit revenues to reform national tax systems. •

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Regional costs were estimated as possibly being significantly different from the global average. Regional costs were found to be largely dependent on the assumed stabilization level and baseline scenario. Sectoral costs: In a literature assessment, Barker et al. (2001:563-564), predicted that the renewables sector could potentially benefit from mitigation. The coal (and possibly the oil) industry was predicted to potentially lose substantial proportions of output relative to a baseline scenario, with energy-intensive sectors, such as heavy chemicals, facing higher costs.

Adaptation and mitigation The distribution of benefits from adaptation and mitigation policies are different in terms of damages avoided (Toth et al., 2001:653). Adaptation activities mainly benefit those who implement them, while mitigation benefits others who may not have made mitigation investments. Mitigation can therefore be viewed as a global public good, while adaptation is either a private good in the case of autonomous adaptation, or a national or regional public good in the case of public sector policies.

Paying for an international public good Economists generally agree on the following two principles (Goldemberg, et al.., 1996:29): •

For the purposes of analysis, it is possible to separate equity from efficiency. This implies that all emitters, regardless of whether they are rich or poor, should pay the full social costs of their actions. From this perspective, corrective (Pigouvian) taxes should be applied uniformly.

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It is inappropriate to redress all equity issues through climate change policies. However, climate change itself should not aggravate existing inequalities between different regions.

Some early studies suggested that a uniform carbon tax would be a fair and efficient way of reducing emissions (Banuri et al., 1996, pp. 103–104). A carbon tax is a Pigouvian tax, and taxes fuels based on their carbon content (Hoeller and Wallin, 1991, p. 92). Criticisms have been made of such a system: • • •

A carbon tax would impose different burdens on countries due to existing differences in tax structures, resource endowments, and development. Most observers argue that such a tax would not be fair because of differences in historical emissions and current wealth. A uniform carbon tax would not be Pareto efficient unless lump sum transfers were made between countries. Pareto efficiency requires that the carbon tax would not make any countries worse off than they would be without the tax (Chichilnisky and Heal, 1994, p. 445; Tol, 2001, p. 72). Also, at least one country would need to be better off.

An alternative approach to having a Pigouvian tax is one based on property rights. A practical example of this would be a system of emissions trading, which is essentially a privatization of the atmosphere (Hepburn, 2007). The idea of using property rights in response to an externality was put forward by Coase (1960). Coase's model of social cost assumes a situation of equal bargaining power among participants and equal costs of making the bargain (Toth et al.., 2001:668). Assigning property rights can be an efficient solution. This is based on the assumption that there are no bargaining/transaction costs involved in buying or selling these property rights, and that buyers and sellers have perfect information available when making their decisions. If these assumptions are correct, efficiency is achieved regardless of how property rights are allocated. In the case of emissions trading, this suggests that equity and efficiency can be addressed separately: equity is taken care of in the allocation of emission permits, and efficiency is promoted by the market system. In reality, however, markets do not live up to the ideal conditions that are assumed in Coase's model, with the result that there may be trade-offs between efficiency and equity (Halsnæs et al., 2007). Efficiency and equity No scientific consensus exists on who should bear the burden of adaptation and mitigation costs (Goldemberg et al.., 1996:29). Several different arguments have been made over how to spread the costs and benefits of taxes or systems based on emissions trading. One approach considers the problem from the perspective of who benefits most from the public good. This approach is sensitive to the fact that different preferences exist between different income classes. The public good is viewed in a similar way as a private good,

where those who use the public good must pay for it. Some people will benefit more from the public good than others, thus creating inequalities in the absence of benefit taxes. A difficulty with public goods is determining who exactly benefits from the public good. Additionally, this approach does not provide guidance as to how the surplus of benefits from climate policy should be shared. A second approach has been suggested based on economics and the social welfare function. To calculate the social welfare function requires an aggregation of the impacts of climate change policies and climate change itself across all affected individuals. This calculation involves a number of complexities and controversial equity issues (Markandya et al., 2001:460). For example, the monetization of certain impacts on human health. There is also controversy over the issue of benefits affecting one individual offsetting negative impacts on another (Smith et al.., 2001:958). These issues to do with equity and aggregation cannot be fully resolved by economics (Banuri et al.., 1996:87). On a utilitarian basis, which has traditionally been used in welfare economics, an argument can be made for richer countries taking on most of the burdens of mitigation (Halsnæs et al., 2007). However, another result is possible with a different modeling of impacts. If an approach is taken where the interests of poorer people have lower weighting, the result is that there is a much weaker argument in favour of mitigation action in rich countries. Valuing climate change impacts in poorer countries less than domestic climate change impacts (both in terms of policy and the impacts of climate change) would be consistent with observed spending in rich countries on foreign aid (Hepburn, 2005; Helm, 2008:229). In terms of the social welfare function, the different results depend on the elasticity of marginal utility. A declining marginal utility of consumption means that a poor person is judged to benefit more from increases in consumption relative to a richer person. A constant marginal utility of consumption does not make this distinction, and leads to the result that richer countries should mitigate less. A third approach looks at the problem from the perspective of who has contributed most to the problem. Because the industrialized countries have contributed more than twothirds of the stock of human-induced GHGs in the atmosphere, this approach suggests that they should bear the largest share of the costs. This stock of emissions has been described as an "environmental debt" (Munasinghe et al., 1996, p. 167). In terms of efficiency, this view is not supported. This is because efficiency requires incentives to be forward-looking, and not retrospective (Goldemberg et al., 1996, p. 29). The question of historical responsibility is a matter of ethics. Munasinghe et al. (1996, p. 167) suggested that developed countries could address the issue by making side-payments to developing countries.

Trade offs

It is often argued in the literature that there is a trade-off between adaptation and mitigation, in that the resources committed to one are not available for the other (Schneider et al., 2001:94). This is debatable in practice because the people who bear emission reduction costs or benefits are often different from those who pay or benefit from adaptation measures. There is also a trade off in how much damage from climate change should be avoided. The assumption that it is always possible to trade off different outcomes is viewed as problematic by many people (Halsnæs et al., 2007). For example, a trade off might exist between economic growth and damages faced by indigenous cultures. Some of the literature has pointed to difficulties in these kinds of assumptions. For instance, there may be aversion at any price towards losing particular species. It has also been suggested that low-probability, extreme outcomes are overweighted when making choices. This is related to climate change, since the possibility of future abrupt changes in the climate or the Earth system cannot be ruled out. For example, if the West Antarctic ice sheet was to disintegrate, it could result in a sea level rise of 4–6 meters over several centuries. Cost-benefit analysis In a cost-benefit analysis, the trade offs between climate change impacts, adaptation, and mitigation are made explicit. Cost-benefit analyses of climate change are produced using integrated assessment models (IAMs), which incorporate aspects of the natural, social, and economic sciences. In an IAM designed for cost-benefit analysis, the costs and benefits of impacts, adaptation and mitigation are converted into monetary estimates. Some view the monetization of costs and benefits as controversial. The "optimal" levels of mitigation and adaptation are then resolved by comparing the marginal costs of action with the marginal benefits of avoided climate change damages (Toth et al., 2001:654). The decision over what "optimal" is depends on subjective value judgements made by the author of the study (Azar, 1998). There are many uncertainties that affect cost-benefit analysis, for example, sector- and country-specific damage functions (Toth et al., 2001:654). Another example is with adaptation. The options and costs for adaptation are largely unknown, especially in developing countries. Results A common finding of cost-benefit analysis is that the optimum level of emissions reduction is modest in the near-term, with more stringent abatement in the longer-term (Stern, 2007:298; Heal, 2008:20; Barker, 2008). This approach might lead to a warming of more than 3 °C above the pre-industrial level (World Bank, 2010:8). In most models,

benefits exceed costs for stabilization of GHGs leading to warming of 2.5 °C. No models suggest that the optimal policy is to do nothing, i.e., allow "business-as-usual" emissions. Along the efficient emission path calculated by Nordhaus and Boyer (2000) (referred to by Fisher et al.., 2007), the long-run global average temperature after 500 years increases by 6.2 °C above the 1900 level. Nordhaus and Boyer (2000) stated their concern over the potentially large and uncertain impacts of such a large environmental change. It should be noted that the projected temperature in this IAM, like any other, is subject to scientific uncertainty (e.g., the relationship between concentrations of GHGs and global mean temperature, which is called the climate sensitivity). Projections of future atmospheric concentrations based on emission pathways are also affected by scientific uncertainties, e.g., over how carbon sinks, such as forests, will be affected by future climate change. Klein et al. (2007) concluded that there were few high quality studies in this area, and placed low confidence in the results of cost-benefit analysis. Hof et al. (2008) (referred to by World Bank, 2010:8) examined the sensitivity of the optimal climate target to assumptions about the time horizon, climate sensitivity, mitigation costs, likely damages, and discount rates. The optimal target was defined as the concentration that would result in the lowest reduction in the present value (i.e., discounted) of global consumption. A set of assumptions that included a relatively high climate sensitivity (i.e., a relatively large global temperature increase for a given increase in GHGs), high damages, a long time horizon, low discount rates (i.e., future consumption is valued relatively highly), and low mitigation costs, produced an optimum peak in the concentration of CO2e at 540 parts per million (ppm). Another set of assumptions that assumed a lower climate sensitivity (lower global temperature increase), lower damages, a shorter time horizon, and a higher discount rate (present consumption is valued relatively more highly), produced an optimum peaking at 750 ppm. Strengths In spite of various uncertainties or possible criticisms of cost-benefit analysis, it does have several strengths: • •

•

It offers an internally consistent and global comprehensive analysis of impacts (Smith et al., 2001:955). Sensitivity analysis allows critical assumptions in the analysis to be changed. This can identify areas where the value of information is highest and where additional research might have the highest payoffs (Downing, et al., 2001:119). As uncertainty is reduced, the integrated models used in producing cost-benefit analysis might become more realistic and useful.

Geoengineering The modern concept of geoengineering (or climate engineering) is usually taken to mean proposals to deliberately manipulate the Earth's climate to counteract the effects of global warming from greenhouse gas emissions. The National Academy of Sciences

defined geoengineering as "options that would involve large-scale engineering of our environment in order to combat or counteract the effects of changes in atmospheric chemistry." IPCC (2007) concluded that geoengineering options, such as ocean fertilization to remove CO2 from the atmosphere, remained largely unproven. It was judged that reliable cost estimates for geoengineering had not yet been published. Geoengineering accompanies mitigation and adaptation to form a 3-stranded 'MAG' approach to tackling global warming, notably advocated by the Institution of Mechanical Engineers. Some geoengineering techniques are based on carbon sequestration. These techniques seek to reduce greenhouse gases in the atmosphere directly. These include direct methods (e.g. carbon dioxide air capture) and indirect methods (e.g. ocean iron fertilization). These techniques can be regarded as mitigation of global warming. Alternatively, solar radiation management techniques do not reduce greenhouse gas concentrations, and can only address the warming effects of carbon dioxide and other gases; they cannot address problems such as ocean acidification, which are expected as a result of rising carbon dioxide levels. Examples of proposed solar radiation management techniques include the production of stratospheric sulfur aerosols, which was suggested by Paul Crutzen, space mirrors, and cloud reflectivity enhancement. Most techniques have at least some side effects. To date, no large-scale geoengineering projects have been undertaken. Some limited tree planting and cool roof projects are already underway, and ocean iron fertilization is at an advanced stage of research, with small-scale research trials and global modelling having been completed. Field research into sulfur aerosols has also started. Some commentators have suggested that consideration of geoengineering presents a moral hazard because it threatens to reduce the political and popular pressure for emissions reduction. Typically, the scientists and engineers proposing geoengineering strategies do not suggest that they are an alternative to emissions control, but rather an accompanying strategy. Reviews of geoengineering techniques have emphasised that they are not substitutes for emission controls and have identified potentially stronger and weaker schemes.

Definition Geoengineering is the idea of applying planetary engineering to Earth. Geoengineering would involve the deliberate modification of Earth's environment on a large scale "to suit human needs and promote habitability". Typically, the term is used to describe proposals to counter the effects of human-induced climate change. However, others define it more narrowly as nature-integrated engineering projects. The term geoengineering is distinct from environmental damage and accidental anthropogenic climate change, which are side-effects of human activity, rather than an intended consequence. The global recovery of hydrocarbons from the subsurface using integrated geoscience and engineering technology has been termed 'petroleum geoengineering' as an activity with global impact. Definitions of the term are not universally accepted.

Background

The field is currently experiencing a surge of interest as it has now become broadly accepted that global warming is both real and dangerous. A degree of urgency in efforts to research and implement potential solutions is based on the historic failure to control emissions, and the possibility that tipping points in the Earth's climate system are close at hand. In particular the Arctic shrinkage is causing accelerated regional warming. Rapid action with geoengineering may be necessary. Other tipping points might be avoided by reducing the impact of global warming in order to stifle positive feedback and prevent the resulting accelerated climate change. The study of geoengineering is a complex discipline, as it requires the collation of knowledge in: • • •

scientific disciplines including atmospheric chemistry, ecology, meteorology, plant biology engineering disciplines including aeronautical engineering, naval architecture, ballistics management and control disciplines such as risk management, operational research, cost-benefit analysis

Several notable organisations have recently, or are soon to, investigate geoengineering with a view to evaluating its potential. Notably, NASA, the Royal Society, the Institute of Mechanical Engineers, and the UK Parliament, have all held inquiries or contests aimed at discovering and evaluating current knowledge of the subject. The Asilomar International Conference on Climate Intervention Technologies was convened to identify and develop risk reduction guidelines for climate intervention experimentation. The major environmental organisations such as Friends of the Earth and Greenpeace have typically been reluctant to endorse geoengineering. Some have argued that any public support for geoengineering may weaken the fragile political consensus to reduce greenhouse gas emissions. Geoengineering are technological efforts to stabilize the climate system by direct intervention in the Earth-atmosphere-system's energy balance (Verbruggen, 2007, p. 815). The intent of geoengineering is to reduce the amount of global warming (the observed trend of increased global average temperature (NRC, 2008, p. 2)). IPCC (2007b:15) concluded that reliable cost estimates for geoengineering options had not been published. This finding was based on medium agreement in the literature and limited evidence.

Major reports considering economics of climate change The Intergovernmental Panel on Climate Change (IPCC) has produced several reports where the economics literature on climate change is assessed. In 1995, the IPCC produced its second set of assessment reports on climate change. Working Group III of the IPCC produced a report on the "Economic and Social Dimensions of Climate Change." In the later third and fourth IPCC assessments, published in 2001 and 2007

respectively, the assessment of the economics literature is divided across two reports produced by IPCC Working Groups II and III. The Stern Review on the Economics of Climate Change is a 700-page report released for the British government on October 30, 2006 by economist Nicholas Stern chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics. The report discusses the effect of global warming on the world economy. The Garnaut Climate Change Review was a study by Professor Ross Garnaut, commissioned by then Opposition Leader, Kevin Rudd and by the Australian State and Territory Governments on 30 April 2007. After his election on 24 November 2007 Prime Minister of Australia Kevin Rudd confirmed the participation of the Commonwealth Government in the Review.

Chapter- 8

Electricity Market

In economic terms, electricity (both power and energy) is a commodity capable of being bought, sold and traded. An electricity market is a system for effecting purchases, through bids to buy; sales, through offers to sell; and short-term trades, generally in the form of financial or obligation swaps. Bids and offers use supply and demand principles to set the price. Long-term trades are contracts similar to power purchase agreements and generally considered private bi-lateral transactions between counterparties. Wholesale transactions (bids and offers) in electricity are typically cleared and settled by the market operator or a special-purpose independent entity charged exclusively with that function. Market operators do not clear trades but often require knowledge of the trade in order to maintain generation and load balance. The commodities within an electric market generally consist of two types: Power and Energy. Power is the metered net electrical output of a generator at any given time and is measured in Megawatts (MW). Energy is electricity that flows through a metered point for a given time and is measured in Megawatt Hours (MWh). Markets for power related commodities are net generation output for a number of intervals usually in increments of 5, 15 and 60 minutes. Markets for energy related commodities required by, managed by (and paid for by) market operators to ensure reliability, are considered Ancillary Services and include such names as spinning reserve, non-spinning reserve, operating reserves, responsive reserve, regulation up regulation down, and installed capacity. In addition, for most major operators, there are markets for transmission congestion and electricity derivatives, such as electricity futures and options, which are actively traded. These markets developed as a result of the restructuring of electric power systems around the world. This process has often gone on in parallel with the restructuring of natural gas markets.

History

The earliest introduction of energy market concepts and privatization to electric power systems took place in Chile in the early 1980s, in parallel with other market-oriented reforms associated with the Chicago Boys. The Chilean model was generally perceived as successful in bringing rationality and transparency to power pricing, but it contemplated the continuing dominance of several large incumbents and suffered from the attendant structural problems. Argentina improved on the Chilean model by imposing strict limits on market concentration and by improving the structure of payments to units held in reserve to assure system reliability. One of the principal purposes of the introduction of market concepts in Argentina was to privatize existing generation assets (which had fallen into disrepair under the government-owned monopoly, resulting in frequent service interruptions) and to attract capital needed for rehabilitation of those assets and for system expansion. The World Bank was active in introducing a variety of hybrid markets in other Latin American nations, including Peru, Brazil, and Colombia, during the 1990s, with limited success. A key event for electricity markets occurred in 1990 when the UK government under Margaret Thatcher privatised the UK electricity supply industry. The process followed by the British was then used as a model or at least a catalyst for the deregulation of several other Commonwealth countries, notably Australia and New Zealand, and regional markets such as Alberta. However, in many of these other instances the market deregulation occurred without the widespread privatisation that characterised the UK example. In the USA the traditional model of the vertically integrated electric utility with a transmission system designed to serve its own customers worked extremely well for decades. As dependence on a reliable supply of electricity grew and electricity was transported over increasingly greater distances, power pools were formed and interconnections developed. Transactions were relatively few and generally planned well in advance. However, in the last decade of the 20th century, some US policy makers and academics projected that the electrical power industry would ultimately experience deregulation and Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) were established. They were conceived as the way to handle the vastly increased number of transactions that take place in a competitive environment. About a dozen states decided to deregulate but some pulled back following the California electricity crisis of 2000 and 2001. In different deregulation processes the institutions and market designs were often very different but many of the underlying concepts were the same. These are: separate the potentially competitive functions of generation and retail from the natural monopoly functions of transmission and distribution; and establish a wholesale electricity market and a retail electricity market. The role of the wholesale market is to allow trading between generators, retailers and other financial intermediaries both for short-term delivery of electricity and for future delivery periods.

Nature of the market Electricity is by its nature difficult to store and has to be available on demand. Consequently, unlike other products, it is not possible, under normal operating conditions, to keep it in stock, ration it or have customers queue for it. Furthermore, demand and supply vary continuously. There is therefore a physical requirement for a controlling agency, the transmission system operator, to coordinate the dispatch of generating units to meet the expected demand of the system across the transmission grid. If there is a mismatch between supply and demand the generators speed up or slow down causing the system frequency (either 50 or 60 hertz) to increase or decrease. If the frequency falls outside a predetermined range the system operator will act to add or remove either generation or load. In addition, the laws of physics determine how electricity flows through an electricity network. Hence the extent of electricity lost in transmission and the level of congestion on any particular branch of the network will influence the economic dispatch of the generation units. The scope of each electricity market consists of the transmission grid or network that is available to the wholesalers, retailers and the ultimate consumers in any geographic area. Markets may extend beyond national boundaries.

Wholesale electricity market

Typical daily consumption of electrical power in Germany A wholesale electricity market exists when competing generators offer their electricity output to retailers. The retailers then re-price the electricity and take it to market. While wholesale pricing used to be the exclusive domain of large retail suppliers, increasingly markets like New England are beginning to open up to end-users. Large end-users seeking to cut out unnecessary overhead in their energy costs are beginning to recognize the advantages inherent in such a purchasing move. Consumers buying electricity directly from generators is a relatively recent phenomenon. Buying wholesale electricity is not without its drawbacks (market uncertainty, membership costs, set up fees, collateral investment), however, the larger the end user's electrical load, the greater the benefit and incentive to make the switch. For an economically efficient electricity wholesale market to flourish it is essential that a number of criteria are met. Professor William Hogan of Harvard University has identified these criteria. Central to his criteria is a coordinated spot market that has "bid-based, security-constrained, economic dispatch with nodal prices". Other academics such as Professors Shmuel Oren and Pablo Spiller of the University of California, Berkeley have proposed other criteria. Variants of Professor Hogan's model have largely been adopted in the US, Australia and New Zealand.

Bid-based, security-constrained, economic dispatch with nodal prices The system price in the day-ahead market is, in principle, determined by matching offers from generators to bids from consumers at each node to develop a classic supply and demand equilibrium price, usually on an hourly interval, and is calculated separately for subregions in which the system operator's load flow model indicates that constraints will bind transmission imports. The theoretical prices of electricity at each node on the network is a calculated "shadow price", in which it is assumed that one additional kilowatt-hour is demanded at the node in question, and the hypothetical incremental cost to the system that would result from the optimized redispatch of available units establishes the hypothetical production cost of the hypothetical kilowatt-hour. This is known as locational marginal pricing (LMP) or nodal pricing and is used in some deregulated markets, most notably in the PJM Interconnection, New York, and New England markets in the USA and in New Zealand. In practice, the LMP algorithm described above is run, incorporating a securityconstrained, least-cost dispatch calculation (see below) with supply based on the generators that submitted offers in the day-ahead market, and demand based on bids from load-serving entities draining supplies at the nodes in question. While in theory the LMP concepts are useful and not evidently subject to manipulation, in practice system operators have substantial discretion over LMP results through the ability to classify units as running in "out-of-merit dispatch", which are thereby excluded from the LMP calculation. In most systems, units that are dispatched to provide reactive power to support transmission grids are declared to be "out-of-merit" (even though these are typically the same units that are located in constrained areas and would otherwise result in scarcity signals). System operators also normally bring units online to hold as "spinning-reserve" to protect against sudden outages or unexpectedly rapid ramps in demand, and declare them "out-of-merit". The result is often a substantial reduction in clearing price at a time when increasing demand would otherwise result in escalating prices. Researches have noted that a variety of factors, including energy price caps set well below the putative scarcity value of energy, the impact of "out-of-merit" dispatch, the use of techniques such as voltage reductions during scarcity periods with no corresponding scarcity price signal, etc., results in a "missing money" problem. The consequence is that prices paid to suppliers in the "market" are substantially below the levels required to stimulate new entry. The markets have therefore been useful in bringing efficiencies to short-term system operations and dispatch, but have been a failure in what was advertised as a principal benefit: stimulating suitable new investment where it is needed, when it is needed. In LMP markets, where constraints exist on a transmission network, there is a need for more expensive generation to be dispatched on the downstream side of the constraint.

Prices on either side of the constraint separate giving rise to congestion pricing and constraint rentals. A constraint can be caused when a particular branch of a network reaches its thermal limit or when a potential overload will occur due to a contingent event (e.g., failure of a generator or transformer or a line outage) on another part of the network. The latter is referred to as a security constraint. Transmission systems are operated to allow for continuity of supply even if a contingent event, like the loss of a line, were to occur. This is known as a security constrained system. In most systems the algorithm used is a "DC" model rather than an "AC" model, so constraints and redispatch resulting from thermal limits are identified/predicted, but constraints and redispatch resulting from reactive power deficiencies are not. Some systems take marginal losses into account. The prices in the real-time market are determined by the LMP algorithm described above, balancing supply from available units. This process is carried out for each 5-minute, half-hour or hour (depending on the market) interval at each node on the transmission grid. The hypothetical redispatch calculation that determines the LMP must respect security constraints and the redispatch calculation must leave sufficient margin to maintain system stability in the event of an unplanned outage anywhere on the system. This results in a spot market with "bid-based, security-constrained, economic dispatch with nodal prices". Since the introduction of the market, New Zealand has experienced shortages in 2001 and 2003, high prices all through 2005 and even higher prices and the risk of a severe shortage in 2006 (as of April 2006). These problems arose because New Zealand is at risk from drought due to its high proportion of electricity generated from hydro. However, similar shortages arose during the 1970s before the electricity market was introduced and the absence of shortages during the 1980s appears to be due to the large increase in capacity as a result of the "Think Big" projects started during the 1970s. The difference the market has made is that now cuts in electricity demand are made voluntarily while in the 1970s cuts were imposed. If the users of electricity know more about what they prefer to cut than the government, this would have led to an increase in efficiency. Many established markets do not employ nodal pricing, examples being the UK, Powernext and Nord Pool (Scandinavia and Finland).

Risk management Financial risk management is often a high priority for participants in deregulated electricity markets due to the substantial price and volume risks that the markets can exhibit. A consequence of the complexity of a wholesale electricity market can be extremely high price volatility at times of peak demand and supply shortages. The particular characteristics of this price risk are highly dependent on the physical fundamentals of the market such as the mix of types of generation plant and relationship between demand and weather patterns. Price risk can be manifest by price "spikes" which

are hard to predict and price "steps" when the underlying fuel or plant position changes for long periods. "Volume risk" is often used to denote the phenomenon whereby electricity market participants have uncertain volumes or quantities of consumption or production. For example, a retailer is unable to accurately predict consumer demand for any particular hour more than a few days into the future and a producer is unable to predict the precise time that they will have plant outage or shortages of fuel. A compounding factor is also the common correlation between extreme price and volume events. For example, price spikes frequently occur when some producers have plant outages or when some consumers are in a period of peak consumption. The introduction of substantial amounts of intermittent power sources such as wind energy may have an impact on market prices. Electricity retailers, who in aggregate buy from the wholesale market, and generators who in aggregate sell to the wholesale market, are exposed to these price and volume effects and to protect themselves from volatility, they will enter into "hedge contracts" with each other. The structure of these contracts varies by regional market due to different conventions and market structures. However, the two simplest and most common forms are simple fixed price forward contracts for physical delivery and contracts for differences where the parties agree a strike price for defined time periods. In the case of a contract for difference, if a resulting wholesale price index (as referenced in the contract) in any time period is higher than the "strike" price, the generator will refund the difference between the "strike" price and the actual price for that period. Similarly a retailer will refund the difference to the generator when the actual price is less than the "strike price". The actual price index is sometimes referred to as the "spot" or "pool" price, depending on the market. Many other hedging arrangements, such as swing contracts, Virtual Bidding, Financial Transmission Rights, call options and put options are traded in sophisticated electricity markets. In general they are designed to transfer financial risks between participants.

Wholesale electricity markets • • • • • • • • • • • •

Czech Republic / Europe - OTE - Czech electricity and gas market operator Western Australia - IMO the Independent Market Operator Australia - AEMO the Australian Market Administrator Austria Brazil - Eletric Energy Commercialization Chamber Canada - Independent Electricity System Operator (IESO) Ontario Market and Alberta Electric System Operator (AESO) Chile Scandinavia - Nord Pool Spot France, - Powernext Germany - European Energy Exchange EEX Great Britain - Elexon India - Indian Energy Exchange

• • • • • • • • • • •

Ireland - SEMO Italy - GME Japan - Japan Electric Power Exchange (JEPX) Netherlands, UK, Belgium - APX-ENDEX New Zealand - New Zealand Electricity Market Philippines - Philippine Wholesale Electricity Spot Market Portugal - OMIP Russian Federation - Trade System Administrator (ATS) Singapore - Energy Market Authority, Singapore and Energy Market Company (EMC) Spain - OMEL Electricity Market USA (summarized here) o PJM o ERCOT Market, o New York Market, o Midwest Market, o California ISO, o New England Market

Retail electricity market A retail electricity market exists when end-use customers can choose their supplier from competing electricity retailers; one term used in the United States for this type of consumer choice is 'energy choice'. A separate issue for electricity markets is whether or not consumers face real-time pricing (prices based on the variable wholesale price) or a price that is set in some other way, such as average annual costs. In many markets, consumers do not pay based on the real-time price, and hence have no incentive to reduce demand at times of high (wholesale) prices or to shift their demand to other periods. Demand response may use pricing mechanisms or technical solutions to reduce peak demand. Generally, electricity retail reform follows from electricity wholesale reform. However, it is possible to have a single electricity generation company and still have retail competition. If a wholesale price can be established at a node on the transmission grid and the electricity quantities at that node can be reconciled, competition for retail customers within the distribution system beyond the node is possible. In the German market, for example, large, vertically integrated utilities compete with one another for customers on a more or less open grid. Although market structures vary, there are some common functions that an electricity retailer has to be able to perform, or enter into a contract for, in order to compete effectively. Failure or incompetence in the execution of one or more of the following has led to some dramatic financial disasters: • •

Billing Credit control

• • • • •

Customer management via an efficient call centre Distribution use-of-system contract Reconciliation agreement "Pool" or "spot market" purchase agreement Hedge contracts - contracts for differences to manage "spot price" risk

The two main areas of weakness have been risk management and billing. In the USA in 2001, California's flawed regulation of retail competition led to the California electricity crisis and left incumbent retailers subject to high spot prices but without the ability to hedge against these. In the UK a retailer, Independent Energy, with a large customer base went bust when it could not collect the money due from customers. New technology is available and has been piloted by the US Department of Energy that may be better suited to real-time market pricing. A potential use of event-driven SOA could be a virtual electricity market where home clothes dryers can bid on the price of the electricity they use in a real-time market pricing system. The real-time market price and control system could turn home electricity customers into active participants in managing the power grid and their monthly utility bills. Customers can set limits on how much they would pay for electricity to run a clothes dryer, for example, and electricity providers willing to transmit power at that price would be alerted over the grid and could sell the electricity to the dryer. On one side, consumer devices can bid for power based on how much the owner of the device were willing to pay, set ahead of time by the consumer. On the other side, suppliers can enter bids automatically from their electricity generators, based on how much it would cost to start up and run the generators. Further, the electricity suppliers could perform real-time market analysis to determine return-on-investment for optimizing profitability or reducing end-user cost of goods. Event-driven SOA software could allow homeowners to customize many different types of electricity devices found within their home to a desired level of comfort or economy. The event-driven software could also automatically respond to changing electricity prices, in as little as five-minute intervals. For example, to reduce the home owner's electricity usage in peak periods (when electricity is most expensive), the software could automatically lower the target temperature of the thermostat on the central heating system (in winter) or raise the target temperature of the thermostat on the central cooling system (in summer).

Electricity market experience In the main, experience in the introduction of wholesale and retail competition has been mixed. Many regional markets have achieved some success and the ongoing trend continues to be towards deregulation and introduction of competition. However in 2000/2001 major failures such as the California electricity crisis and the Enron debacle caused a slow down in the pace of change and in some regions an increase in market

regulation and reduction in competition. However, this trend is widely regarded as a temporary one against the longer term trend towards more open and competitive markets. Notwithstanding the favorable light in which market solutions are viewed conceptually, the "missing money" problem has to date proved intractable. If electricity prices were to move to the levels needed to incent new merchant (i.e., market-based) transmission and generation, the costs to consumers would be politically difficult. The increase in annual costs to consumers in New England alone were calculated at $3 billion during the recent FERC hearings on the NEPOOL market structure. Several mechanisms that are intended to incent new investment where it is most needed by offering enhanced capacity payments (but only in zones where generation is projected to be short) have been proposed for NEPOOL, PJM and NYPOOL, and go under the generic heading of "locational capacity" or LICAP (the PJM version currently [May 2006] under FERC review is called the "Reliability Pricing Model", or "RPM"). There is substantial doubt as to whether any of these mechanisms will in fact incent new investment, given the regulatory risk and chronic instability of the market rules in US systems, and there are substantial concerns that the result will instead be to increase revenues to incumbent generators, and costs to consumers, in the constrained areas.

Chapter- 9

Cost of Electricity by Source

The cost of electricity generated by different sources measures the cost of generating electricity including initial capital, return on investment, as well as the costs of continuous operation, fuel, and maintenance.

Cost factors While calculating costs, several internal cost factors have to be considered. (Note the use of "costs," which is not the actual selling price, since this can be affected by a variety of factors such as subsidies on some energy and sources and taxes on others): •

•

• • •

•

Capital costs (including waste disposal and decommissioning costs for nuclear energy) - tend to be low for fossil fuel power stations; high for renewables and nuclear; very high for waste to energy, wave and tidal, PV and solar thermal. Operating and maintenance costs - tend to be high for nuclear, coal, and waste-toenergy (fly and bottom ash disposal, emissions clean up, operating steam generators) and low for renewables and oil and gas fired peaking units. Fuel costs - high for fossil fuel and biomass sources, very low for nuclear and renewables, possibly negative for waste to energy. Expected annual hours run - as low as 3% for diesel peakers, 30% for wind, and up to 90% for nuclear. Revenue recovered from heat sales can be offset against running costs, and reduce the net costs in the case of Cogeneration (combined heat and power) and District heating schemes. Factors such as the costs of waste (and associated issues) and different insurance costs are not included in the following.

To evaluate the total cost of production of electricity, the streams of costs are converted to a net present value using the time value of money. These costs are all brought together using discounted cash flow here. and here .

Another collection of cost calculations is shown here:, here , and , and . BP claims renewables are on a decreasing cost curve, while non-renewables are on an increasing cost curve.

Calculations Levelised energy cost (LEC) is the price at which electricity must be generated from a specific source to break even. It is an economic assessment of the cost of the energygenerating system including all the costs over its lifetime: initial investment, operations and maintenance, cost of fuel, cost of capital, and is very useful in calculating the costs of generation from different sources. It can be defined in a single formula as:

where • • • • • • •

LEC = Average lifetime levelised electricity generation cost It = Investment expenditures in the year t Mt = Operations and maintenance expenditures in the year t Ft = Fuel expenditures in the year t Et = Electricity generation in the year t r = Discount rate n = Life of the system

Typically LECs are calculated over 20 to 40 year lifetimes, and are given in the units of currency per kilowatt-hour, for example AUD/kWh or EUR/kWh or per megawatt-hour, for example AUD/MWh (as tabulated below).

System Boundaries When comparing LECs for alternative systems, it is very important to define the boundaries of the 'system' and the costs that are included in it. For example, should transmissions lines and distribution systems be included in the cost? Typically only the costs of connecting the generating source into the transmission system is included as a cost of the generator. But in some cases wholesale upgrade of the Grid is needed. Careful thought has to be given to whether or not these costs should be included in the cost of power.

Should R&D, tax, and environmental impact studies be included? Should the costs of impacts on public health and environmental damage be included? Should the costs of government subsidies be included in the calculated LEC?

Discount Rate Another key issue is the decision about the value of the discount rate r. The value that is chosen for r can often 'weigh' the decision towards one option or another, so the basis for choosing the discount must clearly be carefully evaluated. The discount rate depends on the cost of capital, including the balance between debt-financing and equity-financing, and an assessment of the financial risk.

U.S. Department of Energy estimates The table below lists the estimated cost of electricity by source for plants entering service in 2016. No subsidies are included in the calculations. The table is from a January 12, 2010 report of the U.S. Department of Energy (DOE). •

Total System Levelized Cost (the rightmost column) gives the dollar cost per megawatt-hour that must be charged over time in order to pay for the total cost. Divide by 1000 to get the cost per kilowatt-hour. The easy way to do that is to move the decimal point 3 places to the left.

• • • • •

O&M = operation and maintenance. CC = combined cycle. CCS = carbon capture and sequestration. PV = photovoltaics. GHG = greenhouse gas.

The table, according to the DOE (emphasis added), "provides the average national levelized costs for the generating technologies represented in the National Energy Modeling System (NEMS) as configured for the Annual Energy Outlook 2010 (AEO2010) reference case. Levelized costs represent the present value of the total cost of building and operating a generating plant over its financial life, converted to equal annual payments and amortized over expected annual generation from an assumed duty cycle. The key factors contributing to levelized costs include the cost of constructing the plant, the time required to construct the plant, the non-fuel costs of operating the plant, the fuel costs, the cost of financing, and the utilization of the plant. The availability of various incentives including state or federal tax credits can also impact these costs. The values shown in the table do not incorporate any such incentives."

U.K. 2010 estimate In March 2010, a new report on UK levelised generation costs was published by Parsons Brinckerhoff. It puts a range on each cost due to various uncertainties. Combined cycle gas turbines without CO2 capture are not directly comparable to the other low carbon emission generation technologies in the PB study. The assumptions used in this study are given in the report. UK energy costs for different generation technologies (2010) Technology Cost range (£/MWh) New nuclear 55-85 Onshore wind 80-110 Biomass 60-120 Natural gas turbines with CO2 capture 60-130 Coal with CO2 capture 100-155 Offshore wind 150-210 Natural gas turbine, no CO2 capture 55-110 Tidal power 155-390

Analysis from different sources

█ Conventional oil █ Unconventional oil █ Biofuels █ Coal █ Nuclear █ Wind Colored vertical lines indicate various historical oil prices. From left to right: — 1990s average — January 2009 — 1979 peak — 2008 peak Price of oil per barrel (bbl) at which energy sources are competitive.

• • •

Right end of bar is viability without subsidy. Left end of bar requires regulation or government subsidies. Wider bars indicate uncertainty.

A draft report of LECs used by the California Energy Commission is available here. From this report, the price per MWh for a municipal energy source is shown here: California levelized energy costs for different generation technologies (2007) Technology Cost (USD/MWh) Advanced Nuclear 67 Coal 74-88 Gas 313-346 Geothermal 67 Hydro power 48-86 Wind power 60 Solar 116-312 Biomass 47-117 Fuel Cell 86-111 Wave Power 611

Note that the above figures incorporate tax breaks for the various forms of power plants. Subsidies range from 0% (for Coal) to 14% (for nuclear) to over 100% (for solar). Other sources are given here, The following table gives a selection of LECs from two major government reports from Australia. Note that these LECs do not include any cost for the greenhouse gas emissions (such as under carbon tax or emissions trading scenarios) associated with the different technologies. Levelised energy costs for different generation technologies in Australian Dollars (2006) Technology Cost (AUD/MWh) Nuclear (to COTS plan) 40–70 Nuclear (to suit site; typical) 75–105 Coal 28–38 Coal: IGCC + CCS 53–98 Coal: supercritical pulverized + CCS 64–106 Open-cycle Gas Turbine 101 Hot fractured rocks 89 Gas: combined cycle 37–54 Gas: combined cycle + CCS 53–93 Small Hydro power 55 Wind power: high capacity factor 63 Solar thermal 85 Biomass 88 Photovoltaics 120

In 1997 the Trade Association for Wind Turbines (Wirtschaftsverband Windkraftwerke e.V. –WVW) ordered a study into the costs of electricity production in newly constructed conventional power plants from the Rheinisch-Westfälischen Institute for Economic Research –RWI). The RWI predicted costs of electricity production per kWh for the basic load for the year 2010 as follows: Fuel Cost per kWh Nuclear Power 10.7 €ct – 12.4 €ct Brown Coal (Lignite) 8.8 €ct – 9.7 €ct Black Coal (Bituminous) 10.4 €ct – 10.7 €ct Natural gas 11.8 €ct – 10.6 €ct. The part of a base load represents approx. 64% of the electricity production in total. The costs of electricity production for the mid-load and peak load are considerably higher. There is a mean value for the costs of electricity production for all kinds of conventional electricity production and load profiles in 2010 which is 10.9 €ct to 11.4 €ct per kWh. The RWI calculated this on the assumption that the costs of energy production would depend on the price development of crude oil and that the price of crude oil would be approx. 23 US$ per barrel in 2010. In fact the crude oil price is about 80 US$ in the beginning of 2010. This means that the effective costs of conventional electricity production still need to be higher than estimated by the RWI in the past.

The WVW takes the legislative feed-in-tariff as basis for the costs of electricity production out of renewable energies because renewable power plants are economically feasible under the German law (German Renewable Energy Sources Act-EEG). The following figures arise for the costs of electricity production in newly constructed power plants in 2010: Energy source Nuclear Energy Brown Coal Black Coal Domestic Gas Wind Energy Onshore Wind Energy Offshore Hydropower Biomass Solar Electricity

Costs of electricity production €/MWh 107.0 – 124.0 88.0 – 97.0 104.0 – 107.0 106.0 – 118.0

Costs of electricity production €ct/kWh 10.70 – 12.40 8.80 – 9.70 10.40 – 10.70 10.60 – 11.80

49.7 – 96.1

4.97 – 9.61

35.0 – 150.0

3.50 – 15.00

34.7 – 126.7 77.1 – 115.5 284.3 – 391.4

3.47 – 12.67 7.71 – 11.55 28.43 – 39.14

Beyond the power station terminals, or system costs The raw costs developed from the above analysis are only part of the picture in planning and costing a large modern power grid. Other considerations are the shape of the load or Load Profile, i.e. how it varies second to second, minute to minute, hour to hour, month to month. To meet the varying load, generally a mix of plant options is needed, and the overall cost of providing this load is then important. Wind power has poor capacity contribution, so during windless periods, some form of back up must be provided. All other forms of power generation also require back up, though to a lesser extent. To meet peak demand on a system, which only persist for a few hours per year, it is often worth using very cheap to build, but very expensive to operate plant - for example most large grids also use load shedding coupled with Diesel generators at peak or extreme conditions - the very high kWh production cost being justified by not having to build more expensive other capacity and a reduction in the otherwise continuous and inefficient use of spining reserve. In the case of wind energy, the additional costs in terms of increased back up and grid interconnection to allow for diversity of weather and load may be substantial. This is because wind stops blowing frecuently even in large areas at once and for prolonged periods of time. Some wind advocates have argue that in the pan-European case back up costs are quite low, resulting in overall wind energy costs about the same as present day power. However, such claim are generally considered too optimistic, except possibly for

some marginal increases that, in particular circumstances, may take advantage of the existing infraestructure. The cost in the UK of connecting new offshore wind in transmission terms, has been consistently put by Grid/DECC/Ofgem at £15billion by 2020. This £15b cost does not include the cost of any new connections to Europe - interconnectors, or a supergrid, as advocated by some. The £15b cost is the cost of connecting offshore wind farms by cables of typically less than 12 km, to the UK's nearest suitable onshore connection point. There are total forecast onshore transmission costs of connecting various new UK generators by 2020, as incurred from 2010, of £4.7 billion, by comparison. When a new plant is being added to a power system or grid, the effects are quite complex - for example, when wind energy is added to a grid, it has a marginal cost associated with production of about £20/MWh (most incurred as lumpy but running-related maintenance - gearbox and bearing failures, for instance, and the cost of associated downtime), and therefore will always offer cheaper power than fossil plant - this will tend to force the marginally most expensive plant off the system. A mid range fossil plant, if added, will only force off those plants that are marginally more expensive. Hence very complex modeling of whose systems is required to determine the likely costs in practice of a range of power generating plant options, or the effect of adding a given plant. With the development of markets, it is extremely difficult for would be investors to estimate the likely impacts and cost benefit of an investment in a new plant, hence in free market electricity systems, there tends to be an incipient shortage of capacity, due to the difficulties of investors accurately estimating returns, and the need to second guess what competitors might do.

Chapter- 10

EROEI & Thermoeconomics

EROEI In physics, energy economics and ecological energetics, EROEI (energy returned on energy invested), ERoEI, or EROI (energy return on investment), is the ratio of the amount of usable energy acquired from a particular energy resource to the amount of energy expended to obtain that energy resource. When the EROEI of a resource is equal to or lower than 1, that energy source becomes an "energy sink", and can no longer be used as a primary source of energy.

Non-manmade energy inputs The natural or original sources of energy are not usually included in the calculation of energy invested, only the human-applied sources. For example in the case of biofuels the solar insolation driving photosynthesis is not included, and the energy used in the stellar synthesis of fissile elements is not included for nuclear fission. The energy returned includes usable energy and not wastes such as heat.

Relationship to net energy gain EROEI and Net energy (gain) measure the same quality of an energy source or sink in numerically different ways. Net energy describes the amounts, while EROEI measures the ratio or efficiency of the process. They are related simply by

or

For example given a process with an EROEI of 5, expending 1 unit of energy yields a net energy gain of 4 units. The break-even point happens with an EROEI of 1 or a net energy gain of 0.

The economic influence of EROEI High per-capita energy use has been considered desirable as it is associated with a high standard of living based on energy-intensive machines. A society will generally exploit the highest available EROEI energy sources first, as these provide the most energy for the least effort. With non-renewable sources, progressively lower EROEI sources are then used as the higher-quality ones are exhausted. For example, when oil was originally discovered, it took on average one barrel of oil to find, extract, and process about 100 barrels of oil. That ratio has declined steadily over the last century to about three barrels gained for one barrel used up in the U.S. (and about ten for one in Saudi Arabia). Currently (2006) the EROEI of wind energy in North America and Europe is about 20:1 which has driven its adoption. Although many qualities of an energy source matter (for example oil is energy-dense and transportable, while wind is variable), when the EROEI of the main sources of energy for an economy fall energy becomes more difficult to obtain and its value rises relative to other resources and goods. Therefore the EROEI gains importance when comparing energy alternatives. Since expenditure of energy to obtain energy requires productive effort, as the EROEI falls an increasing proportion of the economy has to be devoted to obtaining the same amount of net energy. Since the discovery of fire, humans have increasingly used exogenous sources of energy to multiply human muscle-power and improve living standards. Some historians have attributed our improved quality of life since then largely to more easily exploited (i.e. higher EROEI) energy sources, which is related to the concept of energy slaves. Thomas Homer-Dixon demonstrates that a falling EROEI in the Later Roman Empire was one of the reasons for the collapse of the Western Empire in the fifth century CE. In "The Upside of Down" he suggests that EROEI analysis provides a basis for the analysis of the rise and fall of civilisations. Looking at the maximum extent of the Roman Empire, (60 million) and its technological base the agrarian base of Rome was about 1:12 per hectare for wheat and 1:27 for alfalfa (giving a 1:2.7 production for oxen). One can then use this to calculate the population of the Roman Empire required at its height, on the basis of about 2,500-3,000 calories per day per person. It comes out roughly equal to the area of food production at its height. But ecological damage (deforestation, soil fertility loss particularly in southern Spain, southern Italy, Sicily and especially north Africa) saw a collapse in the system beginning in the 2nd century, as EROEI began to fall. It bottomed in 1084 when Rome's population, which had peaked under Trajan at 1.5 million, was only 15,000. Evidence also fits the cycle of Mayan and Cambodian collapse too. Joseph Tainter suggests that diminishing returns of the EROEI is a chief cause of the collapse of

complex societies. Falling EROEI due to depletion of non-renewable resources also poses a difficult challenge for industrial economies.

Criticism of EROEI Measuring the EROEI of a single physical process is unambiguous, but there is no agreed standard on which activities should be included in measuring the EROEI of an economic process. In addition, the form of energy of the input can be completely different from the output. For example, energy in the form of coal could be used in the production of ethanol. This might have an EROEI of less than one, but could still be desirable due to the benefits of liquid fuels. How deep should the probing in the supply chain of the tools being used to generate energy go? For example, if steel is being used to drill for oil or construct a nuclear power plant, should the energy input of the steel be taken into account, should the energy input into building the factory being used to construct the steel be taken into account and amortized? Should the energy input of the roads which are used to ferry the goods be taken into account? What about the energy used to cook the steelworker's breakfasts? These are complex questions evading simple answers. A full accounting would require considerations of opportunity costs and comparing total energy expenditures in the presence and absence of this economic activity. However, when comparing two energy sources a standard practice for the supply chain energy input can be adopted. For example, consider the steel, but don't consider the energy invested in factories deeper than the first level in the supply chain. Energy return on energy invested does not take into account the factor of time. Energy invested in creating a solar panel may have consumed energy from a high power source like coal, but the return happens very slowly, i.e. over many years. If energy is increasing in relative value this should favour delayed returns. Some believe this means the EROEI measure should be refined further. Conventional economic analysis has no formal accounting rules for the consideration of waste products that are created in the production of the ultimate output. For example, differing economic and energy values placed on the waste products generated in the production of ethanol makes the calculation of this fuel's true EROEI extremely difficult. EROEI is only one consideration and may not be the most important one in energy policy. Energy independence (reducing international competition for limited natural resources), freedom from pollution (including carbon dioxide and other green house gases), and affordability could be more important, particularly when considering secondary energy sources. While a nation's primary energy source is not sustainable unless it has a use rate less than or equal to its replacement rate, the same is not true for secondary energy supplies. Some of the energy surplus from the primary energy source can be used to create the fuel for secondary energy sources, such as for transportation.

EROEI under rapid growth A related recent concern is energy cannibalism where energy technologies can have a limited growth rate if climate neutrality is demanded. Many energy technologies are capable of replacing significant volumes of fossil fuels and concomitant green house gas emissions. Unfortunately, neither the enormous scale of the current fossil fuel energy system nor the necessary growth rate of these technologies is well understood within the limits imposed by the net energy produced for a growing industry. This technical limitation is known as energy cannibalism and refers to an effect where rapid growth of an entire energy producing or energy efficiency industry creates a need for energy that uses (or cannibalizes) the energy of existing power plants or production plants. The solar breeder overcomes some of these problems. A solar breeder is a photovoltaic panel manufacturing plant which can be made energy-independent by using energy derived from its own roof using its own panels. Such a plant becomes not only energy selfsufficient but a major supplier of new energy, hence the name solar breeder. Research on the concept was conducted by Centre for Photovoltaic Engineering, University of New South Wales, Australia. The reported investigation establishes certain mathematical relationships for the solar breeder which clearly indicate that a vast amount of net energy is available from such a plant for the indefinite future. BP Solar originally intended its plant in Frederick, Maryland to be such a Solar Breeder, but the project did not develop. Theoretically breeders of any kind can be developed.

Thermoeconomics Thermoeconomics, also referred to as biophysical economics, is a school of heterodox economics that applies the laws of thermodynamics to economic theory. The term "thermoeconomics" was coined in 1962 by American engineer Myron Tribus, and developed by the statistician and economist Nicholas Georgescu-Roegen. Thermoeconomics can be thought of as the statistical physics of economic value. Thermoeconomics is based on the proposition that the role of energy in biological evolution should be defined and understood through the second law of thermodynamics but in terms of such economic criteria as productivity, efficiency, and especially the costs and benefits (or profitability) of the various mechanisms for capturing and utilizing available energy to build biomass and do work. Thermoeconomists claim that human economic systems can be modeled as thermodynamic systems. Then, based on this premise, they attempt to develop theoretical economic analogs of the first and second laws of thermodynamics. In addition, the thermodynamic quantity exergy, i.e. measure of the useful work energy of a system, is one measure of value. In thermodynamics, thermal systems exchange heat, work, and or mass with their surroundings; in this direction, relations between the energy associated with the production, distribution, and consumption of goods and services can be determined. Thermoeconomists argue that economic systems always involve matter, energy, entropy, and information. Moreover, the aim of many economic activities is to achieve a certain structure. In this manner, thermoeconomics attempts to apply the theories in non-

equilibrium thermodynamics, in which structure formations called dissipative structures form, and information theory, in which information entropy is a central construct, to the modeling of economic activities in which the natural flows of energy and materials function to create scarce resources. In thermodynamic terminology, human economic activity may be described as a dissipative system, which flourishes by consuming free energy in transformations and exchange of resources, goods, and services.