The New Global Growth Path: Implications for Climate Change Analysis and Policy

Peter Sheehan
Centre for Strategic Economic Studies
Victoria University
In recent years the world has moved to a new path of rapid global growth, largely driven by the developing countries, which is energy intensive and heavily reliant on the use of coal – global coal use will rise by nearly 60% over the decade to 2010. On unchanged policies global CO2 emissions from fuel combustion are likely to nearly double their 2000 level by 2020 and continue to rise beyond 2030. Neither the SRES marker scenarios nor the reference cases assembled in recent studies using integrated assessment models capture this abrupt shift to rapid growth based on fossil fuels and centered in key Asian countries. An international effort to develop new, realistic projections to 2030, with a range of scenarios beyond that time, is urgently required.
Recognition of this path as a realistic possibility will have significant effects on the
impact and damage estimates in an unchanged policy case, on the analysis of achievable stabilisation paths and on estimates of the costs of achieving stabilization at a given GHG concentration level. Finally, such recognition means that, if widely desired stabilisation goals are to be achieved, policies with an immediate effect on emissions, perhaps such as price, tax and regulatory measures to reduce energy use and the rapid diffusion of existing non-fossil fuel technologies, will be required, together with greater knowledge about the effectiveness and the economic costs of such policies.
The new global growth path
For more than two decades the world economy has been changing rapidly, with that
change driven by two different but related factors: successive waves of new computing and communications technologies and an expanding process of liberalisation of national and international markets, in areas such as trade, finance, technology and labour. This process has entered a new stage in recent years,\ especially since the entry of China into the World Trade Organisation in 2001 and the
strong growth being achieved in India. Global economic growth has been higher than expected for some years and energy demand has been very strong, much greater than anticipated by markets, providers and analysts.
summary information on trends in global GDP and energy use over 1972–2006. While there was considerable variation within them, in each of the three decades from 1972–2002 the average annual growth of world GDP (in constant purchasing power parity prices) was 3.5%, with per capita GDP growth at around 2%.
By contrast, over the four years 2002–06 the global growth rate was 4.9%, with per capita GDP growth at 3.7%, a very high rate in historical terms. The growth in primary energy use over 2002–06 (3.3%) was more than twice that over 1992–2002 (1.5%), while the share of coal in primary energy use rose strongly, from 25.5% in 2002 to 28.4% in 2006. Indeed, while over the 1972–2002 period coal use grew less rapidly than all other energy sources, over the last four years this has been reversed, with coal use growing by 6.1% per annum, more than twice the rate of all other energy sources (2.3%). Thus coal consumption has provided nearly half of the increase in total primary energy consumption in the last four years, with the absolute increase in coal consumption over 2002–06 (653 mtoe) greater than the increase over the whole of the two decades 1982–2002 (583 mtoe).
The quite different outcomes shown for 2002–06 relative to the previous three decades might well be dismissed as cyclical fluctuations. But it is now widely accepted that fundamental, long term factors are at work: the sustained emergence of China and India as economic powers, more rapid growth in other developing countries, the revival of Japan from its stagnation over a decade or more, better economic prospects in Russia and other CIS states, and more generally an open world economy with low inflation. Reflecting both current demand and revised expectations for the future, global market prices for oil, coal and resources have risen sharply and large scale investment plans for energy and resource development have been put in place, both in key markets such as China and India and in supplier countries such as Australia, Brazil and Russia. This new global economic path has led to a flurry of activity by governments and businesses around the world, as they seek to reassess their position in a world in which China and India are major economic powers.
As a result, longer-term growth forecasts from both private groups and public agencies are being revised upwards. For example, summarises the aggregate forecasts for GDP (in constant purchasing power parity prices) from the IMF World Economic Outlook published in April 2007, using a ten-year moving average annual growth rate. The IMF’s projected global growth rate over 2002–2012 is 4.9%, the same as the actual growth rate for 2002–06. This is not driven by the advanced countries, whose overall growth is projected to slow gradually, but by accelerating growth in all other countries, expected to reach 7.1% per annum over 2002–2012.
The climate implications arise not only from the likelihood of higher long term rates of world economic growth, but from two key facts about this growth path: that energy use and CO2 emissions continue to increase in the developed countries and that many of the developing countries driving growth, such as China and India, rely heavily on coal for their energy needs. As an example within the developed countries, the 2007 projections from the US Department of Energy’s Energy Information Agency for the
USA, still the largest user of energy in the world, show energy use and CO2 emissions from fuel combustion growing at 1.1% and 1.2% per cent per annum respectively from 2005–2030, with energy use and emissions from coal use both growing at 1.6% per cent per annum (DOE, 2007). In the second half of 2006, 140 new coal-fired power stations were in planning or construction in the US (Romero, 2006). In terms of the reliance on coal in key developing countries, in 2004 coal provided 71% of total primary energy supply (excluding biomass and waste) in China and 55% in India, by comparison with 17% for the rest of the world (IEA, 2006). As noted above, increased use of coal is already evident in the historical data – world coal consumption has risen by 30% between 2000 and 2006, about the same as the total percentage increase over the previous two decades, and growth of nearly 60% over the decade to 2010 seems inevitable.This paper aims to document the reality of the new growth path and to explore its implications for climate analysis and policy, without embarking on the major task of providing a detailed projection and/or scenario consistent withThe impact of China and India on global trends
The shift to rapid growth in energy use in China
There has been widespread discussion in recent years about the rapid rate of economic
growth taking place in China, and about the impact of that development on world markets for coal, oil and natural gas. Energy use has indeed grown very rapidly – over the five years 2001–06 total energy consumption grew by 71.5% (11.4% per annum), with GDP growth of 10.0% per annum. This explosive growth in energy use was in sharp contrast with earlier trends. From the ‘opening to the market’ in 1979 to 2001 energy use grew at a much lower rate than GDP, with average rates of growth of 4.1%
and 9.7% for energy use and GDP respectively, with the energy intensity of China’s GDP falling continuously through to 2001 and the elasticity of energy use with
respect to GDP being only 0.42. This decline in energy intensity was especially marked in the second half of the 1990s, so that the shift to rates of growth in energy use in excess of GDP growth after 2001 had profound and unexpected implications in energy markets, and led to severe shortages in 2003 and subsequent years.
The decline in energy intensity in China over 1979–2001 was highly unusual for a developing country,4 but most existing projections of China’s future energy use assume an early reversion to an energy elasticity of 0.5–0.7%, For example, the most
well known projections internationally are those of the International Energy Agency (IEA), published biennially in its World Energy Outlook. In the 2006 edition, with an
assumed average growth rate of GDP (in constant purchasing power parity prices) of
5.5% per annum over 2004–30, the IEA projected growth of only 3.2% per annum in
it or exploring the elasticity of energy use with respect to GDP of 0.58, and that the rate of growth of China’s energy use over 2004–2030 will be little more than half its rate over 1971– 2002 (5.5%).
Of the existing published projections the most realistic, in terms of the trends that have emerged over 2001–06, is the unchanged policy case contained in China’s National Comprehensive Energy Strategy and Policy (NDRC, 2004; see also Dai and Zhu, 2005). The unchanged policy scenario in this report projects annual average growth in energy use and CO2 emissions over 2000–2020 of 4.7% and 4.6% respectively. These growth rates are reasonably close to the outcomes for 1971–2002 noted above, and well above the IEA 2006 growth rate estimates for 2002–2030.
Nevertheless, shows clearly that energy use in the Chinese economy is expanding much more rapidly than envisaged in scenario A. In terms of the main aggregate indicator, primary energy use, the actual figure for 2006 is about 15% greater than the projected figure for 2010, and electricity generating capacity in 2006 was 11% above the projected level for 2010. The demand for coal has been extremely strong, with the 2006 actual being 18.5% above the projected figure for 2010. The demand for oil was broadly in line with projections in 2006, as higher oil prices impacted on demand and led to fuel substitution, and usage of natural gas is also within the projection range. In terms of total energy use, and in particular coal use, the Chinese economy is on a path well above that in the 2004 official Chinese projections, which in turn are well above the IEA 2006 projections.
one of the main reasons for growth in energy demand ahead of the projection. It shows the actual output data for 2006 for four energy intensive industries for which output projections were provided in the NDRC report (2004). Output is running well ahead of expectations in these industries: for two industries (iron and steel and cement) output in 2006 was ahead of the 2020 projected level; paper production in 2006 was closer to the 2020 than to the 2010 projection, while ethylene output is also somewhat ahead of the projection. Consistent with these data, many observers (e.g., CASS, 2007) believe that a structural shift towards energy intensive industries is the main reason for rapid growth in energy use since 2001.
The Chinese Government has expressed concern about the economic, environmental
and social impact of continuing high rates of growth of energy demand. In the 11th Five Year Plan (2006–10) the Government included as a priority target a reduction of 20% in energy use per unit of real GDP over the five-year period (Wen Jiabao, 2006). The precise implications of this target for the growth in energy use and the energy elasticity of GDP depend on the rate of growth of GDP achieved, but the implied elasticities range from 0.41 with 8% per annum GDP growth to 0.52 with 10% growth. Thus the current target also implies a return to the elasticity levels achieved over the 1979–2001 period. Issues concerning the shift from an energy elasticity of GDP of less than 0.5 over 1979–2001 to a value greater than one over 2001–06, together with the prospects of reverting to earlier levels in the near future, are thus critical to understanding the future path of China’s energy use. The reasons for the low elasticity over 1979–2001 have been analysed in an extensive literature (e.g., Sinton and Levine, 1994; Lin and Polenske, 1995; Garbaccio et al., 1999; Sinton et al., 1998; Zhang, 2003; Andrews- Speed, 2004) but limited scholarly attention has as yet been given to the post-2001 trends. In terms of the declining aggregate energy intensity up to 2001, there is strong evidence that this reflected a widespread fall in sectoral energy intensities and took place in spite of an ongoing shift to a more energy intensive economic structure. The fall in sectoral intensities was in turn due to a combination of energy conservation programs and technological change being driven by a planned economy with energy rationing, with rising relative energy prices also playing a significant role in the 1990s. Sheehan and Sun (2007) conclude that, now that energy supplies are abundant, the enforcement mechanisms of the command economy no longer available and rapid growth in energy intensive industries is continuing, an elasticity of significantly less than one will be difficult to achieve, and will require sustained and integrated policy implementation.
Consistent with this analysis, Sheehan and Sun (2007) use a simple but disaggregated model to project China’s energy use and emissions out to 2030. They conclude that, on the policies in force in 2005, China’s energy use and CO2 emissions from fuel combustion are likely to grow by more than 6% per annum over 2005–30. This would imply emissions from energy use (excluding cement production) of 6.2 GtC in 2030, by comparison with an overall global figure in 2004 of 7.2 GtC. Their simulations indicate that achieving major reductions will be difficult, but that a sustained new policy implementation process, involving use of the full range of instruments, could reduce China’s energy use and CO2 emissions by about 35% relative to this projected level by 2030, implying a growth rate over 2005–30 of 4% per annum.
The sustained rise of India
India’s growth has been accelerating since the late 1970s, and reached 5.5% in the Ninth Plan period, 1997–2002. The preliminary GDP growth rate outcome for the
Tenth Plan period, 2002–07,5 is 7.6% per annum, by comparison with a target of 8.1%, and growth in the last two years of the plan period averaged 9.2%. The Planning Commission (PC) has set a growth rate target of 9% for the Eleventh Plan period, 2007–12, with sectoral growth rates of 4.1% for agriculture, 10.5% for industry and 9.9% for the service sector (PC, 2007).
India’s growth has traditionally been driven by services rather than industry, but a notable feature of recent trends has been an increase in the growth of secondary industry (and especially manufacturing) relative to the overall growth of GDP. The target growth rate for real value added in manufacturing is 12% per annum.
The energy elasticity of GDP (excluding energy from biomass) for India was 1.15 over the period 1971–2005, although it was lower over 1990–2002 than in the earlier period. Energy use in India has been limited to date by a focus on service industries and by supply shortages, and half the country’s population remains without electricity (PC, 2007). But industrial and household demand is increasing and sustained efforts are being made to increase electricity generation, primarily through coal-fired power stations. The Planning Commission projects that the demand for coal will rise by 7.6% per annum between 2005–06 and 2011–12 (PC, 2007). India has also been highly dependent on energy from biomass and waste. But with expansion possibilities limited in these traditional areas, growing demand for energy will need to be increasingly met from commercial sources.
The major forward-looking study of India’s energy requirements is the Report of the Expert Committee on Integrated Energy Policy, prepared for the Planning Commission and published in August 2006 (Parikh, 2006). This report outlines both India’s growing energy needs in the context of rapid growth and the programs that are being put in place to ensure that they are met. On the demand side, and on the basis of a range of assumptions about growth rates and the energy elasticity of GDP, it projects growth in commercial energy demand in India between 5.6% and 7.2% per annum over 2006–07 to 2031–32. On the supply side the authors run eleven alternative scenarios, starting from an existing policy case in which the least cost energy sources are developed (scenario 1) through a cascading series of policy scenarios in which the potential of non-fossil energy sources and of energy savings are maximised. In scenario 11 all such policies are implemented simultaneously. For their preferred case of 8% GDP growth, scenario 1 projects an increase in commercial
energy use of 6.0% per annum over 2006–07 to 2031–32, while for scenario 11 the figure is 5.1% per annum. In scenario 1 CO2 emissions from energy use are expected to rise about 7% per annum to 1.5 GtC by 2031–32, while projected emissions by that date are about one third lower in scenario 11 at 1.0 GtC, a growth rate of about 5.5%.
An indicative quantification of the implications of the new growth path
The purpose of the preceding discussion is to provide evidence, for two major countries, on emerging trends in GDP growth and energy use. The new growth path will, of course, impact on many other countries in different ways. But it is important to note the scale of developments in China and India: if, in the light of the trends reviewed above, CO2 emissions from fuel combustion and cement production are assumed to grow by 6% per annum in both China and India over 2004–30, the additional emissions in 2030, over and above the IEA (2006) projection for that year,
amounts to 52.5% of global energy demand in 2004. That is, these revised assumptions alone produce a further increase of over 50% in global emissions relative to the 2004 level, in addition to the increase of 59% already envisaged in the IEA 2006 projections, by 2030.
Short of an authoritative international projection of the implications of the new growth path being available, the strategy of Sheehan, Jones et al. (2007) is adopted here to provide an indicative quantification for working purposes. They start from the IEA (2006) projections, but adjust them to take account of the trends discussed above
in China and India, and in a number of other rapidly developing countries in East Asia, but otherwise adopt the IEA (2006) assumptions and results. The methodology and detailed assumptions used are described in that paper while the results, for CO2 emissions from fuel combustion and cement, are provided in. Emissions in 2030 are 120% above the 2004 level (and 150% above the 2000 level), and still growing at over 2% per annum at that time. First, in recent years the world has moved to a new path of rapid global growth, largely driven by the developing countries, which now comprise 40% of world GDP. This growth path remains energy intensive and heavily reliant on the use of coal – global coal use will rise by nearly 60% over the decade to 2010. Second, if the key developing countries in Asia continue to drive growth after 2010, albeit at a more subdued pace, then on unchanged policies global CO2 emissions from fuel combustion are likely to double their 2000 level by about 2020 and continue to rise beyond 2030. This must be considered a realistic, though of course not inevitable, unchanged policy outcome. Third, the SRES marker scenarios, finalised in 1998, do not capture this abrupt shift to rapid growth based on fossil fuels and centered in key Asian countries, and no longer provide a
realistic guide for climate change analysis. The reference cases assembled in recent studies using integrated assessment models also fail to recognise this new reality. An international effort to develop new, realistic projections to 2030, with a range of scenarios beyond that time, is urgently required. Fourth, recognition of this new emissions path as a realistic possibility is likely to have a significant effect on the impact and damage estimates from an unchanged policy case, on the analysis of achievable stabilisation paths and on estimates of the costs of achieving stabilization at a given GHG concentration level. Finally, recognition of this new growth path also means that policy must focus on the short-run dynamics of emissions, and on measures with immediate impact. For example, if stabilisation is to be achieved at 550 ppm CO2e a significant reduction in global emissions relative to the reference path is needed in the next ten years. This in turn will require an emphasis on policies with an
immediate effect on emissions, perhaps such as price, tax and regulatory measures to reduce energy use and the rapid diffusion of existing non-fossil fuel technologies, together with greater knowledge about the effectiveness and the economic costs of such policies.