ESG | JULY-AUGUST, 2023
28 COLUMN
The economics of climate change
The Jevons Effect, the Khazzoom-Brookes Postulate and recent IEA assumptions – Is it time to
rewrite economic theory or face reality?
I
BY DR KENNETH PEREIRA
N HIS book “The Coal Question”,
published in 1865, British economist
William Jevons observed that
England’s coal consumption
substantially increased after James
Watt developed the Watt steam
engine. The Watt engine was a
more efficient version of Thomas
Newcomen’s earlier design.
Thanks to Watt’s improvements, coal
became a more cost-effective energy
source, leading to increased use of the
Watt engine design in a wide range
of industries. With greater industrial
application came a greater demand
for coal, causing Jevons to note: “It is a
confusion of ideas to suppose that the
economical use of fuel is equivalent
to diminished consumption. The very
contrary is the truth.”
At the peak of the Industrial
Revolution, many in Britain were
concerned that the nation’s prized
coal reserves were rapidly falling, and
some experts opined that improving
technology would reduce coal
consumption. Jevons argued that this
view was incorrect as further increases
in efficiency would tend to increase the
use of coal.
Hence, improving technology would
tend to increase the rate at which
Britain’s coal deposits, a finite resource,
would be depleted, thus threatening the
nation’s future energy security. Jevon’s
thinking was later termed “the Jevons
Effect”.
MORE RECENT RESEARCH
ON THE JEVONS EFFECT
The Jevons Effect is probably the
most widely known paradox when
assessing environmental economics. It
is sometimes also called the rebound
effect (or take-back effect), and it refers
to the reduction in expected gains from
new technologies (that increase the
efficiency of using a particular
resource) because of behavioural or
Figure 1: Historical
and Projected
Energy Supply for
the Period 2000 to
2050
other systemic responses.
In more modern times (1980s), the
then chief economist of the United
Kingdom Energy Authority, Leonard
Brookes, revisited the Jevons Effect
for the specific case of society’s energy
utilisation. Brookes argued that attempts
to reduce energy consumption by
increasing energy efficiency raised
the demand for energy in the economy
as a whole. Independent research in
the United States by Daniel Khazzoom
reinforced the same hypothesis.
In 1992, the economist Harry
Saunders dubbed the work of Khazzoom
and Brookes the “Khazzoom-Brookes
Postulate”, a concept similar to that of
the Jevons Effect. Saunders added to the
existing research, stating that increased
energy efficiency tends to increase
energy consumption in two ways. First,
it makes the use of energy relatively
cheaper, thus encouraging increased
use (the direct rebound effect). Secondly,
increased energy efficiency increases
real income and leads to increased
economic growth, which then ramps up
energy use for the whole economy.
CLIMATE CHANGE, THE JEVONS EFFECT
AND WHY IT MATTERS
In 2021, the International Energy
Agency (IEA) published “Net Zero
by 2050 – A Roadmap for the Global
Energy Sector”. In this document, the
content of which has been widely cited
by politicians, media and others, it is
projected that the total energy supplied
in the early 2020s of just over 600
Exajoules (EJ) will fall to 550 EJ in 2030
(i.e. seven per cent lower than in 2020).
This is projected to occur despite
significant increases in the global
population (between about two and
three billion people) because of a fall
in energy intensity (the amount of
energy used to generate a unit of Gross
Domestic Product (GDP). Figure 1,
below, shows the IEA projections.
Based on its assumption of a projected
fall in energy intensity, the IEA has, in
the same publication, called for a halt in
investments targeting the development
of fossil fuels projects that have not been
sanctioned as of Dec 31, 2021.
Consistent with the learnings from
the Jevons Effect (more recently
confirmed by the Khazzoom-Brookes
Postulate), if energy is affordable (an
objective of the Energy Trilemma – see
Figure 3), then it is probable that human
behaviour will adjust to demand energy
at least the levels seen currently. Thus,
the critical assumption made by the
IEA in their 2021 document proposing
pathways to a net zero world may
require review.
If demand is unlikely to drop as
projected in the coming decades (Figure
1), then there will be a shortfall of
supply, causing whatever available
primary energy sources to increase in
price, leaving those least able to afford
higher cost levels, the most impacted.
Is such a scenario a theoretical
aberration, or could it manifest into a
likely reality?
THE LEARNINGS OF 2022
Western Europe faced an energy
security threat when conflict arose
between Russia and Ukraine in early
2022. At the initiation of the conflict,
Russia provided Western Europe with
35 per cent of its gas supply.
Curtailment of this supply as a
punitive measure against the Russians
without alternative replacement also
meant that Western Europeans would
face energy starvation.
With political and economic chaos
on the horizon and winter only a few
months away, European governments
were forced to urgently intervene in the
Liquified Natural Gas (LNG) markets
to mitigate a potential energy shortage
in the European Union (EU). LNG
prices spiked as cargoes meant for the
emerging economies from Thailand to
Pakistan and other African countries
were redirected to European ports.
Even more glaring, after several
wealthy governments of first-world
nations made this energy grab, they
subsidised the actual cost of energy
delivered to their citizens to protect the
levels and quality of their livelihoods
and minimally impact economic activity.
This was not the case for those
in the emerging economies. In the
poorer countries, economic activity
and livelihoods at manylevels were
significantly impacted as energy prices
soared and governments could not fulfil
a fundamental obligation of delivering
affordable and available energy.
Figure 2 shows price movements
in EU Gas Import Prices. Clearly, the
response of the EU to the Russian/
Ukraine war impacted energy prices
globally in mid-2022.
Let’s project forward to a 2050 world
in which there:
• will be 2-3 billion additional people,
each striving to increase their
standard of living to that of their
European or American fellow global
citizens, performing energy-intensive
activities;
• would have been a prior period of
continuous under-investment in
JULY-AUGUST, 2023 | ESG
Figure 2: European Union Gas Import Prices (Period July 2020 to January 2023)
traditional energy delivery systems;
and
• if the economic theories advanced
by Jevons and, more recently,
Khazzoom-Brookes or Saunders have
a basis,
In this case, we are more likely to
further increase the energy divide
between the rich and the poor nations
in the future. The question that must
be raised is how this highly probable
scenario (based on economic theory
and real responses in 2022) is consistent
with the much-touted UN objective of a
“just transition”?
THE ENERGY TRILEMMA – A DREAM FOR
EMERGING ECONOMIES?
The Energy Trilemma (Figure 3) refers
to balancing energy reliability/security,
affordability and sustainability and its
impact on everyday lives.
Empirical evidence has demonstrated
that when first-world nations face
energy reliability/security concerns, as
was the case in 2022 in Europe, noble
global energy equity rights are quickly
cast aside. Instead, a desperate “grab”
transpires, resulting in price spikes
until the wealthier nations replenish the
storage facilities that will be evacuated
to quench their energy thirst.
Indeed, in 2022 in the wake of the
Russian-Ukrainian conflict and staring a
winter of energy shortage, the European
Union even modified the definitions of
its green taxonomy, urgently permitting
the inclusion of nuclear and gas as
“green” energy resources. It was
necessary to avert a continental-scale
energy starvation catastrophe.
So, what is the solution?
The solution remains the same. A
transition into a cleaner environment
must be orderly and measured. It
must be based on real, available
and applicable technologies lest
this accelerated journey leads to an
alternative scenario – A Probable
COLUMN 29
climate change agenda for the planet.
When COP 27, held in the Egyptian
resort of Sharm El-Sheikh between
Nov 6-18, 2022, concluded, one of the
headline outcomes was reaching an
agreement to compensate nations for
loss and damage caused by climate
change through establishing a fund.
The new Loss and Damage
Fund (LDF) agreed upon at COP27
represented a long and hard-fought win
for small and vulnerable nation-States
and an essential step towards climate
justice. Loss and damage, in its broadest
definition, encompasses all the negative
impacts of climate change, including
extreme weather events like hurricanes
and flooding and “slow onset events”
like rising temperatures and ocean
acidification.
The sources of funds to underwrite
“loss and damage” was left for COP 28 to
formulate and finalise.
Whilst the LDF would greatly assist
emerging economies in the aftermath of
a climate-related catastrophe, the focus
of a balanced narrative at COP28 should
be the need to avert further evolution of
a probable Significant Future Energy
Divide. This can only be achieved if the
Figure 3: The Energy principles of the Energy Trilemma, as
Trilemma shown in Figure 3, are respected and
vigorously pursued.
For now, the foundation of the Divide
has been laid and, if advanced further,
will lead to painful outcomes for the
poorest in the not-too-distant future. The
least developed nations have contributed
minimally to the climate change
phenomenon being experienced today.
Yet these very nations are also being
Evolution into a Future Significant asked to meet temperature targets to
Energy Divide - as shown in Figure 4. avert a global climate disaster urgently.
COP 28 – AN OPPORTUNITY A PRACTICAL WAY AHEAD
TO BALANCE THE NARRATIVE To ensure long-term availability, legacy
A “Probable Future Energy Divide” is energy sources cannot be excluded from
being created. Emerging economies the energy mix. Instead, such sources
should not allow the learnings from should continue to be developed,
2022 go to waste whilst developed prioritising decarbonising as much as
nations must understand that unless the practicable until projections for a net
emerging economies also chart a path zero world need not rely on reductions
to net zero, there is no viable, holistic in energy demand based on efficiencies
and that defy
economic theories
2015-2050 such as the Jevons
Effect. A sustainable
financial future for
emerging economies
will not be defined by
reactively securing
compensation from
the LDF.
Instead, it should be
founded on proactively
protecting adequate
amounts of future
energy supply to
underpin stable and
increasing levels of
economic growth.
Thus, emerging
economies should use
COP28 to ensure the
Emerging Nations principles balanced
Unable to Afford Clean through the Energy
Forms of Energy to Fulfill Trilemma are strictly
Domestic Demand respected now and
in the future so that
everyone will have
equal access in the
future to what is
likely to be a scarce
resource. – @Green
Brownouts,
Blackouts and
Increased Emissions
from Using Cheaper / Figure 4: A Probable
Dirtier Sources of Energy Evolution into a Future
Significant Energy Divide