O E C D N B E R September

2 0 1 4 P A R I S

The Coming Energy Boom, Environmental Quality, and Productivity Growth

Ensuring Productivity Growth and Innovation in the Long Run

September 26, 2014

Michael Greenstone, The Milton Friedman Professor in Economics, University of Chicago; Director of the Energy Policy Institute at Chicago (EPIC)

O E C D N B E R September

2 0 1 4 P A R I S

Overview

1. Energy Consumption is Critical to Well-Being and is Projected to Grow Sharply

China

France

Mexico

USA Canada

India

Energy Growth is Critical for Living Standards

ln(G

DP

Per

Cap

ita)

Energy Access is a Major Problem in Many Countries

KWh/capita

75th Percentile

25th Percentile

Country Population(millions)

KWh/Capita

USA 312 13246UK 63 5472

Germany 81 7081Russia 143 6486

China 1357 3298Pakistan 182 449

Bangladesh 157 259India 1252 684

Bihar(State) 104 122

Ghana 26 344

It takes 131 KWh to use a 60 watt bulb for 6 hours per day for a full

year

285 quadrillion Btu

535 quadrillion Btu

Projected Energy Consumption Growth is Concentrated in Non-OECD Countries

O E C D N B E R September

2 0 1 4 P A R I S

Overview

1. Energy Consumption is Critical to Well-Being and is Projected to Grow Sharply

2. Fossil Fuels are the Cheapest Energy

Sources but They Cause Air Pollution and Climate Change

Electricity Generation from Fossil Fuels is Relatively Inexpensive (USA)

3.2

4.9 5.5

6.2

8.9 9.4

12.2

0

2

4

6

8

10

12

14

ExistingCoal

ExistingNatural

Gas

NewNatural

Gas

New Coal Wind(Onshore)backed up

NewNuclear

Solar (PV)backed up

Private Costs…

¢/K

Wh

O E C D N B E R September

2 0 1 4 P A R I S

10

New Drilling Techniques are Game Changers for Natural Gas and Petroleum

Tremendous Innovation in Fossil Fuels in the Last 5-10 Years

Rank CountryShaleoil

(billionbarrels)Rank Country

Shalegas(trillioncubicfeet)

1 Russia 75 1 China 1,1152 U.S. 58 2 Argentina 8023 China 32 3 Algeria 7074 Argentina 27 4 U.S. 6655 Libya 26 5 Canada 5736 Australia 18 6 Mexico 5457 Venezuela 13 7 Australia 4378 Mexico 13 8 SouthAfrica 3909 Pakistan 9 9 Russia 28510 Canada 9 10 Brazil 245

345 7,299

32 113

Source:EIA

Top10countrieswithtechnicallyrecoverableshaleoilresources

Top10countrieswithtechnicallyrecoverableshalegasresources

WorldShaleOilWorldConsumptionofLiquidsin2010

WorldShaleGasWorldConsumptionofNaturalGasin2010

Tremendous Innovation in Fossil Fuels in the Last 5-10 Years

Projected Carbon Emissions, OECD and

Non-OECD

0

5

10

15

20

25

30

35

1990 2010 2020 2030 2040

Car

bo

n E

mis

sio

ns

(Gt)

OECD Non-OECD

Global PM 2.5 Concentrations

Mean temperature (°C), Year 2013 relative to Year 1880

0

1

2

3

4

5

6

2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Ch

ange

In T

em

pe

ratu

re R

ela

tive

to

Pre

Ind

ust

rial

Era

(C

els

ius)

Predicted Change in Global Temperature Based on 6 SRES Scenarios (IPCC Data)

3,600

2012EconomicallyRecoverableReserves

CarbonPoten

al(GtCO2)

Conventional Fossil Fuels Unconventional Fossil Fuels

282

550

975

1725

2475

Already

Emitted

between

2000 and

2012

1.5°C, 50%

2°C, 80%

3°C, 80%

2.5°C, 80%

768 GtCO2

Preventing Disruptive Climate Change Requires Leaving Valuable Resources in the Ground

18

Restraining Climate Change is a Global Project

0

100

200

300

400

500

600

700

800

1990 2005 2020 2035 2050 2065 2080 2095

Source: EPA (emissions) and MIT

Global Atmospheric CO2 ConcentrationsParts per million

Reference caseEffect of U.S. cap-and-trade bills in 110th Congress

Effect of U.S. legislation reducing emissions by

80% between 2005 and 2050

Any Mitigation Strategy Requires Large, Expensive Emissions Reductions from Developing Countries

0

5

10

15

20

25

20

10

20

15

20

20

20

25

20

30

20

35

20

40

20

45

20

50

20

55

20

60

20

65

20

70

20

75

20

80

20

85

20

90

20

95

21

00

Bill

ion

s o

f To

ns

of

CO

2-e

Figure 1: Chinese Emissions under Baseline vs. Mitigation Scenarios

Baseline Emissions Emissions under 550 ppm target

Source: Deshpande and Greenstone (2010). Calculations based on Energy Modeling Forum estimates.

O E C D N B E R September

2 0 1 4 P A R I S

Overview

1. Energy Consumption is Critical to Well-Being and is Projected to Grow Sharply

2. Fossil Fuels are the Cheapest Energy Sources but They Cause Air Pollution and Climate Change

3. The Productivity Consequences of Air Pollution: Evidence from China

O E C D N B E R September

2 0 1 4 P A R I S

22 Chen, Ebenstein, Greenstone, and Li (2013) “Evidence on the Impact of Sustained Exposure to Air Pollution on Life Expectancy from China’s Huai River Policy”

China’s Winter Heating System

• Heating system was established in the

1950-1980 period

–Heating powered by combustion of coal

in boilers

–Policy Operates During Winter: Nov 15-

March 15

Coal for boilers is heavily subsidized,

most frequently provided for free

Residential Chimneys

The Huai River Policy

0

200

400

600

800

TSP(µg³)

-20 -10 0 10 20

Degrees North of the Huai River Boundary

TSP in South TSP in North Fitted Values from Cubic in Latitude

The estimated change in TSP (and

height of the brace) just north of

the Huai River is 247.5 µg3

and is statistically significant

(95% CI: 114.5, 380.6).

Air Pollution is Higher North of the Huai River

6570

7580

8590

95

Lif

e E

xpec

tanc

y(Y

ears

)

-20 -10 0 10 20

Degrees North of the Huai River Boundary

L.E. in South L.E. in North Fitted Values from Cubic in Latitude

The estimated change in life expectancy (and

height of the brace) just north of the Huai River

is -5.04 years and is statistically significant

(95% CI: -8.81, -1.27).

Life Expectancy is Lower North of the Huai River

500 Million People in Northern China are losing more than 2.5 billion years of life expectancy

Loss of 2.1 Billion Life Years in India

WHO Indian NAAQS Air Pollution Standards

Loss of 2.5

Billion Life

Years in

Northern

China

PM2.5 Levels Imply Large Life Expectancy Losses in Other Countries Too

O E C D N B E R September

2 0 1 4 P A R I S

Overview

1. Energy Consumption is Critical to Well-Being and is Projected to Grow Sharply

2. Fossil Fuels are the Cheapest Energy Sources but They Cause Air Pollution and Climate Change

3. The Productivity Consequences of Air Pollution: Evidence from China

4. The Productivity Consequences of Climate Change: Evidence from India

“The Unequal Effects of Weather and Climate Change: Evidence from Mortality in India”

-Burgess, Deschenes, Donaldson, Greenstone

01

02

03

04

05

06

07

0

Num

ber

of D

ays P

er

Ye

ar

<49 49-52 52-54 55-57 58-60 61-63 64-66 67-69 70-72 73-75 76-78 79-81 82-84 85-87 88-90 91-93 94-96 >=97

Historical Distribution: 1957-2000 Average Hadley 3 A1FI (error-corrected): 2070-2099 Average

Historical and Prediction Distribution of Daily Average Temperatures in India

Effect of Daily Average Temperatures on Agricultural Yields

-0.0

10

-0.0

05

0.0

00

0.0

05

<70 70-72 73-75 76-78 79-81 82-84 85-87 88-90 91-93 94-96 >=97Daily Average Temperature (F)

Estimate 95% C.I.

Estimated Impact of a Day in 10 Temperature-Day Bins on Log Agricultural Yield,

Relative to a Day in the 70-72 Farenheit Bin

-0.0

10

-0.0

05

0.0

00

0.0

05

<70 70-72 73-75 76-78 79-81 82-84 85-87 88-90 91-93 94-96 >=97Daily Average Temperature (F)

Estimate 95% C.I.

Estimated Impact of a Day in 10 Temperature-Day Bins on Log Agricultural Real Wage,

Relative to a Day in the 70-72 Farenheit Bin

The Effect of Daily Average Temperatures on Log Real Agricultural Wages

Mortality Impact of Daily Temperature in India and United States

-.00

5

0

.00

5.0

1

<70 70-72 73-75 76-78 79-81 82-84 85-87 88-90 91-93 94-96 >=97Daily Average Temperature (F)

India Estimate India 95% C.I.

US Estimate

Estimated Impact of a Day in 10 Temperature-Day Bins on Log Annual Mortality Rate,

Relative to a Day in the 70-72 Farenheit Bin

Predicted Impact of Climate Change on Indian Life Expectancy at Birth

-8-6

-4-2

02

2015-2029 2030-2044 2045-2059 2060-2074 2075-2099

Rural India Urban India

Years

O E C D N B E R September

2 0 1 4 P A R I S

Overview

1. Energy Consumption is Critical to Well-Being and is Projected to Grow Sharply

2. Fossil Fuels are the Cheapest Energy Sources but They Cause Air Pollution and Climate Change

3. The Productivity Consequences of Air Pollution: Evidence from China

4. The Productivity Consequences of Climate Change: Evidence from India

5. Energy Pricing Policies Cause Poor Supply, Strain Budgets, Inequality, and Excessive Reliance on Fossil Fuels

1. Low Rates of Payment for Electricity

2. Large but Poorly Targeted Energy Subsidies

3. Pollution and Climate Damages are not Priced

3 Problems with Energy Pricing

Repayment Rates are Low in Developing Countries. Leading to “Circular Debt”

0

5

10

15

20

25

Pe

rce

nta

ge o

f O

utp

ut

Electricity Transmission and Distribution Losses

Distribution Losses Limit Supply

0

5,000

10,000

15,000

20,000

0% 5% 10% 15% 20% 25% 30% 35% 40%

KW

h C

on

sum

pti

on

pe

r C

apit

a

Aggregate Transmission & Distribution Losses (%)

USA

UK

Brazil

Russia

India

China

Pakistan

3 Problems with Energy Pricing

1. Low Rates of Payment for Electricity

2. Large but Poorly Targeted Energy Subsidies

3. Pollution and Climate Damages are not Priced

End User Energy Consumption Remains Heavily Subsidised

Ratio of End User Energy Subsidy to

Military Expenditure

0

1

2

3

4

5

6

7

8Ir

an

Egyp

t

Ve

ne

zue

la

Ban

glad

esh

Ind

on

esi

a

Arg

en

tin

a

Nig

eri

a

Me

xico

Ecu

ado

r

Thai

lan

d

Pak

ista

n

Alg

eri

a

Vie

tnam

Lib

ya

Sau

di A

rab

ia

Ind

ia

Ru

ssia

An

gola

Sou

th A

fric

a

Ch

ina

Rat

io

Energy Subsidies Benefit the Wealthy, not the Poor

6%

9%

10%

Electricity

Natural Gas

Gasoline

Share of Fossil Fuel Subsidies Received by the Lowest 20% Income Group

1. Low Rates of Payment for Electricity

2. Large but Poorly Targeted Energy Subsidies

3. Pollution and Climate Damages are not Priced

3 Problems with Energy Pricing

Fossil Fuels Greatly Benefit from Failure to Price Pollution and Climate Damages

9.1

11.7

6.6

9.4 9.9

13.3

0

2

4

6

8

10

12

14

16

18

ExistingCoal

New Coal NewNatural

gas

NewNuclear

Wind(Onshore)backed up

Solar (PV)backed up

¢/kW

h

Private Costs Non-Carbon External Costs Carbon-External Costs

Policy Implications

1. Virtuous Circle Between Repayment Rates, Energy Supply, and Growth

2. Energy Subsidies Are Expensive, Exacerbate Inequality, and Usually Favor Fossil Fuels

3. Pricing Energy Based on Full Social Costs Would Reduce Health and Climate Damages

Papers Cited

• BP Energy Outlook 2035

• Burgess, Deschenes, Donaldson, Greenstone (2013) “The Unequal Effects of Weather and Climate Change: Evidence from Mortality in India”

• Chen, Ebenstein, Greenstone, Li (2013) “Evidence on the Impact of Sustained Exposure to Air Pollution on Life Expectancy from China’s Huai River Policy”, Proceedings of the National Academy of Sciences, 2013, 110 (32).

• Deshpande and Greenstone (2010). Comment on “On the Economics of Climate Policy”: Is Climate Change Mitigation the Ultimate Arbitrage Opportunity?”.E. Journal of Economic Analysis &Policy :Vol. 10: Iss. 2 (Symposium), Article 20.

Papers Cited Continued…

• EIA Energy Outlook 2014. http://www.eia.gov/forecasts/aeo/pdf/0383(2014).pdf

• E. Somanathan, Rohini Somanathan, Anant Sudarshan, Meenu Tewari (2014). The Impact of Temperature on Productivity and Labor Supply: Evidence from Indian Manufacturing

• Greenstone, et al. (2014) “Lower Pollution, Longer Lives: Life Expectancy Gains if India Reduced Particulate Matter to Air-Quality Standards”

• Greenstone, Looney (2012) “Paying Too Much for Energy? The True Costs of Our Energy Choices”