JACK YANG – APRIL 18TH, 2023
EDITOR: RAMYA SRIDHAR
Regarding non-renewable energy, two common beliefs prevail: it’s incredibly lucrative and environmentally detrimental. We admire the prosperity brought by oil to the U.S, natural gas to Russia, and coal to the UK, but lament the Deepwater Horizon Oil Spill in 2010, Flint, MI’s water contamination from natural gas, and deforestation in Appalachia due to coal mining.
As a result, renewable energy sources like solar, hydroelectric, and wind are seen as harbingers of energy equality for all, irrespective of social or economic standing. Optimists believe renewable energy can democratize energy by enabling small-scale implementation, reducing individual dependence on centralized energy systems.
However, is renewable energy genuinely a game-changer offering affordable energy for all? If not, and if its adoption is infeasible for some nations in the short-term, which alternatives should be explored? Is renewable energy being used by high-income countries to impose energy restrictions on low-income ones, hindering their access to energy sources best suited for immediate economic growth? If so, how is that fair given that wealthy nations imposing these restrictions faced no such constraints during their industrialization? On the other hand, does a lack of restriction absolve moral accountability from lower income countries for climate change crises, which are inherently global issues?
To address these questions, this article aims to create a balanced framework that considers the economic advantages and environmental consequences of both energy types, challenging the notion that adopting renewables is universally the best choice for every nation. If that is the case, then the equitable course of action for developed countries would be to refrain from imposing short-to-medium term regulations on developing countries regarding their energy source choices.
Fossil to Fuel: Coal’s Journey Through Time
Let’s talk about coal and its origins as the first widespread energy source that fuelled the steam engines of the industrial revolution.
Coal is derived from the remains of prehistoric plant matter. When burned, it produces heat, generating steam to drive turbines, which in turn powers generators to create electricity.
Georgian and Victorian England loved coal. Why? Compared to alternatives like wood, wind, and animal power, coal was abundant, cheaper, and higher in energy per unit volume (known to physicists as energy density). In the mid-18th century, the cost of coal per unit of energy output was around one-sixth of wood’s. Coal could be transported easily and in high quantities through England’s waterways, packhorses and railways (once the latter was invented). These compounding advantages in cost-effectiveness and transportability meant that by 1900, 95% of the country’s energy needs were being met by coal.
Even amidst England’s coal fever, many were wary of the trade-off between coal’s unparalleled economic efficiency and its negative environmental consequences. In 1804, poet William Blake described “dark Satanic mills” powered by “England’s green and pleasant land”, a phrase immortalized as a metaphor for the negative impact of the Industrial Revolution on the natural landscape of England. As England approached the zenith of its coal reliance in 1865, economist William Stanley Jevons spoke of coal as both “a vital question for the whole future progress of the nation” and a “resource that causes severe environmental degradation”.
Modern coal mining techniques have not only failed to reduce environmental impacts but also introduced new problems. Take mountaintop removal mining, which involves using explosives to remove the tops of mountains to access coal seams underneath. The explosions create massive dust clouds that devastate nearby vegetation and contaminate water sources with sediment and heavy metals (including lead and mercury), leading to disastrous effects on aquatic and human life. West Virginia is America’s poster child for coal’s environmental and social devastation: The process has not only destroyed the state’s ecosystems (to the tune of 500 mountains in the Appalaichans and 1 million acres of forest), but has also increased the incidence of cancer and birth defects in affected areas.
Black Gold’s Environmental Toll – The High Cost of Oil
Over time, societies have shifted their energy preferences, and although coal remains a significant contributor to global energy consumption, accounting for 34.6% of the world’s electricity supply in 2020, the world has also embraced oil as a major energy source.
Oil, formed from ancient marine plant and animal remains under pressure and heat for millions of years, releases nearly twice the energy per unit of mass as coal. It’s certainly earned its moniker “black gold” – since Edwin Drake drilled the first oil well in Pennsylvania in 1859, big oil has ballooned into a 3.3 trillion dollar industry.
Most people associate oil with its preeminent source region — the Middle East. In 2012, energy expert Daniel Yergin claimed that oil discoveries in the Middle East and the subsequent increase in Saudi Arabia’s oil reserves “saved the world economy from a collapse equal to that of the 1930s.”
But perhaps the most relevant, yet unknown example of how oil has both spearheaded regional economic development and brought about environmental destruction is the Niger Delta region of Nigeria. Oil was discovered in the region in the 1950s, and it has since become the country’s economic backbone, accounting for over 90% of its foreign exchange earnings. However, the extraction and transportation of oil have also led to severe environmental degradation, including oil spills that have contaminated the land and waterways, deforestation, and air pollution.
Navigating the Natural Gas Boom
As the world transitioned from coal to oil, embracing the latter’s higher energy output and economic potential, it also grappled with the environmental challenges posed by both energy sources. Now, societies are increasingly looking towards natural gas as a cleaner alternative, hoping to strike a balance between energy demands and environmental concerns.
Natural gas is derived in a similar manner as oil, but at higher temperatures and in a process called thermogenic methane formation. As the name suggests, it is primarily composed of methane, a potent greenhouse gas that is released when natural gas is burned, to generate electricity.
The 21st century has seen natural gas rapidly grow as an energy source, primarily due to advancements in hydraulic fracturing or “fracking” technology. This technique has made it economically feasible to extract natural gas from shale formations, resulting in a significant increase in natural gas production in the United States, making it a cheaper and more abundant energy source.
Natural gas is also considered a more environmentally friendly fossil fuel for the 21st century. When burned, it produces less carbon dioxide per unit of energy compared to coal or oil. As carbon emissions have become a central issue in global discussions, natural gas offers an appealing option for countries aiming to reduce their carbon footprint.
However, while natural gas usage may be less environmentally harmful, the fracking process is not without its problems. Fracking can contaminate groundwater and release methane into the atmosphere, at which point it acts as a potent greenhouse gas 80 times more heat-trapping than carbon dioxide. For example, residents of Dimock, Pennsylvania reported water contamination and health issues after fracking operations began in the area. When sudden catastrophes occur, the consequences are severe. In 2015, Porter Ranch gas leak released millions of cubic feet of methane into the atmosphere, lasted for several months and led to the evacuation of thousands of residents in the area.
The evidence is clear: non-renewable energy is cheap and hurts the environment; it presents a Faustian bargain of sorts where countries forgo their environment in favor of economic gain. But what about renewable energy? Is it likely to compete with fossil fuels in terms of cost in the near future, and is it that much more environmentally friendly?
Let’s tackle what are generally considered the two most prominent renewable energy sources: solar and wind energy.
Solar Supremacy
In contrast to the finite nature of fossil fuels, solar energy harnesses the virtually unlimited power of the sun. Solar panels are made of photovoltaic cells, which convert sunlight into electricity. These cells, made of semiconductors such as silicon, absorb photons from the sun and release electrons, thus creating an electric current ready for commercial use.
Solar energy has become increasingly prominent in certain areas due to declining costs and various government incentives; Apple Park’s 100% renewable energy usage demonstrates the effectiveness of federal and state-level tax credits, cash rebates, and net energy metering programs when implemented correctly.
Solar energy boasts lower operating costs and, after sufficient implementation, the added benefit of reduced dependence on fossil fuels: in the same 10-year span between 2009 and 2019 in the United States, the average cost of electricity generated by solar photovoltaic (PV) systems has decreased by 86%, and the percentage of new electric generating capacity installed in the United States from solar energy has grown from less than 1% to 40%.
These savings are offset by incredibly high initial installation costs: The average installed cost of solar photovoltaic systems in the United States is $2.86 per watt today (2023). This means that the cost to install a 5 kW solar panel system, which is enough to power an average American household, would be around $14,300. While the real cost of installation has decreased significantly over the past decade, it still represents a significant upfront investment for most homeowners and businesses. Solar energy’s problems also extend to intermittency, a concept best summed up by the fact that you won’t see a solar panel in Tóshavn in the Faroe Islands, a place that averages only 840 hours of sunlight a year.
Environmentally, solar energy has significant benefits compared to fossil fuels: at the point of use, solar energy emits no greenhouse gasses nor air pollution. However, the manufacturing and disposal of solar panels is another story: the production of solar panels can result in the release of toxic chemicals such as lead, cadmium, and hexafluoroethane, which can harm both human health and the environment. Solar panels can also cause environmental damage at the end of their lifespan, as the panels may release toxic chemicals if not properly disposed/recycled.
Beyond the Blades – Wind Energy
Wind energy’s most prominent form is the windmill: a brilliant invention that captures the kinetic energy of wind through its blades, converts the kinetic energy into mechanical energy, which then drives a generator to produce electricity.
Similar to solar energy, wind energy emits no greenhouse gasses nor air pollution at the point of use. However, studies suggest that the energy required to build a wind turbine can outweigh the energy generated by the turbine itself in its first year of operation. Wind turbines also have a limited lifespan and must eventually be decommissioned; said blades are made of composite materials that inevitably end up in landfills or incinerators. Additionally, wind turbines can be noisy and can have negative impacts on wildlife, particularly birds and bats.
Wind energy has lower operating costs than traditional fossil fuels, making it a cost-effective solution for generating electricity. Wind energy has no fuel costs, and the price of electricity generated from wind turbines has decreased significantly in recent years.
Like solar energy, wind energy suffers from the major issue of intermittency. Wind is dependent on changing weather patterns and atmospheric conditions, and is thus not a constant resource. As such, wind energy cannot provide a consistent supply of electricity, and may require supplemental sources.
Reconciling differences in energy sources – The Energy Bundle
Energy sources vary greatly, and making decisions about them can be complex. If only there were an established economic framework that could guide us in making choices under constraints while maximizing utility and minimizing costs…
Enter Microeconomics.
Let’s define a concept called the “energy bundle”. Similar to a consumption bundle in an introductory microeconomics course, which refers to the mix of goods and services chosen by an individual or household, a country’s energy bundle represents the combination of diverse energy sources chosen to power its economy, industries, homes, and transportation.
Just as consumers maximize their utility by selecting a consumption bundle that offers the highest possible satisfaction, countries aim to optimize their energy bundle to ensure efficient and effective energy use. This involves considering factors such as cost, availability, reliability, and environmental impact.
For example, a country may allocate a certain percentage of its energy bundle to renewable sources such as solar, wind, and hydroelectric power, while also allocating a percentage to non-renewable sources such as coal, oil, and natural gas. The composition of the energy bundle can change over time due to technological advancements, price fluctuations, and shifting macroeconomic priorities.
The energy bundle is not just a theoretical idea – it’s an empirical observation of countries’ actions over the medium-to-long term. Consider Germany’s Energiewende, or energy transition – since the early 2000s, Germany has been shifting its energy mix from nuclear power and coal to renewables such as wind, solar and biomass in response to growing energy independence needs (see the war in Ukraine) and grassroots NIMBY initiatives against nuclear power, with the goal of generating 80% of its electricity from renewable sources by 2050. Germany’s energy bundle is thus a combination of various renewable energy sources, as well as traditional sources that are being phased out.
Now consider Brazil’s hydroelectric energy bundle. Brazil generates the majority of its electricity from hydroelectric power, which is abundant due to the country’s many rivers and waterfalls. However, the country is also investing in other renewable energy sources such as wind and solar, as well as natural gas, as hydropower’s intermittency grows with increasingly severe droughts. Brazil’s energy bundle is thus a combination of hydroelectric, natural gas, and renewables.
Likewise, Saudi Arabia’s energy bundle is shifting away from its dominant export in oil. MBS has realized the volatility of relying heavily on oil prices and is moving towards solar and wind energy, with the goal of generating 50% of its electricity from renewables by 2030. The Saudi energy bundle is thus shifting towards an increasingly balanced combination of oil and renewables, reflecting their changing macroeconomic priorities.
Why is this concept useful? It delivers much-needed nuance to a subject that demands it. Just as a steaming bowl of chicken soup would be less appealing at a sweltering summer frat party than on a frosty winter evening at grandma’s house, hydroelectric energy wouldn’t be a suitable option for the arid deserts of Saudi Arabia. When we approach countries’ energy choices just as we would our personal consumption decisions, we recognize that there is no single best energy source in isolation. Instead, the optimal energy bundle must take various factors into account.
An extension of this metaphor is that countries, like consumers, will choose the energy bundle that incurs the lowest possible cost. It is crucial, however, to realize that the meaning of “cost” differs depending on a country’s level of development. Economically developed countries such as the US can afford to prioritize environmental concerns due to their strong tax base and lower poverty rates, while less developed countries like Nigeria may have to prioritize economic growth and poverty reduction over environmental considerations.
Energy bundles and the power game
The great thing about this energy bundle theory is that, when universally adapted, it works great. Each country is free to choose their energy bundle, fast track their economic development and eventually, reach a point where they can start prioritizing renewables and act in the greater good of the global community.
Unfortunately, power dynamics and international politics play a crucial role in hindering the universal adoption of this theory. Developed countries often exert their influence on developing countries, limiting their choices for energy sources. This limits the agency of developing countries in choosing their energy bundles, resulting in an uneven playing field. Countries with greater wealth and superior natural resource endowments have the freedom to choose their energy bundle as they see fit, while others are deprived of this same privilege. Protectionist measures, such as subsidies for renewable energy use, can also displace otherwise competitive fossil fuel industries in developing countries, while regulations and restrictions can prop up uncompetitive renewables.
In 2019, the International Monetary Fund (IMF), in which China currently holds the plurality of voting power, provided a $4.2 billion loan to Ecuador, conditional on the implementation of austerity measures and the elimination of domestic fuel subsidies. The move was highly controversial and sparked widespread protests, with critics arguing that it would harm the country’s poor and vulnerable populations and spark frictional unemployment in an economy without the economic base and social fabric to cope with it.
The European Union (EU) has been known to impose restrictions and regulations that harm more competitive fossil fuel industries and prop up uncompetitive renewables in developing countries. In 2013, the EU implemented the Renewable Energy Directive, which required member states to generate at least 20% of their energy from renewable sources by 2020. The directive also included sustainability criteria that effectively excluded palm oil-based biofuels from being used to meet the target, significantly impacting palm oil-producing countries such as Malaysia and Indonesia, which have accused the EU of protectionism.
One of the most glaring issues with this status quo of developed countries imposing restrictions on developing countries is the moral double standard at play. During their own industrialization periods, high-income countries never faced the same constraints, whether domestic or transnational. Victorian England, for example, never had to contend with solar panel subsidies driving up their coal prices, nor did American firms until the establishment of the EPA in 1970.
The question arises: how can these countries tell developing nations to stop doing what they once did, and which brought them substantial economic benefits despite severe environmental degradation?
That question becomes harder to answer given that richer countries often supply predatory renewable energy contracts, leveraging international pressure on developing countries to conform to the global agenda and advance selfish financial and geopolitical interests. For instance, the construction of the Patuca III dam in Honduras by the Chinese state-owned company Sinohydro was controversial from the outset due to concerns about the potential impact on the environment and local communities. The project was pushed through without sufficient consultation from affected communities and has led to forced displacement, as well as the loss of traditional lands and livelihoods. If you ask Sinohydro, though, they’ll tell you that it was a way for Honduras to reduce their dependence on fossil fuels and promote sustainable development.
Fundamentally, if oil spills, air pollution and multinational fossil fuel giants exploiting local populations repulses you, then so should a globalist narrative that peddles renewable energy as a fix-all solution. Even if promoted unintended, an unequivocally pro-renewable agenda exploits developing economies and deprives them of their agency in constructing their energy bundles, and ultimately serves to perpetuate global economic inequality.
Ultimately in the long term, every country should strive towards sustainability, energy independence, and the proper stewardship of our natural resources as a collective. The best way to do this is to allow sovereign countries complete agency over their energy bundles. Call it laissez-faire, cowboy capitalism, whatever you want. But as we race towards sustainable energy and economic development, let’s consider taking the leg weights off those who started later, trusting in them to slow down once they’ve hit their stride.
Featured Image Source: Enel Green Power
Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty, or the University of California, Berkeley in general.
