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Wharton: Why Decarbonizing Energy Systems Should Be Prioritized

Research by experts at Wharton and elsewhere refutes conventional wisdom among policymakers that economic growth is the inevitable casualty of reducing greenhouse gas emissions.

This article was published with permission from Knowledge @ Wharton, Wharton's online business journal. It originally appeared here.

New research by experts at Wharton and elsewhere refutes conventional wisdom among policymakers that economic growth is the inevitable casualty of reducing greenhouse gas emissions. Economic growth can be achieved along with emissions reductions if policymakers integrate “mediating mechanisms,” they argued in a paper based on their findings.

Titled “Energy System Decarbonization and Productivity Gains Reduced the Coupling Between CO2 Emissions and Economic Growth in 73 Countries Between 1970 and 2016,” the paper identified five mediating mechanisms as influential:

  1. increases in economic productivity
  2. energy system decarbonization
  3. electrification
  4. winter warming
  5. deindustrialization.

The paper’s authors are Ranran Wang, an assistant professor at Leiden University in the Netherlands; Valentina A. Assenova, Wharton management professor; and Edgar G. Hertwich, professor of Energy and Process Engineering at the Norwegian University of Science and Technology.

“Our paper clearly shows that emissions can be reduced consistently over time and successfully,” said Hertwich. “It also establishes that there’s a tradeoff between economic growth and greenhouse gas emissions. The faster the economy is growing, the more aggressively you need to move on decarbonizing the energy system.”

The article establishes that the higher the carbon intensity and the lower the productivity of an economy, the higher the emissions increase. The policy implications of this finding is that it is “crucial that decarbonization and productivity improvements happen first,” the authors noted.

The article presents evidence to buttress those assertions. “Our results indicate countries such as Germany, Denmark, Finland, New Zealand, and Uruguay have managed to achieve decoupling, i.e., reducing CO2 emissions during periods of economic growth, primarily through decarbonization of the energy system,” the authors stated.

Key Findings

The study’s major findings emphasize the role of mediating mechanisms in reducing carbon emissions:

  • Before accounting for the mediating mechanisms, a 1% increase in GDP per capita was associated with a 1% increase in CO2 emissions per capita on average.
  • The mediating mechanisms reduced emissions by 22 petagrams, mainly during periods of economic growth. Energy system decarbonization and productivity growth were the primary carbon-reduction mechanisms at higher and lower development levels, respectively.
  • A 1% increase in a country’s overall economic productivity was associated with roughly a 0.5% annual reduction in its CO2 emissions per capita.
  • Deindustrialization such as through a move to services reduced CO2 emissions by about 0.8% as the share of non-industrial output in GDP grew by 1%.
  • More than 80% of the emission-reduction effect of deindustrialization was attributable to reduced use of primary energy. A 1% annual increase in the share of renewable energy used in energy supply was associated with a 1.5% yearly decrease in CO2 emissions per capita on average.
  • Shifting to renewables is about 1.5 times more effective than the coal-to-gas switching for reducing CO2 emissions.
  • Annual CO2 emissions per capita decreased by 0.6% for every 1% increase in the share of natural gas substituted for coal.
  • Much of the decarbonization effect of fuel switching was attributable to reducing carbon intensity, and the rest was attributable to improving energy efficiency. Specifically, for every 1% increase in the share of natural gas substituted for coal, the direct reduction of CO2 emissions was 0.4%.
  • Every 1% increase in the share of electricity in the final energy supply was associated with a 1.3% decrease in annual per-capita CO2 emissions.
  • Winter warming also reduced national CO2 emissions per capita. An increase in the average temperature of the coldest month by 1°C was associated with a 0.5% annual reduction in carbon emissions.

Hertwich said this study is an advancement over existing research on climate change outcomes in that it incorporates changes in the energy mix in different countries, driven by policy changes or other market forces rather than seeing “economic growth as a single explanatory factor” for CO2 emissions. The study also analyzed “the largest dataset” covering 73 economies between 1970 and 2016 to empirically assess the relationship between carbon emissions and economic growth, and mediating mechanisms, he added.

“People often assume that if you clean up your energy system more rapidly, then you will run the risk of having slower economic growth. In our analysis, we didn’t find that,” said Wang. The study found that a transition to a cleaner energy system, such as through electrification or increasing the share of renewables in the energy supply, enabled economies to grow while also not resulting in increased carbon emissions.

Window for Emerging Economies

Significantly, the findings offer a pathway to decarbonize for developing countries like China and India. Policymakers in these countries have long argued that it is unfair to expect them to accelerate a switch from coal and other carbon-emitting energy sources to cleaner energy when developed countries have had the early advantage of industrializing their economies through carbon-intensive energy policies. The alternative path for developing countries includes increased electrification and use of renewables, increased productivity and a shift to a services-based economy.

“The challenge for developing and emerging economies is that they are coming into industrialization and development at a critical moment in history when climate change and carbon emissions present difficult challenges to sustainable development,” said Assenova. “On the one hand, we want to improve human welfare in emerging economies by continuing to accelerate the pace of economic growth. These economies need to build infrastructure like roads and schools, and carbon emissions accompany development. At the same time, these economies also have to think about how they could leapfrog what developed economies have done and bypass some of the policies that have contributed to the catastrophic effects of climate change.”

The research showed that developing countries have benefitted from increased productivity, electrification, and energy system decarbonization. But their increasing emissions are rooted in how their energy mixes have developed historically, the paper noted. “A dramatic upgrade in their energy system is still needed to mitigate climate change and meet the global temperature goals,” the authors added.

Policy Mismatches

For the U.S., policy consistency is critical to combat climate change effectively. The Biden administration has brought “a renewed focus on the need to address climate change issues,” but at the same time, it is embarking on “a big infrastructure overhaul that might be counterproductive to climate change efforts,” said Assenova.

A $1 trillion infrastructure investment bill that recently passed the Senate aims to rebuild deteriorating roads and bridges but also funds new climate resilience programs. Yet, it has faced criticism for its relatively low allocation for electrification and electric vehicles. Another cause for concern is the emissions outcomes of proposed infrastructure investments. “While politicians tout the ‘green recovery’ and ‘building back better,’ a recent tally of energy-oriented expenditure in recovery packages indicates higher subsidies for fossil fuels than for clean energy,” the authors stated.

“The [U.S. economic] recovery is being led by growth in manufacturing and construction, while service industries are still suffering,” the authors said. “A stimulus directed at construction and manufacturing cannot help in the required transition unless the expenditure is explicitly directed at mitigating steps such as building refurbishment and transmission grid upgrades needed to absorb higher shares of renewables.”

Falling Short of Targets

The authors presented several key takeaways for policymakers against the backdrop of the underwhelming progress in reducing greenhouse gas emissions after the 2015 Paris agreement, where 192 countries agreed to halt the global temperature rise at well below 2 degrees, preferably 1.5 degrees. Achieving a 1.5°C warming goal requires cutting global GHG emissions by more than 7% per year on average from 2020, the paper stated.

“[But] the current climate commitments, even if fully realized, are far from adequate to meet the target of the Paris Agreement,” the authors stated. “Worse, countries have not been on track to achieving their past pledges, and global GHG emissions continued to grow in 2019 and fell by only 6.4% in 2020 owing to the COVID-19 pandemic.” The authors added that based on the observed trends, “even the most successful countries will likely fail to achieve the decoupling required to meet the Paris target.”

All materials copyright of the Wharton School of the University of Pennsylvania.