The team working on the Envisioning Ireland’s Energy Futures project for the Irish Environmental Protection Agency has submitted this report. Feasta will hold a one-day seminar to discuss its conclusions when the EPA publishes it in the Autumn. The strongest conclusion is the need to move to a low-carbon economy as rapidly as possible, even if this slows down economic growth. The report also anticipates the development of rural biorefineries and the re-location to the countryside of energy-intensive manufacturing so as to be close to renewable energy sources.
A report to the Irish Environmental Protection Agency , June 2007
Tightening restrictions on the use of fossil fuels to limit climate change combined with the depletion of the sources of the most cheaply-produced oil will have far-reaching effects on the Irish economy and society. Energy prices can be expected to rise substantially in relation to those of labour. As a result, technologies will evolve which lower business and household costs by saving energy. This will be done either by using more labour or by increasing the intensity with which energy is used as capital. For example, a householder may invest energy as capital by installing more insulation in order to avoid using so much energy as income to heat his home every year. Similarly, a firm may invest energy as capital by holding greater stocks of components, tying up the energy embodied in them, in order to reduce the income energy used by frequent deliveries. In other words, higher energy costs can, perversely, increase the demand for energy for use as capital investment.
Renewable energy projects are generally more capital energy intensive than their fossil energy alternatives and another way in which higher energy costs can increase the demand for energy for capital purposes is by making the development of renewable energy sources more profitable. The pace at which renewable sources can be expanded therefore depends on the energy supply. This is a crucial consideration because if the pace is inadequate and this country’s total fossil and renewable energy contracts more rapidly than the efficiency with which it uses energy increases, overall economic growth will stop and the economy will shrink.
While some sectors of the economy may expand when the total supply of energy is diminishing, the contribution their growth makes to national income will be outweighed by the sectors in decline. The sectors most likely to grow in an economy which is contracting because its energy supply is shrinking include renewable energy production, agriculture (the production of biofuels), home improvements, repair and maintenance and some types of manufacturing. Those most likely to experience reduced sales will include construction, retail, the motor trade, road freight transport, tourism and airlines.
The strongest conclusion from this study is that, as energy supplies are going to be increasingly tight and thus increasingly costly in future, the sooner investments of energy capital are made in saving energy and in the transition to renewable energy, the more substantial those investments can be and, as a result, the smaller will be the extent to which the economy contracts as the imported energy supply tightens. Foregoing economic growth now for the sake of achieving greater energy self-sufficiency will enable the country to maintain higher incomes in future.
A second important conclusion which is linked to the first is that no attempt should be made to keep energy prices low whatever the motive for doing so. Maintaining international competitiveness or reducing fuel poverty are not adequate resasons for preventing the market signalling to companies and consumers to produce more renewable energy and to reduce their fossil energy use. Other ways need to be found to meet any commercial and social objectives which impede the move to an energy-self-sufficient economy.
Renewable energy sources are, for the most part, relatively small and dispersed. Developing renewables efficiently means that the pattern of energy production and distribution has to change. The centralised generation of electricity will give way to distributed generation and, if fuel is burned as part of the generation process, it will become very important that the low-grade heat finds a good use. This will affect the location of manufacturing companies both within Ireland and around the world. Firms for whom energy is an important component of their costs will locate in communities which can guarantee them secure supplies of electricity and process heat at fixed prices. A recognition of this will obviously affect Ireland’s inward investment strategy.
Another factor which will affect spatial planning and investment policy is that renewable sources of liquid fuels like biodiesel and bioethanol will not be able to make up for the increasingly restricted supply of oil. The transport sector will be profoundly affected and the higher energy modes like air- and road-freight will become much more costly in comparison with rail and water. One way firms will attempt to reduce their distribution costs is by manufacturing a smaller quantity of a wider range of products in a greater number of plants. This will lead to much more local production for local use.
The third factor which will work to ensure that economic activity becomes more widely dispersed is that although biomass is going to replace oil as a source of many chemicals, it is too bulky to be transported far. Accordingly, just as co-operative creameries were set up in almost every parish a century ago to concentrate milk into butter or cheese, small biorefineries which concentrate their area’s vegetable matter into valuable, transportable substances will be established throughout the country over the next 25 years.
Because industrial agriculture is energy-intensive, the cost of food will become much higher in relation to people’s earnings. While this will enable farms to afford to employ more workers and become more labour-intensive, it will also mean that, together with the increased cost of energy, non-farmers will have less money left over for discretionary spending. The shopping-as-a-pastime economy will end. Trade unions will be unable to preserve their members’ living standards. As there will be more jobs in rural areas and the cost of energy and food is likely to be lower there, the flow of people from rural to urban is likely to be reversed.
The major threat to the Irish economy identified by the study comes not from higher energy prices themselves but from the European Central Bank’s reaction to them. In a market economy, higher real prices are needed to allocate inadequate energy supplies to the most profitable uses and to encourage energy saving and the development of new energy sources. Because different amounts of energy are embodied in everything we buy, the price of everything needs to change by a different amount. There is no standard percentage that can be applied. An inflation is required to make this differential adjustment relatively painless in comparison with the distress that would be caused if an attempt was made to maintain price stability while bringing the changes about.Such an exercise would require low energy-use firms to reduce their prices, even though their energy costs had risen, by enough to allow high-energy use ones to put their prices up.This painful course seems to be the one the ECB is following. Certainly, by increasing interest rates to slow inflation, it is attempting to maintain the value of the euro despite the fact that the cost of one of the two factors of production, energy, has gone up and is likely to stay up, in euro terms. The only way that the value of the euro can be maintained in this situation is if the price of labour is forced down in euro terms, so that the fall balances the rise. Such a policy threatens to create an economic disaster.
Another important conclusion is that is that, when a vital commodity such as fossil energy gets scarce, its distribution can no longer be left to a completely uncontrolled market but has to be rationed .The scenario developed for this study in which energy rationing was introduced enabled much higher and more stable living standards to be maintained in Ireland than the one in which the market was left to itself. This was because all the scarcity rents accrue to the energy producing countries unless rationing is introduced internationally and this threatens the world economy. Moreover, unless rationing is introduced internally, the distribution of energy can become very polarised and cause a social disaster.
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