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The Actuary The magazine of the Institute & Faculty of Actuaries

Energy: Limits to growth

Renewable and efficient energy technology will have to replace fossil fuels far faster than most people currently anticipate. The reason is the combined impact of two key issues that will shape the 21st century: Peak oil (when the maximum rate of global petroleum production is achieved) and climate change. Climate change and peak oil are both symptoms of the same ultimate cause. For the last 200 years since the industrial revolution, the human race has behaved as if the world is infinite. Our problems now are due to the fact that we have exceeded the limits of planet Earth. This was forecast by a far-sighted group of academics more than 30 years ago.

The history of Limits to Growth
In 1972 a book called Limits to Growth (LTG) was published by a group of scientists at MIT. It sold thousands of copies and attracted much controversy and sometimes vitriolic criticism. During the 1980s and 90s it was largely forgotten and passed into obscurity. Now the message contained in it is more relevant than ever. The authors created a computer model of the world, to represent key characteristics such as population, economic activity, resource use etc. They concluded that unless action was taken, humanity would overshoot the carrying capacity of the Earth and a collapse in population and industrial production would be the inevitable result.

When OPEC restricted the oil supply to the West in the 1970s many people believed that the limits of oil supply had been reached. In fact, the shortage of oil at that time was purely man-made. When the price of oil decreased and steady economic growth resumed in the 1980s the LTG ideas were set aside. What many of those critical of LTG ignored was that it never predicted that we would suffer from overshooting the limits of the earth during the 20th century. Now we have the benefit of over 30 years of additional data with which to judge the thesis. So far all the data is confirming that the model was realistic; an updated edition of the book was published in 2004.

The message is a stark warning, but it also tells the success story of how humanity pulled back from the brink of destroying the ozone layer. I summarise a few of the most important ideas in the book below:

We all have our own personal mental model of the world, comprised of all our beliefs, attitudes and values. The authors of LTG call this our “worldview”. Our worldview is our window on the world, we see through it, but we don’t see it. It also acts as a filter; we tend to see only what matches our existing worldview and ignore information that contradicts it.

The authors of LTG believe that they have a different worldview to many because they have a background in systems science. This means that they see more easily than most the effects of the interaction of different parts of a system, which may be unexpected and complex.

Fossil fuel use – a different perspective
Fig 1 below is the usual way of looking at the development of fossil fuel use since the industrial revolution. Data Source: United States Department of Energy However, if we replot the data on a longer time scale, from the beginning of human history, a different picture emerges (Fig 2). For most of human history the human race has not used fossil fuels. They should only ever be seen as a temporary boost of energy, which kick-started the industrial revolution. Unfortunately, in the words of George W. Bush, we have become “addicted to oil”. For further interest look up M. King Hubbert, the geologist who successfully predicted the peak in US oil production.

Exponential growth – the driving force of overshoot
Exponential growth is a very familiar concept in the form of compound interest. However, some of the consequences of the mathematics of exponential growth are not generally appreciated:
>> A constant growth rate implies a constant doubling time, which implies that a constant growth rate means accelerating growth in absolute terms.
>> If a resource is being used at a constantly increasing rate, then the amount of that resource used during the doubling time is equal to all of the resource used in all the previous doubling times since the increase began.

Behaviour of an exponentially growing system within finite limits
It doesn’t take degree level mathematics to figure out that exponential growth cannot continue forever in a system with finite limits. There is an apposite quote from the economist and philosopher Kenneth Boulding (1910-1993): “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist." The graphs below (Figs 3-6) illustrate the four possible behaviours of exponential growth. The growth could be either population or industrial production:

1. Continuous growth: If physical limits are very far off or are themselves growing.
2. Sigmoid growth: If signals from physical limits are instant and responded to immediately or the population limits itself without needing signals.
3. Overshoot and oscillation: Results if signals or responses are delayed and limits are unerodable or are able to recover quickly from erosion.
4. Overshoot and collapse: Results if signals or responses are delayed and limits are erodable (irreversibly degraded when exceeded). In the case of the Earth, there is a delay between the signal of overshoot and the response, and limits are erodable. So overshoot and collapse is the mode of behaviour that is likely to result.

Markets and new technologies won’t solve our problems by themselves
Critics of LTG say that technology will provide the answers, and price changes will drive the development and adoption of the new technologies. For example, new renewable energy sources will replace the depleted oil supply when oil becomes expensive. The most powerful argument against relying on this idea is simply that it hasn’t happened yet to any significant degree. Even with the maximum possible adaptation efforts starting now it is too late to avoid severe disruption from the effects of reducing oil supply.

A risk management-based worldview: minimising risk versus maximising growth
It appears from the lack of radical action so far that most politicians believe that our civilization is too advanced to fail. Surely we only need to accept that there is even a tiny chance of collapse for that possibility to drive the policy response. In his 2006 review of the economics of climate change, Nicholas Stern said that greenhouse gas emissions have been, and continue to be, driven by economic growth. He also said that man-made climate change could cause disruption on a similar scale to the world wars and the depression of the 1930’s. In April 2008, in an interview with Reuters he admitted that even that was an underestimate of the risk.

Economic growth also causes an increase in per capita energy use, which accelerates oil depletion. Put the climate change and peak oil issues together and doesn’t this suggest that economic growth itself is the biggest risk to the economy? If we are addicted to oil, perhaps we are equally addicted to rapid economic growth? It is time to recognise that unrestricted economic growth is no longer synonymous with a healthy economy. Gordon Brown talks about his record of unbroken economic growth as being an example of stability. Yet during that period of growth, very little was done to replace fossil fuels and combat global warming. Therefore, his much vaunted period of “stability” was actually a period of rapidly escalating risk.

For poor countries, the benefits of economic growth are very clear: wealth to ensure the basics of adequate food supply, universal schooling and adequate healthcare among others. There is a strong moral argument that rich countries should rein in growth to allow poor countries more headroom. While correct, it is not necessary to make this argument – sheer self preservation is enough to argue that unrestricted economic growth in the rich world is no longer desirable. T

here are many examples in the financial services sector of rapid growth followed by collapse. A recent example is the story of Northern Rock. What is interesting is that even up to the last few months before they had to be rescued by the Bank of England, in the face of an impending credit crunch, the Northern Rock management continued with their high growth strategy. Perhaps lessons can be learned from the psychology that caused them to put maximizing growth at a higher priority than minimizing risk?

Of course our whole economic system is based on the assumption of continued growth. What LTG shows us is that eventually economic growth must cease – if one limit is avoided another rapidly comes up. We can either plan for a managed pullback to avoid collapse or wait for multiple crises and disasters to hit. Surely it is within the intellectual power of humanity to devise an economic system that is fully sustainable?

Less than 10 years to act
As oil becomes ever more expensive and economic conditions worsen, many are calling for more exploitation of coal and unconventional fossil fuels such as tar sands to bridge the energy gap. This would be an unmitigated disaster. But it is already starting to happen as governments plan new coal fired power stations and big oil companies are re-carbonizing in a bid to maximise short-term profitability. Whereas humanity could eventually recover from an economic collapse, the change to the climate would effectively be permanent. Latest evidence suggests that we have less than 10 years in which to start the deep cuts in greenhouse gas emissions necessary to avoid catastrophic climate change.

The alternative approach is to use the painful reality of Peak Oil to question how and why governments could have so badly mishandled this issue. As recently as February 2008, the British Government’s position was that there was sufficient oil and gas to fuel economic growth for the foreseeable future. This is puzzling, and virtually constitutes wilful blindness.

We can ask; if governments can get their risk management so egregiously wrong regarding oil supplies, perhaps they could be similarly mishandling the response to climate change? We have to realise that we are in a situation that is unique in human history. We have overshot the physical limits of planet Earth and policies from the past may be completely inappropriate.

Those that know most about the threat from climate change are calling for a mobilization of rich world economies as if in a time of war. Productive capacity should be diverted from consumption towards the battle to save the climate. We should not be afraid of telling people that we need to willingly accept a significant reduction in our standard of living. It can be seen as an insurance premium against catastrophe. We in the rich world can afford the cut in income. We cannot afford to do nothing, and run the risk of losing everything. A decline in living standards can’t be avoided, but by taking the most rapid possible action starting now, we can save ourselves from disastrous climate change.

Oliver Bettis prices industrial risks at Great Lakes UK. Any views expressed are strictly his own.

Further information:

Northern Rock http://www.economist.com/opinion/displaystory.cfm?story_id=9832838 http://business.timesonline.co.uk/tol/business/money/property_and_

Stern Review of the Economics of Climate Change

Jeremy Leggett advertisement on Peak Oil and climate change http://www.theoildrum.com/tag/jeremy_leggett

Government response to oil and gas shortage question

Figures 1-6