At what cost?

Can the world thrive on 100% renewable energy?

A transition away from fossil fuels is necessary, but it will not be painless

A WIDELY read cover story on the impact of global warming in this week’s New York magazine starts ominously: “It is, I promise, worse than you think.” It goes on to predict temperatures in New York hotter than present-day Bahrain, unprecedented droughts wherever today’s food is produced, the release of diseases like bubonic plague hitherto trapped under Siberian ice, and permanent economic collapse. In the face of such apocalyptic predictions, can the world take solace from those who argue that it can move, relatively quickly and painlessly, to 100% renewable energy?

At first glance, the answer to that question looks depressingly obvious. Despite falling costs, wind and solar still produce only 5.5% of the world’s electricity. Hydropower is a much more significant source of renewable energy, but its costs are rising, and investment is falling. Looking more broadly at energy demand, including that for domestic heating, transport and industry, the share of wind and solar is a minuscule 1.6% (see chart). It seems impossible to eliminate fossil fuels from the energy mix in the foreseeable future.

But all energy transitions, such as that from coal to hydrocarbons in the 20th century, take many decades. It is the rate of change that guides where investments flow. That makes greens more optimistic. During the past decade, solar photovoltaics (PV) and wind energy have been on a roll as sources of electricity. Although investment dipped slightly last year, the International Energy Agency, a global forecaster, said on July 11th that for the first time the amount of renewable capacity commissioned in 2016 almost matched that for other sources of power generation, such as coal and natural gas. In some countries the two technologies—particularly solar PV in sunny places—are now cheaper than coal and gas. It is no longer uncommon for countries like Denmark and Scotland to have periods when the equivalent of all their power comes from wind.

Ambitions are rising. The Senate in California, a state that is close to hitting its goal of generating one-third of its power from renewables by 2020, has proposed raising the target to 60% by 2030; Germany’s goal is to become 80% renewable by 2050. But whether it is possible to produce all of a country’s electricity with just wind, water and hydro is a subject of bitter debate.

In 2015 Mark Jacobson of Stanford University and others argued that electricity, transport, heating/cooling, and industry in America could be fully powered in 2050-55 by wind, water and solar, without the variability of the weather affecting users. Forswearing the use of natural gas, biofuels, nuclear power and stationary batteries, they said weather modelling, hydrogen storage and flexible demand could ensure stable supply at relatively low cost.

But in June this year Christopher Clack, founder of Vibrant Clean Energy, a firm, issued a stinging critique with fellow researchers in the Proceedings of the National Academy of Sciences, the journal in which Mr Jacobson et al had published their findings. They argued that a narrow focus on wind, water and solar would make tackling climate change more difficult and expensive than it needed to be, not least because it ignored existing zero-carbon technologies such as nuclear power and bioenergy. They claimed the models wrongly assumed that hydroelectricity output could continue for hours on end at many times the capacity available today, and pointed to the implausibility of replacing the current aviation system with yet-to-be-developed hydrogen-powered planes. In their view, decarbonising 80% of the electricity grid is possible at reasonable cost, provided America improves its high-voltage transmission grid. Beyond that is anyone’s guess.

Others take a wider view. Amory Lovins of the Colorado-based Rocky Mountain Institute, a think-tank, shrugs off the 100% renewables dispute as a sideshow. He takes comfort from the fact that it is increasingly common for renewables sustainably to produce half a location’s electricity supply. He believes that the share can be scaled up with ease, possibly to 80%. But in order to cut emissions drastically, he puts most emphasis on a tripling of energy efficiency, by designing better buildings and factories and using lighter materials, as well as by keeping some natural gas in the mix. He also sees clean-energy batteries in electric vehicles displacing oil demand, as petroleum did whale oil in the 19th century.

Some sceptics raise concerns about the economic ramifications if renewables’ penetration rises substantially. In an article this month, Michael Kelly of Cambridge University focused on the energy return on investment (EROI) of solar PV and wind turbines, meaning the ratio between the amount of energy they produce to the amount of energy invested to make them. He claimed that their EROI was substantially lower than those of fossil fuels; using renewables to generate half of the world’s electricity would leave less energy free to power other types of economic activity.

Critics note that his analysis is based on studies of PV returns in Spain from more than half a decade ago. Since then solar and wind costs (a proxy for EROI) have plunged, raising their returns. What is more, other studies suggest returns from fossil-fuel-derived energy have fallen, and will decline further as they incur increased costs associated with pollution and climate change. A high share of renewables may be less efficient at powering economic growth than fossil fuels were in their 20th century heyday. But if the climate doomsayers are to be proved wrong, a clean-energy system must be part of the solution.

Trump Gives Beijing a Lesson in the Art of the Deal

The president’s moves are neither capricious nor naive, though they lack a certain diplomatic finesse.

By Michael Auslin

President Trump and Chinese President Xi Jinping at the G-20 summit in Hamburg, Germany, July 8. Photo: pool/Reuters

With only six months in office, President Trump has put his signature on America’s China policy. A strategy that may appear capricious to his critics in fact has a logic consistent with Mr. Trump’s guiding beliefs. He sought a deal with China, then concluded he would not get one, and so acted in what he believes is America’s best interest.

Mr. Trump’s approach is undoubtedly transactional, but it’s surprisingly realistic given China’s kid-glove treatment by most U.S. presidents. In potentially putting Beijing and Washington at loggerheads, it is also undeniably risky.

In June, the White House delivered three blows to China. First, it imposed sanctions on a Chinese bank and two individuals for abetting North Korea’s financial transactions. Second, it listed China in the category of worst offenders in human trafficking. Finally, it announced a $1.4 billion arms sale to Taiwan. The Trump administration also made several lesser-order jabs, among them calling for more freedom in Hong Kong and conducting another freedom-of-navigation operation near the contested Spratly Islands in the South China Sea. It did all this as Chinese President Xi Jinping tried to celebrate the 20th anniversary of the return of Hong Kong to China from Britain.

Any one of these actions would normally be enough to rock Sino-U.S. relations, at least for a while. Taken together, they constitute a significant break from the past two decades of diplomatic engagement between the two powers. Is this an enduring shift on the part of the Trump administration? Or simply shots across Beijing’s bow to get China to cooperate more with Washington and behave better abroad?

To Mr. Trump’s critics, the moves represent a recognition of his initial naiveté regarding China. When the president tweeted on June 20 that China’s efforts to help on North Korea had not worked out, he was derided for his apparent faith in Beijing’s promises and for flipping his opinion so quickly. The latest turnaround was seen as part of a pattern stretching back to the campaign and transition, when candidate and President-elect Trump warned that he would not shrink from putting economic and political pressure on China. Then, soon after taking office, the president radically shifted to a far more cooperative stance, going so far as to host Mr. Xi at Mar-a-Lago for a family-style summit.

But Mr. Trump’s moves are neither capricious nor naive, even if they do lack a certain diplomatic finesse. His interest has always been in the bottom line, and diplomatic niceties of the kind that have suffused Sino-U.S. relations since Richard Nixon’s epochal 1972 visit to Beijing are useful to him only if progress is being made.

Last month’s actions put Beijing on notice that Mr. Trump’s transactional approach is real, and so are the potential consequences for failing to make a deal. Moreover, each move serves some larger U.S. purpose, whether strategic (Taiwan) or tactical (North Korea). Chinese leaders have long been accustomed to strong words and no action from Washington; now they will have to consider how far the Trump administration may go.

By publicly calling out China, Mr. Trump risks chipping away at Beijing’s carefully polished image as a global leader and contributor to stability. Beijing, already upset by criticism leveled by Defense Secretary Jim Mattis about China’s militarization of the South China Sea islands, lashed back at the administration’s moves, especially the arms sale to Taiwan.

With a critical Communist Party Congress coming up in the fall, Mr. Xi will be loath to be seen as unable or unwilling to combat an activist U.S. policy in Asia. He may look for ways to check Mr. Trump’s recent moves, such as ratcheting up economic and diplomatic pressure on U.S. allies like South Korea, which is already in Beijing’s doghouse for accepting a new U.S. missile defense system. Mr. Xi may also try to regain some standing by challenging the U.S. Navy in the South China Sea.

Mr. Trump has made clear that he means what he says about deal-making. China said it would help and did not. That’s enough for Mr. Trump to put the world’s two most powerful countries on a potential collision course. He might be bluffing or he might be in earnest. Either way, the American president’s sharp dose of realism has the potential to reshape the world’s most important relationship.

Mr. Auslin is a fellow at the Hoover Institution, Stanford University.

China in Africa: A Different Kind of Military Theater

By Allison Fedirka

China has been trying to show the world just how militarily capable it is by expanding operations to other continents. This time, it’s focused on Africa. With much fanfare, Chinese military personnel set sail July 11 from the port at Zhanjiang for Djibouti, where they will help set up China’s first permanent overseas military base. China says the base will provide support for peacekeeping, anti-piracy and humanitarian operations. But media and military analysts have claimed that the Djibouti base is part of China’s so-called “string of pearls” strategy, which is meant to develop a network of military and commercial assets and relationships along the India Ocean to project power abroad. The base, however, is not an example of China’s military prowess but rather an attempt to boost China’s image at home and abroad.

China chose Djibouti as the location for its base because Beijing has an interest in ensuring the flow of trade from the Persian Gulf to China. Eighty percent of China’s seaborne oil imports pass through this route through the India Ocean, so it’s a vital part of keeping the country running.

And the need to ensure access to this route is the motivation behind the “string of pearls” strategy. China figures it can secure access to the Indian Ocean and through various chokepoints by building military and commercial facilities throughout the South China Sea, the Bay of Bengal and, to a lesser degree, the Arabian Sea. Facilities have already been developed in Bangladesh, Myanmar, Pakistan and Sri Lanka.

But these efforts are more a case of grandstanding than effective protection of Chinese interests. With a relatively weak navy, at least compared to the U.S. Navy, China lacks the ability to secure this route militarily. So instead, it is trying to portray an image of strength to distract from its actual weakness.

This photo taken on Dec. 23, 2016 shows Chinese J-15 fighter jets being launched from the deck of the Liaoning aircraft carrier during military drills in the Yellow Sea, off China’s east coast. STR/AFP/Getty Images

Few details about the facility have been made public, and what little is known suggests that the base has no military significance. Reports indicate that navy warships have been sent to the base, but there is no available information on the number of personnel to be stationed there, the length of their deployment or a timetable for operability. Some estimates suggest that 2,000 soldiers – likely marines and special operations forces – will eventually be stationed at the base.

By the end of the year, the facility will hold weapons and ammunition and will include wharves for stationing Chinese navy ships. It will cost the Chinese $20 million annually to rent the base, which covers 36 hectares near a commercial port owned by Chinese companies. There are plans to build an airfield, although they exist only on paper. There is one helicopter pad that should be completed by the end of the year. Notably, military expert Zhou Chenming told the South China Morning Post that the facility “is not a military base in the full sense” but that its capacity could be expanded later to repair ships and accommodate planes. From this, we suspect that the base has no aircraft and cannot service vessels. This doesn’t say much about the facility’s capabilities, and since so little is known about the nuts and bolts of the base, it would be difficult for anyone to reasonably conclude that it can help China project power abroad.

But more important is the fact that China’s navy lacks blue-water capabilities – the ability to operate in the deep waters of the world’s oceans. The navy has ambitious plans to develop these capabilities, but doing so takes a long time – at least one or two generations, assuming no major disruptions or pauses in the process. The navy does not currently have any operational aircraft carrier battle groups. Its sole operational aircraft carrier, the Liaoning, is a refurbished ship that initially launched in 1988. The Liaoning can carry about half the number of planes a U.S. aircraft carrier can. Its first live-fire exercises were held in December 2016, and its accompanying fighter pilots are only now graduating from initial training. The crew has little experience and requires years more training before the ship can be operationally effective. The Chinese navy, moreover, has yet to overcome basic logistical problems, including refueling. Most of the country’s naval vessels are not nuclear powered and must therefore stop at ports to refuel, limiting their capabilities and reach.

China can’t project power globally. It has to be selective in setting its priorities, and Africa isn’t at the top of this list. China’s real concerns are much closer to home. Any imports coming through the Indian Ocean destined for China must pass through the Strait of Malacca, a major chokepoint bordered by Malaysia, Indonesia and Thailand. Passage through the strait is secured by the U.S. Navy, but the Chinese don’t want to rely on the U.S. for access to such an important route. Chokepoints are also an issue in the South China Sea, where China and several other East Asian states are competing for territory. What capabilities and resources Beijing does have will be focused on this region rather than the Horn of Africa.

A New Course for Economic Liberalism

Sebastian Buckup
 France's new economic policy

GENEVA – Since the Agrarian Revolution, technological progress has always fueled opposing forces of diffusion and concentration. Diffusion occurs as old powers and privileges corrode; concentration occurs as the power and reach of those who control new capabilities expands. The so-called Fourth Industrial Revolution will be no exception in this regard.
Already, the tension between diffusion and concentration is intensifying at all levels of the economy. Throughout the 1990s and early 2000s, trade grew twice as fast as GDP, lifting hundreds of millions out of poverty. Thanks to the globalization of capital and knowledge, countries were able to shift resources to more productive and higher-paying sectors. All of this contributed to the diffusion of market power.
But this diffusion occurred in parallel with an equally stark concentration. At the sectoral level, a couple of key industries – most notably, finance and information technology – secured a growing share of profits. In the United States, for example, the financial sector generates just 4% of employment, but accounts for more than 25% of corporate profits. And half of US companies that generate profits of 25% or more are tech firms.
The same has occurred at the organizational level. The most profitable 10% of US businesses are eight times more profitable than the average firm. In the 1990s, the multiple was only three.
Such concentration effects go a long way toward explaining rising economic inequality.

Research by Cesar Hidalgo and his colleagues at MIT reveals that, in countries where sectoral concentration has declined in recent decades, such as South Korea, income inequality has fallen. In those where sectoral concentration has intensified, such as Norway, inequality has risen.
A similar trend can be seen at the organizational level. A recent study by Erling Bath, Alex Bryson, James Davis, and Richard Freeman showed that the diffusion of individual pay since the 1970s is associated with pay differences between, not within, companies. The Stanford economists Nicholas Bloom and David Price confirmed this finding, and argue that virtually the entire increase in income inequality in the US is rooted in the growing gap in average wages paid by firms.
Such outcomes are the result not just of inevitable structural shifts, but also of decisions about how to handle those shifts. In the late 1970s, as neoliberalism took hold, policymakers became less concerned about big firms converting profits into political influence, and instead worried that governments were protecting uncompetitive companies.
With this in mind, policymakers began to dismantle the economic rules and regulations that had been implemented after the Great Depression, and encouraged vertical and horizontal mergers. These decisions played a major role in enabling a new wave of globalization, which increasingly diffused growth and wealth across countries, but also laid the groundwork for the concentration of income and wealth within countries.
The growing “platform economy” is a case in point. In China, the e-commerce giant Alibaba is leading a massive effort to connect rural areas to national and global markets, including through its consumer-to-consumer platform Taobao. That effort entails substantial diffusion: in more than 1,000 rural Chinese communities – so-called “Taobao Villages” – over 10% of the population now makes a living by selling products on Taobao. But, as Alibaba helps to build an inclusive economy comprising millions of mini-multinationals, it is also expanding its own market power.
Policymakers now need a new approach that resists excessive concentration, which may create efficiency gains, but also allows firms to hoard profits and invest less. Of course, Joseph Schumpeter famously argued that one need not worry too much about monopoly rents, because competition would quickly erase the advantage. But corporate performance in recent decades paints a different picture: 80% of the firms that made a return of 25% or more in 2003 were still doing so ten years later. (In the 1990s, that share stood at about 50%.)
To counter such concentration, policymakers should, first, implement smarter competition laws that focus not only on market share or pricing power, but also on the many forms of rent extraction, from copyright and patent rules that allow incumbents to cash in on old discoveries to the misuse of network centrality. The question is not “how big is too big,” but how to differentiate between “good” and “bad” bigness. The answer hinges on the balance businesses strike between value capture and creation.
Moreover, policymakers need to make it easier for startups to scale up. A vibrant entrepreneurial ecosystem remains the most effective antidote to rent extraction. Digital ledger technologies, for instance, have the potential to curb the power of large oligopolies more effectively than heavy-handed policy interventions. Yet economies must not rely on markets alone to bring about the “churn” that capitalism so badly needs. Indeed, even as policymakers pay lip service to entrepreneurship, the number of startups has declined in many advanced economies.
Finally, policymakers must move beyond the neoliberal conceit that those who work hard and play by the rules are those who will rise. After all, the flipside of that perspective, which rests on a fundamental belief in the equalizing effect of the market, is what Michael Sandel calls our “meritocratic hubris”: the misguided idea that success (and failure) is up to us alone.
This implies that investments in education and skills training, while necessary, will not be sufficient to reduce inequality. Policies that tackle structural biases head-on – from minimum wages to, potentially, universal basic income schemes – are also needed.
Neoliberal economics has reached a breaking point, causing the traditional left-right political divide to be replaced by a different split: between those seeking forms of growth that are less inclined toward extreme concentration and those who want to end concentration by closing open markets and societies. Both sides challenge the old orthodoxies; but while one seeks to remove the “neo” from neoliberalism, the other seeks to dismantle liberalism altogether.
The neoliberal age had its day. It is time to define what comes next.