Book Excerpt

The economics of energy conservation

The Globe and Mail

An offshore wind farm near the Danish island of Samso. (BOB STRONG/BOB STRONG/REUTERS)

Three years ago, Jeff Rubin left Bay Street to publish a book that warned that the world was on the brink of a period of deglobalization because of the rising cost of energy. Now, as he argues in his forthcoming book, The End of Growth, sustained high oil prices mean that advanced economies are gearing down into a new era of slow – or no – economic growth.

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While most economists believe that zero growth means big trouble, Mr. Rubin says it does not have to be a disaster – because consumers in the developed world can learn to live with less, even in energy-hungry Canada. The former CIBC World Markets chief economist cites research to show that some of the happiest people on Earth live in slow-growth economies. Lofty oil prices will do more than any regulations to curb greenhouse gas emissions and slow urban sprawl. The transition to slower growth spells tough, near-term changes in the economy – but in the long run, the environment and its citizens might be better for it.

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Just what does this new world look like, and what will it take to adjust? Some surprising answers lie an ocean away, in Denmark.

The first thing I noticed on a flight into Copenhagen a few summers ago was a ring of wind turbines surrounding the city. Not far from the city’s harbor, the sweeping arc of offshore windmills is a hard sight to miss. I found out later that this is exactly what the Danes have in mind. The gleaming white windmills, which rise more than 100 meters above the deep blue waters of the Øresund strait, are intended to be an unmistakable symbol of Denmark’s commitment to renewable energy.

The rest of Denmark’s bona fides when it comes to green living are also tough to ignore. In the last two decades, Denmark has cut its carbon dioxide emissions by 13 per cent. That makes for a remarkable contrast with North American emissions, which have increased by 30 per cent since 1990, the baseline year for the Kyoto accord. The credit for reversing greenhouse gas emissions is often given to eco-friendly initiatives like the wind turbines I saw dotting the Copenhagen seascape. It’s a success story the Danes are literally selling to the rest of the world. Denmark, which in 1991 became the first country to set up an offshore wind farm, now garners 11 per cent of its exports from sales of energy technology. At home, wind power accounts for an impressive 20 per cent of domestic electricity generation.

Denmark clearly has plenty of good reasons to be proud of its environmental track record. From the moment I glimpsed the wind turbines from my plane seat, though, I couldn’t get away from a niggling curiosity about how the country generates the rest of its power. At the conference I was attending, a speaker from a local power company presented on Denmark’s world-leading green technology. I tracked him down after my own talk, figuring he was just the person to ask. He hemmed and hawed, but when I pressed him, he reluctantly told me how his country generates the other 80 per cent of its power.

Coal.

I was floored. The first thought that crossed my mind was, “Something is rotten in the state of Denmark!” For a country striving to be completely independent of fossil fuels, Denmark couldn’t have picked a worse way to generate electricity. Coal is 20 per cent dirtier than oil and twice as dirty as natural gas. With big dollars at stake selling green energy technology around the world, I can understand why Denmark wants to showcase its offshore wind farms instead of its coal-fired power plants. But the cold hard truth is that it is smokestacks, not wind turbines, that allow most Danes to turn on the lights.

Coal’s share of power generation, I found out, is the same in Denmark as it is in China. Where China’s carbon footprint now dwarfs every other country in the world, though, Denmark’s is actually shrinking. How can this be?

To answer this energy riddle, you need to look past how power is generated in Denmark and into the prices Danish citizens pay for electricity. Households in Copenhagen pay roughly 30 cents per kilowatt-hour for power. That’s two to three times the average price in North America. In Denmark, government-regulated power prices are laden with carbon taxes, which means electricity isn’t cheap, whether it’s wind powered or coal fired. Not surprisingly, Danes use a fraction of the power that North Americans consume.

All those world-famous windmills, it turns out, aren’t behind Denmark’s falling emissions. The real reason for its smaller carbon footprint is its high electricity prices, which put a huge damper on power demand.

That’s good news for the planet’s future. Despite its offshore wind farms, Denmark shows that carbon abatement isn’t limited to places with ideal conditions for wind power – or solar or hydroelectric, for that matter. Higher energy prices are a tactic that can be applied anywhere. The market is oblivious to whether the wind blows or the sun shines. Charge enough for power in any country in the world and people will use less electricity. It’s basic economics.

If capping carbon emissions is the goal, the solution isn’t to rush out and build wind turbines; simply raising prices will do the job. Consider, for instance, the state of Montana or the province of Alberta, both of which have huge coal reserves. What’s more, citizens there consider energy abundance a veritable birthright, so few think twice about burning as much of it as possible. Even in those places, though, I bet charging 30 cents per kilowatt-hour would cut the demand on the local power grid in a hurry.

To lower carbon emissions, you don’t need to build a single wind turbine or invest even a dollar in so-called clean coal technology. Just charge more for power and emissions will come down as a result.



Denmark’s track record of environmental success also has a lot to do with cars. Or I suppose I should really say a lack of cars. Cyclists are everywhere in Copenhagen, which boasts some of the best bicycle lanes in the world. They even have their own traffic signals. And it’s paid off. No matter where you go in Copenhagen, nearly everyone seems to get there on a bike.

It’s admirable, no doubt, and Danes should certainly be proud. But once again, the economist in me, ever on the lookout for price signals that explain human behavior, felt compelled to ask more questions.

It turns out that driving a car in Denmark, much like turning on the lights, is a very expensive proposition. The biggest cost isn’t even at the pumps. While fuel is more expensive in Denmark than it is in Canada or the United States, gasoline prices in Copenhagen are largely in line with the rest of Europe. Yet few other major European cities have the same volume of bike traffic as Copenhagen.

What differentiates Denmark from its neighbors is the cost of buying a car. Danish car buyers pay a tax ranging from 100 to 180 per cent of the vehicle’s sticker price; the exact amount depends on the size of the engine. For the cost of one vehicle with a gas-guzzling V-8 in Denmark, for instance, you could buy up to three cars in North America. If my fellow Torontonians had to pay those prices, the number of bikes on the road might start to rival Copenhagen.

Of course, ending a hundred-year-old love affair with the automobile won’t come easy. A few years ago, for example, Toronto’s city council passed a new annual vehicle registration tax that cost Toronto car owners the princely sum of $65 a year. That was too much for Torontonians to stomach. Facing disastrous pre-election polling numbers, the incumbent mayor headed for the exit. One of the first acts of the new mayor, Rob Ford, was to announce that the city’s war against the car was over. He and his new council cancelled the tax.

Defenders of North America’s car culture will also argue that the sprawling landscapes of cities such as Los Angeles, Phoenix and Calgary make Copenhagen-style bike usage impractical. Getting to work every day certainly can’t be like training for a triathlon. And frigid winter temperatures in some cities are also clearly unsuitable for year-round cycling. Those are fair points, but what the Danish model shows us is that prices influence demand. The Danes have crafted policies that encourage conservation. There’s nothing stopping civic governments in North America from doing the same.

The world won’t always look the way it does now. The sprawl that defines many North American cities is a result of cheap oil that makes it affordable for suburban homeowners to commute to work. Replace inexpensive oil with triple-digit prices and cities will eventually shrink back to their original bike-sized urban cores. When gasoline prices move high enough, you can also bet that suburbanites and city-dwellers will start agitating for better transit options. High fuel costs will force these types of changes on all of us before you know it. Denmark is meeting this pending reality on its own terms. The rest of us would be wise to consider how that country is doing it.

Copenhagen’s trademark windmills act as a smokescreen that obscures a more important takeaway than the mere viability of green energy. The power the Danes use is not much greener than anywhere else. Denmark is green because the Danes have learned how to use less power.

I’m sure a good number of Danes would take issue with me. They’ll point to their coal plants, which are among the most carbon efficient in the world. They’ll rightly note that those same power stations do double duty, generating heat as well as electricity. While all of that is true, it misses the fundamental point. Prices are what have made the difference. Prices are what matter.









As much as Denmark is a living, breathing example of environmental success, it’s only fair to note that the battle against carbon emissions is easier there than it is elsewhere. Denmark has no significant hydrocarbon reserves of its own, which means its politicians don’t need to worry about appeasing a carbon-intensive energy industry. In the same spirit, the country also doesn’t have an auto sector to speak of. In Denmark, no one needs to worry about currying favor with autoworkers to get re-elected.

Contrast Denmark’s situation with the pressures faced by my home province of Ontario. When the global recession sent automakers reeling toward bankruptcy, Ontario, along with Canada’s federal government, spent billions of taxpayer dollars to help keep General Motors and Chrysler solvent. Across the border, politicians in Washington doled out even more money to those same companies in order to safeguard high-paying manufacturing jobs.

Likewise, the oil industry also gets billions in subsidies from governments in the United States and Canada. In the United States, government tax breaks for Big Oil are wrapped in the rhetoric of promoting energy self-sufficiency and reducing the country’s dependence on imported oil from faraway lands that could become unfriendly at any moment. In Canada, subsidies are granted under the guise of protecting one of the country’s leading exports.

Danish politicians don’t have to contend with the powerful lobbying efforts of Big Auto or Big Oil. The country is politically free to impose what are, in effect, huge carbon taxes that encourage energy conservation. While admirable from an environmental standpoint, for a country that’s forced to buy oil and coal from foreign producers, slashing energy consumption also makes a tremendous amount of economic sense.

Half a world away, the Japanese are coming to the same conclusion.



Like Denmark, Japan is largely devoid of domestic hydrocarbon reserves. That forces the country to import nearly every last drop of the 4.5 million barrels of oil its economy burns every day. In an effort to reduce its oil imports, Japan turned to nuclear energy, which before the Fukushima meltdown accounted for nearly a third of the country’s power generation.

Japan has no obvious substitute for its lost nuclear power. Practically and economically, that makes for a country highly motivated to adopt Danish-style energy conservation.

The new catchword in Japan is setsuden, or electricity conservation. These days, the concept is evident almost everywhere. Office dwellers are going without air-conditioning, while factory workers are switching off lights and machinery when they’re not needed. In stores, escalators are becoming staircases. And households across the country are being encouraged to scale back power usage by as much as 20 per cent. Even Japanese businessmen, renowned for their conservative attire, are being asked to wear casual clothes to work rather than dark suits, the idea being that dressing in breathable material will reduce the strain on office air-conditioning.







Setsuden is defining the new contours of an energy-constrained Japanese economy. Similar changes may soon decide the shape of your economy as well.

A magical new power source isn’t waiting in the wings to solve Japan’s energy problems. Instead, the country is figuring out that the alternative to building more nuclear reactors is using less electricity and closing the energy gap in other ways. Here, the cost of fuel will actually turn out to be one of Japan’s best friends. High prices enforce an economic discipline that will naturally curtail energy use.

Certainly other steps will help along the way. More electric vehicles are bound to be on roads in Japan, and around the world, before too long. Wind and solar power will continue to become more affordable and more efficient, which will add to the role they’re able to play in supplying tomorrow’s power needs. And more inventive measures are being found all the time. In Paris, an ambitious car-sharing service using electric vehicles has been launched. Other cities are bound to follow suit.

But the really big changes that will come in an energy-constrained future won’t have to do with the type of vehicles we drive or how we generate electricity. Instead, what will matter most is the energy that’s not used. The real energy savings, as Denmark knows, happen when fewer cars are on the road and less power is used at home.



Excerpted from The End of Growth . Copyright © 2012 Jeffrey Rubin Enterprises Inc. Published by Random House Canada, an imprint of the Knopf Random Canada Publishing Group, a division of Random House of Canada Limited. Reproduced by arrangement with the Publisher. All rights reserved.

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