Green growth at the end of the flat world

In a decarbonising world, energy-intensive activities will have to take place near specific locations

By Ricardo Hausmann

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Published: Tue 14 Dec 2021, 10:10 PM

We do not expect pineapples to come from Norway or papayas to come from the Sahara Desert. These fruits instead tend to grow in places with lots of sun and water. So, why is it that energy-intensive products like steel come from energy-poor countries like Japan and South Korea?

The answer is that coal and oil have a unique feature when compared to wood, natural gas, or hydrogen: they are amazingly energetic per unit of volume and weight. This fact, combined with advances in transportation technologies in the twentieth century, meant that the world became “flat” from an energy point of view. Because oil could be transported from the Arabian Gulf to New York or Seoul for a fraction of what a barrel of oil cost at its source, the absence of local energy sources was not an obstacle.

This was not always the case. Before railways, proximity to coal mattered for iron production, and before the steam engine, being close to fast-moving rivers that could power waterwheels was crucial for manufactures. But today, locally available energy sources are not a prerequisite for engaging in most energy-intensive activities. Except for natural gas (which in any case is a bit greener than coal and oil), energy can be brought to most places at modest cost.

Yet, as the world weans itself off coal and oil, energy flatness will become a thing of the past. With the exception of nuclear power, all green sources of energy — sun, wind, hydro, and geothermal — are unevenly distributed and costly to transport. Even if firms insist on using fossil fuels together with carbon capture and storage, they will benefit from proximity to geological formations that can store carbon dioxide — and these are not ubiquitous.

In a decarbonising world, therefore, energy-intensive activities will again have to take place near specific locations, just as in the days of waterwheels. That is not good news for cities like Gwangyang, South Korea, home to the world’s largest steel plant, or for the Middle East’s aluminium industry, which is currently powered by natural gas.

Who benefits from this shift will depend on the outcome of a brewing conflict involving the Earth and its atmosphere. The environmental movement has long worried about the impact of human activity on the planet, from local pollution of land, air, and water to the destruction of forests and animal species. But climate change and the need to decarbonise dramatically increases the trade-offs of addressing these different concerns.

In particular, as Bill Gates has pointed out, significantly reducing CO2 emissions will entail electrifying everything that can be electrified. But this will require massive amounts of copper, aluminium, cobalt, lithium, and rare earths, which can come only through a big expansion of mining. Mass electrification may also require more hydropower and nuclear plants.

We are already seeing the effects of this. While the recent increase in the oil price helps decarbonisation by making fossil-fuel energy more expensive, the fact that aluminium and copper prices are near historic highs means that the price of electric alternatives also is going up, dampening the speed of green-energy substitution.

These metal-price increases are to some extent inevitable, because the time required to install new capacity means that supply responds slowly to demand. But the speed of the supply response does not depend on technical factors alone. It is also deeply connected to the ability of political systems to create a national consensus on the right way to develop mining activities, minimising environmental damage and adequately compensating potential losers.

This is easier said than done. Mining remains highly controversial, even in countries such as Peru and Chile, where it is the dominant export industry and a major contributor to global output. Peru’s prime minister recently ordered exploration and development licences not to be renewed in a key mining region. The licensing process has similarly tied the hands of South Africa’s mining industry. And, beyond mining, Colombia and Chile have significant hydropower potential, but creating a national consensus to tap into it has been difficult.

So, while the losers from decarbonisation are relatively obvious, the winners will be those that combine geographic luck with smart action. Sun and wind do not become electricity without human effort.

Cities, regions, and countries that want to benefit from the relocation of energy-intensive industries will need to ensure that they can credibly offer secure access to green energy. That will depend on their capacity to transform their energy systems. Some countries could follow France in developing their nuclear energy potential. Kazakhstan, for example, could use its ample uranium reserves to develop next-generation nuclear power plants and supply the rest of the world’s needs. Venezuela could maximise the hydro-energy output of its underutilised Caroní River to revive the country’s steel and aluminium industries. Australia, Namibia, and Chile could use their record-high insolation rates to become the major producers of green hydrogen.

Sub-Saharan African countries could seek to exploit their geological potential and rival Australia and South America in mining. Bolivia, Chile, and Mexico could dominate the lithium battery sector by transforming their lithium carbonate resources into lithium oxides and batteries using green energy. (South Korea, Japan, and China are currently engaged in the same process using fossil fuels.) Other countries might develop carbon storage capacity.

Decarbonisation will change national development paths, and force policymakers to rethink their economic strategies. Too much of the greening debate has focused on the sacrifices each country can make to lower its emissions. But the end of energy flatness will cause massive industry relocation, while saving the atmosphere will require finding better ways to mitigate damage to the land. First movers that develop a national consensus to promote the right ecosystem for green growth are bound to come out ahead.

Ricardo Hausmann, a former minister of planning of Venezuela and former chief economist at the Inter-American Development Bank, is a professor at Harvard University’s John F. Kennedy School of Government and Director of the Harvard Growth Lab.

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