The world faces an urgent need to transform energy systems toward cleaner, renewable fuels. Yet as challenging as the current energy transformation is, it’s worth noting that we’ve been through such momentous changes before. Over 200 years ago in England, coal fueled the start of the industrial revolution, opening the way to new economic growth and technological development that spread to many parts of the world.
In this episode, an economist explores the extent to which energy has come to underpin modern economies, and how energy resources of all types have become inseparable from our everyday lives.
Jesús Fernández-Villaverde is a professor of economics at the University of Pennsylvania. He is also the author of an upcoming book on global economic history, with a major focus on the role of energy in economic development.
Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania, I’m Andy Stone. In today’s world, there’s an urgent need for energy transformation, and move towards cleaner renewable fuels. Yet, as challenging as the current energy transformation is, it’s worth noting that we’ve been through such momentous changes before. Over 250 years ago in England, coal fueled the Industrial Revolution, opening the way to new economic growth and technological development that spread to many parts of the world.
On today’s podcast, we’ll explore the way that energy, from fossil fuels to renewables, has come to underpin our economies, and how energy resources in their many forms have become inseparable from our everyday lives. Today’s guest is an economist whose recent work has focused on energy use over the centuries with insights that may help guide us through our latest energy transformation. Jesus Fernandez Villaverde is a professor of economics at the University of Pennsylvania. He’s currently writing a book on global economic history, a large part of which is focused on the role of energy in economic development. Jesus, Welcome to the podcast.
Jesus Fernandez Villaverde: Thank you.
Stone: So, your upcoming book offers in engaging history of energies intertwining with our everyday lives over the centuries. And I’d like to cite what, to me, was a mind boggling figure from the book. You write that in any given fraction of a second, mankind consumes 18 terawatts of energy, and that’s enough energy to raise 77 million pounds 112 miles into the air in one second. 77 million pounds is the weight of one U.S. Navy aircraft carrier or, I did the calculation, 18,000 cars in one second. And we consume that much energy again, in every split second. What was your response? When you came across that figure? And what does it signify?
Villaverde: I started writing the book. And I wanted to figure it out, yes, how much energy we consume. So, I searched a couple of resources online, and I found this figure and I was like, wow, we really use a lot of energy in every single second. That makes sense. Because, right, as we are talking, now, we are using the energy in the computers that are recording our conversation, the light in the studio where we are talking, probably the heat that is heating up this room, probably at home, you have a fridge, which is still working, and you have a TV, which even if it is in a standby, maybe it’s still using energy, and probably both you and I have cell phones in our pockets that are using electricity. And you keep adding, adding, and adding and you realize our lives are built around huge amounts of consumption of energy, even if we forget about just food.
So, this is actually, this number that you cited is without food consumption. So, it’s just pure energy that we use for things besides just staying alive.
Stone: And then there’s obviously polyester in our clothes, which comes with petroleum, the whole type of thing.
Villaverde: Yes, let me give you a very simple example, that sometimes I sometimes you talk with people here at the university, and they say, well, I don’t consume that much energy because I live in a small apartment and I’m very conscious about the environment. And these people are usually professors, and I tell them, how often do you go to Europe last year?
And I tell them, you know, you are you aware of the enormous amount of energy that is required to transport a human being from the Philadelphia airport to the Heathrow Airport in London. If you did that four times last year, you just blow out of the charts, your consumption of energy. And most professors here at Penn will do that. And they will not think twice about it.
Stone: You know, I wanted to ask you just to get perspective. What was the global energy demand before the Industrial Revolution really got going, say in the middle of the 19th century?
Villaverde: It was not very big. Most of the world was very, very poor. I teach a class in global economic history to undergrads here at Penn. On the first day, I joke that I’m going to give you the Twitter summary of global economic history. And it is until 200 years ago, we were very poor. And then over the last 200 years, we have become very rich.
We were living in societies that use very little energy on a very good part of explanation of why we’re so poor is because in fact, we use very, very little energy. It is really the enormous arrival of energy first with coal in the United Kingdom, and later in oil in the U.S. and other Western economies that allow us to grow very, very fast and get increments in per capita income of around between 30 to 50, which is the ratio between income before the Industrial Revolution and today.
Stone: So I wanted to ask you more about that you’re writing a book about global economic history and you’ve chosen to focus part of that, significant part of that, on energy. And you just kind of hinted how energy is so tied into that economic development.
Villaverde: Yes, I was, before starting breaking the walk. As you can imagine, I got all the standard textbooks on the area and I read them. And I was very surprised about how little attention people were given to energy. On I thought this doesn’t make a lot of sense, because for most of human history, or ability to produce goods and services has been dramatically limited by the fact that we didn’t have access to energy. And even when we didn’t have access to energy, sorry, when we had some access to energy, that access was very difficult to store.
What do I mean by that? For instance, think about a windmill. So a windmill, or a water wheel, can actually generate a fair amount of energy, but that energy is not on demand. If it doesn’t blow, you have the windmill operating, if there is not enough water, it was the winter and the water is frozen. So just creating manufacturing activities, then 50 years ago, I sorry, centuries ago was going to be extremely difficult.
So, it’s not very surprising that humanity was stuck at a very low level of economic activity. I want to think about it is as follows. Modern economic growth is the process where we take around 90% of the population, which is focused on producing energy, basically food for ourselves, and reducing the number to 2 or 3%. And using all these other 87% of the population, to do things like making movies, a writing books, branding a podcast, etc. And that’s only feasible, if we’re 3% of the population, we can generate all those enormous amount of energy that I was mentioning before. So modern life will just not exist without that amount of energy. And I was very surprised that in most textbooks, they will either not even mentioned this, or they will just have a couple of paragraphs about it and don’t really dwell much on the issue.
Stone: You point out in the book that coal and oil use initially took off, not necessarily where these resources were most abundant. But instead, in countries where laws and institutions were best established, why is that?
Villaverde: I wanted to highlight that there is no such a thing as quote, unquote, technological determinism. Sometimes people have these very nice explanations. Oh, England, had the Industrial Revolution, because there was coal in England. China did not have the Industrial Revolution, because there was no coal in China.
I think that explanations get the argument backward. is because in England, you had good institutions. What are good institutions, rule of law, property rights, etc. People were invested, but interested and invested. And to that investment, you needed energy. And that’s why people started searching. And then they say, oh, wow, maybe we can use this code to produce what we need. And they learn how to use the code.
The best example is in the U.S. The oil industry starts here in Pennsylvania, in western Pennsylvania, and is not random. It’s not that one day a person was walking, and said, oh, oil, let’s do something about it. The U.S. in the 1850s has a serious problem of energy, there is not enough food and we are running out of expand whale oil for illumination. And a bunch of people are thinking, what can we do to alleviate this problem.
And they talk with chemists and chemists suggests that maybe oil is a good way to solve that problem. And they invest in engineering and learning how to drill and we invent the modern drilling. And then we learn how to get oil out of the ground, and we learn how to distill it. So because in the U.S., we had the rule of law, on property rights, etc, people felt there was an incentive to learn how to develop new sources of energy that allow us to grow is not because we needed to grow. That’s sort of because we found the oil that’s on how we needed to, that allow us to grow in the future.
Stone: And along with that, in the U.S., they were private rights to the subsurface resources.
Villaverde: Exactly and that’s absolutely key. And that’s one of the things I always tell my students you need to understand the U.S. is very different from nearly every other country in the world. I, your listeners, could probably guess from my funny accent. I’m from Spain. If you drill in Spain, and you find something that belongs to the government, it’s public property. If I drill in my backyard here in Philadelphia and I found oil that’s mine.
That radically changes incentives. Because why I’m ever going to drill in my backyard if that’s not going to be for me. So, in the U.S. from day one, there was a very strong incentive to drill and to search for oil because you weren’t going to appropriate those profits. While in Europe that was not going to happen. A good way to think about it is tight oil. Look, you can have whatever opinion you have about the overall mental impact of tight oil, that’s perfectly fine and that’s a different conversation. The amazing fact is around 96% of tight oil in the planet is produced in the U.S.
The U.S. is not even such a great place to produce tight oil. So, there must be something fundamentally different between the U.S. and the rest of the world. That explains why the U.S. produces so much tight oil. And in my opinion is because in Texas, in North Dakota, I drill, I get that tight oil, it’s for me. So people put a lot of interest on effort on learning how to do it.
Stone: Let me jump back into history another moment here. In the year 1273, the city of London, England put the first restrictions on coal use in history. And that was due to the foul air because people were burning coal in London. Coal use and the problems that come with it obviously go a long way back yet coal use didn’t really take off until the 18th century. What was it at that time that really made that change? You kind of hinted a little bit to we’re running out of wood, these types of things, is that all that it was, even in the UK?
Villaverde: Yes, well, it’s a combination, I will say of two factors. The first one is population in Europe has grown a lot. England is starting to become a very densely populated country. And we started running out of wood. Happens in London, also happened in Philadelphia, a little thing few people know, right after the Revolutionary War, most of the surrounding areas of Philadelphia have way less forest cover today, because people have been using that wood for heating on for production. So the area around Philadelphia was really very, very bad.
Stone: So, all this greenery for this new forest?
Villaverde: Yes, none of this is old forests. All of this is after the 19th century. So, people in England is thirsty as well, we really need something to substitute wood because wood is not around is becoming very expensive. And the second factor, which is very important, is thanks to the scientific revolution, we learn how to use a steam to produce power. How to transform the chemical energy unleashed by the combustion of coal into rotary motion and to linear motion, which allows you to run a machine. And that suddenly generates nearly overnight a huge demand for coal that did not exist before.
Stone: This question may be may seem a little bit obvious, but I want to ask it in any event. What has the development of energy resources meant for the countries that have been most successful, particularly for the early adopters?
Villaverde: It meant that first England and later the U.S. had an enormous advantage in terms of having access to cheap energy, which meant they were able to jump into the Industrial Revolution into manufacturing and being able to produce goods at a much cheaper price and scale up their activities. Think about textiles. You know, when people think about the Industrial Revolution, they probably think about a gigantic textile factory. Without coal operating a lot of those textile machinery that will have never happened.
So, the U.K. and later the U.S. were able to achieve enormous economic superiority, if I may use that word, thanks to the fact that they have access to cheaper sources of energy that no other country in the world had access at the time.
Stone: Historically, have there been common drivers for the replacement of one type of fuel by another over history?
Villaverde: Relative prices, people use one source of energy or another because of the relative price of that source of energy. It’s cheap to heat my house with coal, I’m going to use coal. If it is cheaper to heat my house with solar panels. I’m going to use solar panels. Economist highlight the enormous power of prices, people look at prices, and they very carefully consider alternatives and react to them. On oil, yes it became cheaper than coal and you didn’t really need to convince anyone, you didn’t need to have a mandate. You didn’t need to have any piece of legislation. People just thought oil is cheaper. And I’m going to switch from coal to oil and people respond to prices.
Stone: Going off of what you just said renewable energy is attractive because it’s clean, which in an important way makes it different from what has always been attractive about fossil fuels, which, as you said, have been valuable for their abundance, their low cost and their high energy potential. Does history give us insight into how to best incentivize energy transformation, when environmental priorities are the driver?
Villaverde: So I guess the answer is very related with a previous one, because the key word here is to harness the power of prices. Let me explain what I mean by that. When we say that oil is cheap, we are maybe not being too careful, because oil is cheap for me to produce. But oil is generating a cost on everyone else through the social cost of CO2. Now, if we could have a price system, where my private use of oil reflected the social cost of CO2, then it will make sense to compare the cost of renewables with the cost of oil.
So, in some sense, right now, what is happening is that oil is quote, unquote, subsidized, because it’s not reflecting the true cost of CO2. Having said that, I think that the way to move forward is not to impose mandates, is not to try to achieve energy transition by an act of Congress, is just much simpler. Ask people who use oil to pay for this social cost of CO2 emission, which is, you know, we got to have that conversation, maybe $100, a ton, maybe $200, maybe $50. On every time you put gas in your car, you will need to pay a CO2 tax. And you will see how even the more convinced users of pickup trucks will start going, hmm, maybe that electric car is not such a bad idea. And thus, what has always worked in life, it has been don’t tell people what to do. Tell them what they need to pay for each of the options they face. And people are really, really good at understanding what is best for them, in terms of their choices.
Stone: Well so you just said that mandates are not the way to go. But it’s interesting, increasingly, we’re seeing calls from for direct government spending on clean energy. This is a fundamental part of the Green New Deal that’s been in the news very much lately. At the same time, I’ve increasingly seen carbon pricing plans such as cap and trade or direct carbon tax, described as a middle of the road solution that will never allow us to transition to a low carbon energy system as quickly as is necessary. In your view, can market mechanisms, get carbon emissions down fast enough?
Villaverde: Definitely, yes. It’s just an issue of the price at which we want to charge CO2 emissions. Imagine that we sit down, we think carefully about it. And we come up to the conclusion that the social cost of carbon right now CO2 emissions is $500. And suddenly filling your tank will not cost you $40. But it will cost you $400. I promise you that if and for oil will collapse overnight.
So, that’s not a question of whether or not people react to prices, people react to prices much faster, and much more efficiently than to any mandate. Because it’s in your own interest to do so, it’s only an issue of which price we want to charge on CO2. And we can have a national conversation about that.
The problem of any type of mandate is that there is no reason why the government should know what is the best use of CO2. Imagine that we decide as a society that we want to have, let’s suppose one tonne of CO2 emission per person per month And I’m just given a completely arbitrary number. And the way we are going to implement that is sort through a sufficiently high tax. In some sense, I will have a budget of CO2 that I want to allocate myself. Do I want to allocate that budget into driving a gigantic SUV? Or do I want to allocate that budget by warming my house a little bit more? Because I don’t like to wear a sweater at home. Do I want to allocate that budget to fly to Europe? Or do I want to allocate that budget to actually selling those rights to someone else that has a higher value for those?
Those are millions and millions of individual decisions about which governments do not know anything about. Let me give you a very concrete example. My neighbor, I live in a very typical suburban area in Philadelphia. My neighbor has a gigantic pickup truck. From all I can tell, there is no particular reason why he should be driving that gigantic pick up. A naive approach when we say we are not going to let your neighbor drive a pickup truck. But what do I really know?
Maybe he has a health problem and he needs the extra space. Maybe on the weekends, when I’m not looking at him, he goes to visit his parents in the middle of the mountains, and he actually needs a pickup truck. He is the best person to decide. Do I need a pickup truck? Or do I need a Toyota Prius? And is the market system who’s going to make him decide that appropriately. And it’s the same for utilities. Utilities are the ones who know what is the best way to produce electricity in any particular moment, given the particular situations. What I just need to tell the utility is, look, if you’re going to emit CO2, this is how much you need to pay. And now you’ll figure it out. And that’s what always works is let the markets decide. And use, in as I was saying before, harnessing the power of markets to achieve those reductions.
Stone: Do economists provide any possible solutions to the political challenge of imposing a high carbon price?
Villaverde: I do a little bit of consulting about economic policy, in both here in the U.S. and more than anything in Europe. And I’m always asked those type of questions. Okay, so you just told me we should do A, that’s never going to get to the floor of Congress, this is never going to get out of committee, people in the state of Washington have voted twice against it. My answer always builds on two steps.
Step one is, as an academic, I need to tell you what is optimal. On my friends, a very good friend of mine knows a very senior politician in Europe, are the ones who are a specialist in getting this out of the committee. I don’t know how to get legislation out of the committee, I can tell you what is the optimal thing. Second, by insisting and repeating to the public again, and again, what the right thing is, you transform something that is only theoretical into feasible.
Let me give you an example that is not from energy. Most economists defend the idea that central bank should be dependent like the Federal Reserve System. In the late 1970s, a lot of economists defended this idea. And I’m pretty sure a lot of my quote unquote, intellectual forefathers in economics would ask the same questions. This will never get out of the committee. But economists repeated this for 20 years, until it became so clear that the political forces generated that act. So, if I keep telling people and again and again, don’t do mandates, CO2 emission, taxes make much more sense. In 10 years, this will become politically feasible.
Stone: You note in the book that early in the days of the coal and oil businesses, there wasn’t any particular threat from a strong incumbent industry that was interested in stopping development of those resources, nobody had a whole lot to lose at that point. Today, we see a lot of friction between incumbent oil, gas, and coal interests, and new technologies such as renewables. As an economist, you see a solution to the challenge of incumbency?
Villaverde: It is a hard problem. Those who have to lose for from a reform always fight very strong against it. Coming perhaps a little bit back to my answer, before explaining to the public which the advantages and disadvantages are of the current energy system. And the alternatives are very powerful tools that we should not underestimate. I really believe that when the average voters are explain in a candid way, what the options are, many of them vote in the right way.
Unfortunately, I have been witness of many presidential campaigns, I will say I have seen very little of this candidate explanations from both sides of the aisle. And again, as an economist, that’s a little bit what I want to push the conversation toward. Saying look, these are the options. This is what we know, this is what we don’t know, on maybe we can get a lot of attractions in that way.
In particular, I want to just point out that my defense of CO2 taxes is not in any way a strange or odd. If you walk to the Department of Economics here at Penn, we are I think 32, I am happy to bet that 31 of them will agree with me. Maybe there is among 32 people, there’s always someone with a crazy idea, but very recently, most prominent economist in the country, much more prominent than me. And I was one of the signers have signed an open letter making this point on there were economists from both sides of the aisle, people who were a little bit more center of right people a little bit more center of left. So in that sense, this is really one of those situations where you are going to get enormous consensus among everyone who have thought about this issue with some time and some effort.
Stone: At the same time that we’re looking at the future of our energy systems and climate. There’s also a lot of talk these days about globalization, globalization of economies, international trade, and you bring up in the book, the idea that international trade can actually be an efficient tool to lowering the carbon footprint. We often talk about technologies in these things, but you talk about trade can tell us a bit more about that.
Villaverde: Well, imagine that we are going to still use a lot of steel for many, many decades. Imagine that. For whatever reason, one country is much more efficient that they still produce in that oil. If we all start buying steel from that country, the total amount of energy that the planet will need to produce the required amount of steel will go down. And what a lot of people is not aware, is that big ships these days are so amazingly efficient in terms of energy consumption, that even if you actually need to pay the extra cost of transport in this let’s say from South Korea, to the U.S., you end up using much less energy.
Let me give you an example, which may be a little bit provocative, but some listeners may appreciate it. I often go to my supermarket. And you notice, I’m a professor. So, I go to one of these all organic supermarkets. And they have this that says buy local. And I’m always thinking, well, you know, buy local veggies, it’s not very energy efficient. Because growing tomatoes, or peppers in Philadelphia, not that great. And if you go to Boston it’s a very bad idea. It’s much better to produce those in California and bring them to Philadelphia. The total amount of energy is substantially lower, even if we factor in the additional amount of energy that it takes to bring the tomatoes from California to Philadelphia. So, we are there’s the issue of freshness it’s less fresh, but that’s a different issue. But if your concern is I want to eat tomatoes that require as little energy as possible, you probably want to eat tomato from California, you don’t want to eat tomatoes from your local farmer.
Stone: Interesting perspective, I want to ask a question that’s gonna put you a little bit on the spot here, if I may. So, with energy so ingrained in our lives, and we’ve been talking about this for the last 20 minutes or so, where will the history of energy lead us next? And to be more specific, for the sake of the future of the planet? Should we become less dependent on energy after two centuries of becoming more dependent on it? And is becoming less dependent even possible?
Villaverde: I think so. I think it is. If you actually look at how much energy we use in the U.S. per capita, it has roughly stabilize, even perhaps going down a little bit over the last 20 years. And there is a lot of gains that are relatively cheap to achieve in energy reduction. In terms of energy consumption reduction, I mentioned for instance, before we have huge amount of fat to trim in our transportation sector. I’m pretty sure 90% of people that drive gigantic SUVs and gigantic pickup trucks do not need the pickup truck. Yeah, as an aside they are not you know, they are not deer hunters that need the pickup truck to put three deers in the back. Okay. I see a lot of these soccer moms in my neighborhood with gigantic Range Rovers, I’m pretty sure they could survive with a smaller car.
And our houses are not very energy efficient. A lot of construction is not very energy efficient. So, there is really a lot of fat to trim. And again, I don’t want to do that through mandates. I want to do that through a CO2 emission taxes. In that sense, I think that yes, we can reduce a lot of energy consumption. On the other hand, energy is great. It makes you feel warm a night. I teach at Oxford for a little bit during the May and June and Oxford is beautiful has this beautiful all colleges and you know it’s full of Tories making photographs. But when you’re actually a professor, they put you in one of those colleges to live and they are not very well heated. It’s really unpleasant to wake up at three in the morning to go to drink a glass of water, it is really cold, you don’t want to live like that.
And if we can generate all that energy, and I really think we can generate all that energy in a sustainable way through a smart combination of renewables and biofuels and other sources of energy. Why not? It’s nice to wake up, go to the restroom, get a glass of water and be nice and warm. It is nice to wake up at six in the morning, take a shower and the water is really really hot. And it’s nice to sit in a nice car and drive and listen to your favorite podcast.
Stone: With that, I’ve got one final question to ask you. You write that fossil fuels have allowed us, and I’m quoting here from the chapter, fossil fuels have allowed us to break away from poverty and create the scientific and technological preconditions to get us to the cusp of sustainable and abundant sources of energy. So basically, you’re praising fossil fuels, as you just did for the positive transition they’ve brought to us. And you’re also saying that they’re paving the way for a cleaner future. Tell us more about what you mean.
Villaverde: Coming back to the beginning of this conversation, in the 18th century, we just couldn’t produce enough. And without a productive economy, we will have never had the resources to create research universities, we will have never had the modern scientific revolution, we will have never powered computers. And the reason we know now how to make a solar panel that is very efficient. And in some sense, even the cheaper way to produce electricity right now is the sun, is because we had computers that allow us to do all the simulations and all the numerical analysis required to produce a solar panel.
So, jumping from a traditional, what I call in the book organic energy, into a modern renewable energy without passing in the middle for fossil fuels is just not something that was feasible. And the beautiful thing about fossil fuels, an analogy I use in the book is a little bit like you have this rich uncle that dies and leaves you $20,000. And you can use this $20,000 in a smart way, which is maybe they will pay you for going to college, you get a good BA and you start working and you start making a lot of money. Or you can use the $20,000 to go on a gigantic drinking binge or not get anything about it.
And in some sense that what fossils fields are. We had this window of opportunity of growing, the window of opportunity, which I think Western countries to good advantage of it. But now the window is closing because climate change on thanks to everything we have learned in terms of science. Now we know how to operate an economy that can really, really operate with very low CO2 emissions.
Let me just give you one figure that I learned after I finish the chapter. The United Kingdom now is emitting less CO2, that in the mid of the 19th century. And I’m not saying in per capita terms, I say, the whole of the United Kingdom. Why? Because United Kingdom has been one of the leaders in transitioning through a smart policies towards a much less polluting way to generate electricity. While that basically tells you we can do this, and I really think that with the right policies in 15-20 years, we could be back in a very sustainable solution. This may end up being the case that in that new sustainable solution is saddled with hotter than it would have been otherwise. But at the margin that may not have been a bad choice. Economics is always about choices. And everything has a cost. And I think we do the right thing because it will be worthwhile.
Stone: Jesus, thank you for talking.
Villaverde: Thank you.
Stone: Today’s guest has been Jesus Fernandez Villaverde, professor of economics at the University of Pennsylvania. Check out the Kleinman Center’s website for our latest research into energy and environmental policy. Our web address is kleinmanenergy.upenn.edu. And our Twitter handle is @kleinmanenergy. Thanks for listening to the podcast and have a great day.