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 Persian 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 decarbonizing 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 aluminum 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 decarbonize dramatically increases the trade-offs of addressing these different concerns.
We are already seeing the effects of this. While the recent increase in the oil price helps decarbonization by making fossil-fuel energy more expensive, the fact that aluminum 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.
So, while the losers from decarbonization 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.
Decarbonization 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. Copyright Project Syndicate 2021
Ricardo Hausmann is a professor at Harvard’s John F. Kennedy School of Government and Director of the Harvard Growth Lab.
