Consumer Surplus from Energy Transitions
by Roger Fouquet (Grantham Research Institute on Climate Change and the Environment at LSE)
Abstract: Energy transitions have led to major advances in human wellbeing. However, little evidence exists about the scale of the net benefits. By developing a new method for identifying the demand curve, and by using a unique, historical data set, this paper estimates the consumer surplus associated with heating, transport and lighting over more than two hundred years and identifies the gains from a number of key energy transitions. For certain energy transitions, the increase was dramatic, reflecting the transformations in society and lifestyles that mobility and illumination provided in the nineteenth and twentieth centuries. Yet, the net benefits related to heating technologies only rose modestly. Finally, due to saturation effects of the demand for energy services, future technological developments and energy transitions may benefit consumers (though not necessarily society as a whole) less than those in the past.
Circulated by NEP-HIS on 2017‒10‒22
Review by: Cristián Ducoing (Lund University)
The current research focus in energy transitions is mainly motivated by the environmental implications of energy consumption. This more than justified direction has relegated to a second place the analysis of the enormous benefits derived from energy transitions, specially when we observe consumers’ welfare. This new paper by Roger Fouquet analyses the positive impacts of energy transitions (hereafter, ET) by looking into how each ET generates consumer surplus.
This paper combines data sets from two previous works of the author about the United Kingdom on service prices between 1300 and 2010 (Fouquet 2011a), and service consumption between 1700 and 2010 (Fouquet 2014). The data sources and methodologies used were explained in Fouquet (2008). In brief, Fouquet has done an upgrade of his former estimations to measure how much welfare we have obtained by ET. The author follows a standard measure of welfare (how less consumers pay for a specific service) and he applies it to each ET during the last two centuries in the United Kingdom.
As shown in the examples in Figure 1, a key advantage of focusing on energy services, rather than on fuels (energy carriers), is that the demand for services remains comparable with the introduction of new goods and technologies.
The conclusions extracted from the paper could be summarized as follows:
- Attempts to estimate consumer surplus face enormous challenges, mainly by the effects of disruptive technologies. However, it could be possible to get an approximation taking into account the methodology used by Nordhaus (1997). Moreover, the paper presents a novel method that allows to identify the changes in demand curves for energy services (lightning, heating and transport).
- There were dramatic increases in consumer surplus due to energy transition in transport (stagecoaches to railways) and lightning (candles to gaslight and to electric lightning).
- Developing countries are benefited by increasing energy consumption. On the other hand, benefits in developed countries could be lower than in the past.
- The method offered allow us to forecast the long-run net benefits of new energy technologies and transitions. This issue has enormous policy implications in relation with the environmental challenges that we are facing us.
Currently, to defend energy systems/consumption as mechanisms of progress and development is quite complicated, specially if the energy systems contain fossil fuels, such as the main energy carriers in the case of the United Kingdom. This paper focuses its attention on the “good side” of energy consumption and mechanization, tackling a compulsory debate on the trade-off between economic development and sustainability. Roger Fouquet has mentioned this debate in an 2016 article, where he analyzed the lessons from history to our current energy transition. Now, Fouquet has demonstrated, accounting for the consumer surplus, than previous energy transitions have been beneficial for consumers/population. The question is: how should the current and future energy transition be carried? In order to achieve economic development, countries pursuing higher income levels require an increase in energy consumption. Fossil fuels still are a valid option to increase energy consumption; a low carbon economy could be farther in the road than we thought. A challenge to global society is to create an economic environment favorable to clean energy technologies, in order to promote economic growth in low income regions without the deprivation of our natural resources and environment.
As this paper has shown us, there are periods when the increase in energy consumption has been beneficial to aggregate welfare, at least from a country/region perspective. However, the current global situation doesn’t allow an increase in energy consumption based in fossil fuels without risking main environmental equilibriums.
The only possible criticism to the paper is the implicit “normative” scope supported by one country experience. Nevertheless, Fouquet presented this paper as a starting point for further research.
Fouquet, R. (2011a) “Divergences in Long Run Trends in the Prices of Energy and Energy Services.” Review of Environmental Economics and Policy 5(2) 196-218.
Fouquet, R. (2014) “Long Run Demand for Energy Services: Income and Price Elasticities over 200 Years.” Review of Environmental Economics and Policy 8(2) 186-207.
Fouquet, R. (2008) Heat Power and Light: Revolutions in Energy Services. Cheltenham: Edward Elgar.