[MUSIC] Welcome to EDHEC-RISK constitute. Today, we are going to talk about the economic roots of climate change. I'm going to make the point somewhat surprising, perhaps that climate change is an economic problem. And let me quote for this William Nordhaus, who's a Nobel Prize winning economist which is most famous for his work on climate economics, the economics of climate change. And here is one of the points that he has made which I think is very, very important. Here is what he says. He says most people think that global warming is a question for the natural sciences, the engineering and the physics and that's obviously important. But, here is what he says. He says however, in reality, the ultimate source and the solutions of climate change, they lie in the real of the social sciences. So, let's try and understand why we are making this claim that climate change is after all an economic problem. Okay. Well, here is the problem. Everything we do in terms of economic activity, every single aspect of how we produce goods and services and how we consume them, everything in that process involves the combustion of fossil fuels. Now, this graph here shows the correspondence between the trend in economic growth and the physical production of oil. And as you can see, even from this simple naked eye inspection, there's a close correspondence between how much energy we produce in economic growth. Now, there's a very simple mathematical way of framing the question of the economic origin of climate change. This is known as the Kaya Identity. And the Kaya Identity says something very simple which is of course a tautology. If you look at total emission, let's call them capital E. Well, total emission, you can think about them as the number of people on the planet. Let's call that capital P. Then, you multiply that by the per capita income. Y divided by P, where Y is total income divided by P, it's total income per person. And then, you multiply that by energy intensity X divided by Y, which tells us how much energy we're using per unit of economic activity. And then, we are multiplying this by carbon intensity which is total emission per unit of energy uses. And if you look at all of these of course, it's a tautology that the products of all of those terms give the total emissions. Now, what do we learn from this tautology? Well, we learn very useful insights on how to reduce emissions. I mean, from a mathematical standpoint, what you would like to do is you take the log in the previous equation, and then you differentiate this equation and this is what you find. Now, let's think about this in the word. Well, in words, this says that the growth rate of emission is equal to the growth rate of population plus the growth rate of per capita income plus the growth rate of energy intensity. That is, how much energy we need to produce goods and services plus the growth rate of carbon intensity which is out of total energy, how much carbon emissions are we using? Well, this very simple decomposition suggests that if one seeks to reduce emissions as is badly needed, then one needs to either or I mean, those options are not mutually exclusive. Obviously, but we need to reduce population growth, reduce economic growth, we need to save energy, and we need to switch to different energy sources. There are four degrees of freedom, four places that where we can look at and find answers to the problem of how to decrease the total emission of carbondioxide in the atmosphere. Now, if you take a look at a graphical representation of this Kaya, a so-called Kaya Identity, what you find is when you look at the black solid line which is the carbon evolution of carbondioxide. What you find is it's essentially well explained by the growth of GDP per capita which is the blue-dotted line and the population growth which is the red-dotted line. Everything else is not a big problem. Carbon intensity is actually staying somewhat stable over the last 30-40 years. It's kind of stable, and energy intensity is actually going down. In other words, the world is slowly, but surely learning to be more parsimonious, somewhat efficient at producing goods and services while using less and less energy. The problem though, is that we produce more goods and services because population is growing massively. And also the amount of consumption per capita is also increasing in particular, of course in some countries, like the developed countries. So in the end of the day, there's a very clear correspondence of connection between carbon emissions and economic growth. Unless we are willing to accept a strong decrease in population, that the level of the planet which is not obviously in simple concept to put in place. Well, then we have to look at economic growth as being declared the main a vision of the problem. Now, economic growth is clearly related to carbon emissions. And as you can see on this graph when you look at increasing in carbon emission, it's always increasing except in those few moments in time where we are looking at some economic slowdown or crisis. I mean, we're talking about the first oil crisis, the second oil crisis and more recently, we're talking about the Asian financial crisis, the global financial crisis, the supreme crisis in 2008. Now, you may wonder how about the COVID crisis, I mean current COVID crisis has most likely an impact. Yes, it has and actually people estimate the reduction of up to 5% in global emission, and we're talking about 2.5 billion tonnes of CO2 in 2020. That's the estimated impact of the economic slowdown because of the COVID crisis in terms of carbon emissions. So clearly, I mean the story is very clear. Global warming is a problem of economic origin, it is caused and fueled by economic growth. [MUSIC]
