Accelerated structural change: the forces that are

breaking global trends

Manuel Pinho 1

February 2018

We are witnessing accelerated structural change in many areas, which creates

uncertainty. To what extent is it different from previous episodes of rapid

transformation? What are the main drivers and at what pace it is unfolding?

What are the main uncertainties? Is it impacting all countries/ regions in the

same way? Is it producing a wave of populism and protectionism? Is the shift in

the global balance of power unstoppable?

Unlike other episodes of structural change, this one is driven not by one but by 6

forces that are operating at the same time. Technological change, the shift

eastwards of the economic center of gravity, the emergence o Globalization 3.0,

urbanization and the energy transition. It is unfolding very rapidly in all fronts

creating feedback loops. For example, China´s rapid resource- intensive GDP

growth produced a commodities super- cycle, which spurred a wave of

investment and technological change, raised climate awareness and prompted

new energy solutions, all along from super low cost variable renewable energies

to innovative transport models. Uncertainties abound, which is no surprise. It is

impacting different countries/ regions on different manners depending on their

development level, institutions, resource endowment, social bargain, etc. It

encompasses a shift if the center of gravity of the world economy to the East, in

2030 4 of the 5 largest economies in the world will be in Asia. Accelerated

structural change is compounded by the rise of China that is challenging an era of

Western dominance that had lasted for more than one century. Populism and

protectionism is rising in some countries, however this does not seem to

correspond to a general trend.

1 Adjunct professor, School of International and Public Affairs, Columbia University, Guest professor, International Business School, Beijing Foreign Studies University.

1

1. A fractured world in an era of prosperity

The world economic outlook is positive. The IMF revised its world 2017 GDP

growth estimate to 3.7 %, ½ percentage point higher than in 2016 and adjusted

upwards the growth forecast for 2018 and 2019 to 3.9%. 2 The growth of trade

volumes is estimated to have increased by more than 2 p.p. and for the first time

in many years the world economy is growing in a synchronized manner. Stock

markets are high and the unemployment is declining in most advanced

economies. In China and India, the 2 most populated countries in the world, GDP

is growing faster than expected. Interest rates remain close to zero and inflation

seems to be under control. Is this cyclical, structural or a combination of both?

This positive scenario has developed at the same time as important structural

transformations are unfolding. Indeed, the structure of the world economy is

changing at an unusually rapid pace, driven by the combined impact of 6 factors:

technological change, the shift eastwards of the world´s economic center of

gravity, a new stage of globalization, urbanization, climate awareness and an

energy transition. Given the scale and scope of this transformation it is no

surprise that it is creating fractures, raising uncertainty and meeting resistance.

Protectionism and populism have emerged in some countries, the most

important examples being the UK that voted for Brexit and the US. However, this

does not seem to represent a global trend given that at the same time, China (Xi

Jinping), India (Modi), Japan (Abe), France (Macron) and Germany (Merkel)

remain committed to developing global trade and reducing carbon emissions, for

example. The new US administration adoption of an “America first” stance

approach encompassing inter alia protectionism, tightening emigration laws and

pulling out of the Paris climate deal did not come from nowhere and is associated

to a large extent with the shift in the world´s balance of power and the social

bargain in the US.

2 http://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-january-2018

2

Important challenges and uncertainties remain. Globalization is facing

headwinds and the possibility that globalization may be stalling cannot be totally

ruled out. Skill- biased technological change and robots are eliminating jobs.

Inequality is rising from high levels by historical standards and the global middle

class is squeezed. The digital revolution, including social networks and artificial

intelligence, is increasingly raising security concerns. In addition to this, a new

order is emerging and experience shows that this process is seldom smooth.

From an historical viewpoint much attention has been given to past episodes of

transition from a dominant power to another one that highlight that this is

seldom a smooth process.

However, there are many reasons to be optimistic. The number of people that

live in absolute poverty has declined to 750 million, from 1, 800, 000 million in

1990, although it remains high in Sub Saharan Africa and South Asia. Life

expectation at birth rose from 65 years in 1990 to 72 in 2015 and the infant

mortality rate declined from 65 to 31 per 1,000 in the same period. The gap

between rich and poor countries has been reduced. Consumers are in the drivers

seat in many areas. Flows of information within countries and between countries

are increasing exponentially. New technologies and business models are creating

tremendous opportunities and making the life of million peoples around the

world much easier, not least they are permitting middle income and poor

countries to leapfrog in several areas. Climate awareness has risen and an energy

transition is under way, which will result in cleaner energy at a cost much lower

than expected and hopefully on the adoption of policies that will avoid

dangerous climate change.

2. Long term GDP growth

3

Several past episodes of structural change have been heralded as unique,

however the picture since the early 19th century remains one of sustained

growth in income per capita. 3

1500 1600 1700 1820 1870 1913 1950 1973 19980

1000

2000

3000

4000

5000

6000

World income per capita

Source: Maddison

World income per capita rose almost tenfold since the 1st Industrial Revolution

prompted by James Watt´s version of the steam engine and around sevenfold

since the late 19th century´s 2nd Industrial Revolution prompted by the internal

combustion engine and electricity. Never before the world had witnessed growth

of income per capita year after year and the Industrial Revolution marked a shift

from Malthusian growth to modern growth driven by technological progress,

more people and better-educated people. 4 main trends have emerged.

First, growth in income per capita has been sustained, i.e. it has taken place year

after year, thereby producing exponential growth. Since 1980, for example,

world GDP grew at an annual average rate of 3.6% p.a. and population by 1.9%.

This period was marked by the 2 largest recessions since World War 2, in 1982

and, more importantly in 2008, that were followed by surprisingly rapid,

although uneven, recoveries.

3 https://minneapolisfed.org/publications/the-region/the-industrial-revolution-past-and-future

4

19801983

19861989

19921995

19982001

20042007

20102013

20162019

2022-1

0

1

2

3

4

5

6

World GDP growth

Source: IMF

Second, the 19th century Industrial Revolution was also a demographic

revolution. World population rose from 1 billion in 1820 to7.5 billion, almost 1/3

of which lives in China and in India, the 2 most populated countries in the world.

0 1000 1500 1600 1700 1820 1870 1913 1950 1973 1998 20100

1000

2000

3000

4000

5000

6000

7000

8000

World Population

Source: Maddison

Third, the West was the main beneficiary, while the rest of the world lagged

behind until recently, which produced “divergence big time”- a large and

increasing gap between rich and poor countries. 4 The United States became

the largest economy in the world and, after World War II, the dominant

power.

4 http://documents.worldbank.org/curated/en/103231468766464256/pdf/multi0page.pdf

5

1500 1600 1700 1820 1870 1913 1950 1973 19980

5000

10000

15000

20000

25000

30000

The West and China

Western Europe United States China

Source: Maddison

Fourth, the Industrial Revolution was predominately an energy revolution based

on heat engines fueled initially by coal that permitted to use unprecedented

amounts of concentrated energy. 5

1820 1870 1900 1913 1940 1950 1973 1990 2008 20350

2000400060008000

1000012000140001600018000

World energy consumption, Mtoe

Fossil Fuels Other sources

To what extent these trends have changed? Technological change did not

stall; on the contrary it is accelerating driven by the digital revolution and its

combination with other technologies. Its benefits are reaching a large

number of people around the world. 6 billion people have access to mobile

phones and 3.2 billion are connected to the Internet. In contrast, important

changes are taking place with regard to demography, the world´s economic

balance of power, climate awareness and energy use.

5 Brynjolfsson, E., A. McAfee, The Second Machine age, Norton, 2016

6

World population growth decelerated markedly and the population is getting

older and more urban, the median age having risen from 24 to 29 years in

1990- 2015 and for the first time ever, more than half of the world´s

population lives in cities. 6 China became the largest economy in the world

and in 2030 4 of the 5 largest economies (China, India, Japan and Indonesia)

will be in Asia. CO2 emissions did not increase for 3 consecutive years and

available evidence indicates that the Paris climate agreement will survive the

US decision to pull out. An energy transition is under way, encompassing a

precipitous decline in the cost of variable renewable energies, energy

efficiency improvements and the emergence of new mobility solutions.

3. Extreme poverty and inequality

The 2 bleak spots are first the sluggish progress in reducing extreme poverty in

Sub Saharan Africa and South Asia, and second the rise in inequality, which both

contribute to a fragmented society.

The record in achieving the 2000- 2015 Millennium Development Goals is

globally impressive mostly as regards income targets. 7 Indeed, the number of

poor living with less than 1.9 $/ day declined by 1, 200 million in 1990- 2015.

1990 1999 2011 2012 20150

500

1000

1500

2000

2500

19591751

963 897702

Number of poor leaving with less than 1.9 $/ day

6 https://esa.un.org/unpd/wup/

7 http://pubdocs.worldbank.org/en/503001444058224597/Global-Monitoring-Report-2015.pdf

7

Source: World Bank

Progress in achieving the non- income targets has been more modest and gains

were uneven. Indeed, while progress in Asia was remarkable, in Sub Saharan it

remains at unacceptable high levels.

At the same time, global inequality within countries, as measured by the share of

the 10% richer in GDP, has risen markedly in the last 35 years and is reaching

the levels observed in the early 20th century. 8

19211928

19351942

19491956

19631970

19771984

19911998

20052012

0

0.1

0.2

0.3

0.4

0.5

0.6

Share of the 10% higher incomes

USFranceGermanyChinaUK

Source: World inequality Report 2018

According to the 2018 Oxfam report, 2017 witnessed the largest increase ever in

the number of billionaires and 82% of the growth in global wealth went to the

top 1%. 9 The 2018 Picketty Report shows that the early 80´s marked the end of a

more egalitarian period and that since then the share of the global top 10%

earners rose to the levels of the early 20th century and they captured twice of

the growth of global income as the 50% poorest. 10 However, there are marked

differences among countries resulting, for example, from inequality in the access

8 http://piketty.pse.ens.fr/files/ACPSZ2017NBERWP.pdf

9 https://www.oxfam.org/en/research/reward-work-not-wealth

10 http://wir2018.wid.world

8

to education and the progressivity of the tax system, which highlights that

inequality is also the result of societal choices. Among advanced economies, the

US stands out as the country where inequality is the highest and where it has

increased the most in several aspects.

Europe

China

Russia

US- Can

ada

Sub Sa

haran

Afri

caBra

zilIndia

Middle

East

010203040506070

Source: World Inequality Report 2018

4. The 6 drivers of change

In the early 21st century change accelerated. In retrospect, 2007 was a

watershed. The genome was mapped. The iPhone and Google street view were

launched. Amazon released Kindle. Facebook went public and Alibaba was listed

in the Hong Kong stock exchange. George Mitchell started the production of shale

gas in Texas. The current episode of global transformation has 3 specific

features.

First, it is not driven by one, but by six main forces operating at the same time:

digitalization, the dislocation Eastwards of the world´s center of gravity,

globalization 3.0, urbanization, increasing climate awareness and an energy

transition.

Second, it is unfolding at an extremely rapid pace. Examples are abundant. The I

Phone was launched only in 2007 and the I Cloud and Siri in 2011. Airbnb was

created in 2008 and became the largest hotel chain in the world without owning

one single hotel. Solar power was bid at below 30$/ Mwh in Chile, compared

9

with more than 100$/ Mwh paid to power generated in the Hinckley Point

nuclear reactor. All Volvo cars will be electric or hybrid as from next year.

Third, it is taking place at the same time that a new global order is emerging

where the Western dominance is being challenged by the rise of China as a

superpower and the shift of the economic center of gravity of the world to Asia.

The share of China, Japan, India and Korea in world GDP is already higher than

that of the US and the EU combined.

China, Japan, India, Korea; 32

US, EU; 31.3

Rest of the world; 36.7

Share in world GDP

5. Digital revolution

We are witnessing unfold a technological revolution based on digital hardware,

software and networks the nature of which is different: it is

Exponential ❨every year, the amount of integrated circuit computing power

that can be bought with 1 dollar doubles).

Digital ❨the marginal cost of scaling up production is zero and digital goods

are non rival) and

Combinatorial ❨for example drones are the result of the combination of data

processing, sensors and digital imaging technologies).

The speed of change, as witnessed for example by the increase in computer

power of the large digital platforms, is impressive.

10

2013Yahoo 2014 Baidu 2015 Alibaba 2016 Tencent0

10203040506070

Computing power, terabytes processed in one minute

Source: McKinsey

Think of a Honda Civic that costs 20, 000 dollars in the US. If the same principle

of integrated circuits applied to car manufacturing, a Honda Civic would cost

only 75 dollars in 2025. Although the digital revolution has already produced

many changes, its end is not near and in the US, 4 or the 5 and 6 of the 10 largest

companies by market cap are digital based.

Company Market cap billion of US dollars

1 Apple 688

2 Alphabet 528

3 Microsoft 455

4 Amazon 466

5 Berkshire Hathaway 418

6 Exxon Mobil 357

7 Johnson and Johnson 367

8 Facebook 344

9 JPMorgan Chase 341

1

0

Wells Fargo 323

Most people have smart phones, many of which have more capacity than the

supercomputers of the past. What’s App was launched in 2010 in the US and the

11

number of subscribers grew to 1.2 billion. One year later, We Chat was launched

in China, where it has reached rapidly 1 billion subscribers that spend on

average 60 minutes per day using this app. Siri was launched in 2010 and the I

Cloud one year later. The rate of adoption of new technologies is tremendously

fast and innovations can be easily replicated.

A visitor to China in 2010 would be surprised by the contrast between the

modernity of the country in terms of infrastructures and access to luxury goods

and how difficult it was to open a bank account, get a credit card and make

payments and he would try to figure out how this complex problem could be

solved. A few years later, a visit to a supermarket in Beijing shows that very few

people currently use currency and credit cards, most make payments with their

smart phones using we Chat- pay and Ali- pay. Amazon has 250 million clients,

while Ali Baba has 500 million; it ships 12 million packages per day, compared

with 3 million by Amazon. In 2016, it sold 18 billion $ in single´s day.11

The digital revolution combines with other technologies such as sensors,

artificial intelligence, 3 D imaging and robotics to turn everything upside down at

an amazing pace. In 1997, Deep Blue beat Gary Kasparov. In 2011, Watson

defeated Jeopardy´s champions. In 2016, Google´s Alpha defeated the Go´s world

champion. In 2017 and Alibaba´s Al outscored at Stanford top humans at a

language and comprehension test processing. Phantom IV, the top DJI mass

consumer drone manufactured in Shenzhen sells at less than 1, 000$. In 2012,

the first 3D- printed prosthetic jaw was implanted. And the best is yet to come

given the nature of the digital revolution.

6. Shift eastwards of the center of gravity

The economic center of gravity of the world is shifting eastwards. In retrospect,

1980, when economic reform was launched in China led by Deng Xiaoping, was

the turning point of the second half of the 20th century. The economic record of

11 https://www.cnbc.com/2016/11/11/singles-day-news-alibaba-poised-to-smash-records-at-worlds-largest-online-shopping-event.html

12

China since then is impressive and the speed at which the economic balance of

power has taken place has no precedents.

19801983

19861989

19921995

19982001

20042007

20102013

20162019

20220

5

10

15

20

25

GDP growth Share of world GDP

Source: IMF

Since 1980, the economy expanded at an annual average rate of 10% doubling in

size every 7 years and the share of the country in world GDP rose from less than

3 to more than 18%, overtaking the US as the largest economy in the world by

GDP expressed in PPP. However, income per capita remains at a level similar to

Brazil and Mexico and avoid falling in the middle- income trap remains a

challenge.

The importance of China cannot be understated. In 2014, it became the largest

economy in the world. It is the world´s largest energy consumer since 2008. In

2011- 2013 it used more cement than the US´s cumulative consumption in the

entire 20th century. Assuming that its GDP will grow at an average rate of 5%

until 2030 and in the US at the potential rate estimated by the CBO, in 2030 GDP

in China will be 30% higher than in the US. The idea of Western weakness is

evident and creates risks, the emergence of populism in the US and the UK being

a clear sign.

Industry still accounts for around 40% of GDP in China, compared with 19% in

the US, and 28% both in Germany and Japan. China is unusually open by the

standards of a large economy; it became the largest exporter and the second

largest importer in the world and holds the largest external reserves, by far. It

13

has been a strong beneficiary of globalization, however although net exports

have led GDP growth until the GFC, it is not the case anymore, as a result of the

rebalancing of the economy from industry, investment and exports towards

services and consumption, which are part of the so- called “new normal” of

“lower but higher quality growth”. China has the capacity to adapt to

protectionism much better than in the past. China produces roughly the double

of cars than the US. Its high- speed train network is 5 times the distance from

New York and Los Angeles and its companies have a 75% market share of the

equipment market. It accounts for 43% of the world´s EV production. It is

developing innovative transport sharing solutions. 12

China is rapidly shifting from manufacturing of low to higher value added

products based on a focused industrial policy, China 2025. It has a strong

scientific base, highly skilled resources, not least a large domestic consumer

market. 13 It ranks 2nd in the world by number of scientific articles 14 and first by

patents and trademarks. 15 Priorities include high- end biopharmaceuticals, new

transport solutions, integrated circuits and new generation IT and advanced

manufacturing and robotics.

Digital industries are a top priority. China has 3 world- class players, Alibaba,

Tencent and Baidu, is the undisputed global leader in mobile payments, has more

internet users that the US and the EU combined, holds the world record in

computing power and has the 2 fastest supercomputers and 150 out of the 500

fastest computers in the world. 16

12 https://www.mckinsey.com/global-themes/china/chinas-electric-vehicle-market-plugs-in

13 http://onlinelibrary.wiley.com/doi/-10.1002/app5.177/full

14 http://www.scimagojr.com/countryrank.php

15 http://www.wipo.int/edocs/pubdocs/en/wipo_pub_941_2016.pdf

16 https://www.mckinsey.com/~/media/McKinsey/Global%20Themes/China/Chinas%20digital%20economy%20A%20leading%20global%20force/MGI-Chinas-digital-economy-A-leading-global-force.ashx

14

China has impressive challenges ahead, all along from deregulating services,

reducing financial leverage, reducing pollution, inequality and the number of

people in rural areas. There are many uncertainties. However, its rise is a game

changer.

7. Globalization 3.0

Globalization is facing headwinds, mostly in the US, where it is blamed for being

responsible for the destruction of manufacturing jobs and the rise of inequality,

among many other evils. At the same time, there is a heated debate about

whether it is stalling. 17

The IMF refers to globalization as ″the increasing integration of economies

around the world, particularly through the movement of goods, services, and

capital across borders″. Globalization fueled prosperity since World War II, the

first decline in global inequality since the 19th century and lifting hundreds of

millions of people from poverty.

The world is in its 2nd globalization experiment, the first (1880- 1930) ended

with the Great Recession, which was followed by World War II and the second

dates from around 1980 to the present. The current liberalization experience has

3 distinct stages.

The first (Globalization 1.0, 1980- 2000), corresponds to a period of proactive

measures to liberalize trade, China´s accession to the WTO and opening up of

capital accounts. World trade, as measured by the share of imports in world GDP

rose from 15 to 24%.

17 https://drodrik.scholar.harvard.edu/files/dani-rodrik/files/populism_and_the_economics_of_globalization.pdf

15

The second (Globalization 2.0), from 2000 to 2008- 2012, was marked by the

acceleration of global supply chains, the phenomenal growth of China´s exports,

unprecedented exports of equipment goods by advanced economies to fuel China

´s industrialization, increasing capital flows until the GFC and a once in a

generation commodities super- cycle, the beneficiaries of which were the natural

resources exporters that became the fastest growing economies in the world,

together with China. Globalization 2.0 was intrinsically unstable and could not

last forever.

The beginning of the third (Globalization 3.0) was marked by the precipitous

decline in capital flows that followed the GFC, the end of the commodities super

cycle around 2012, the compression of global supply chains and the stagnation, if

not a decline, in the share of trade in world GDP. At the same time, cross border

data flows are increasing exponentially and paradoxically it may be argued that

the world has never been so connected. Indeed, the trend of global trade

slowdown and declining cross border financial flows has been offset by an

exponential increase of data flows permitted by the digital revolution.

. According to McKinsey, “cross-border data flows are increasing at rates

approaching 50 times those of last decade. Almost a billion social-networking

users have at least one foreign connection, while 2.5 billion people have email

accounts, and 200 billion emails are exchanged every day. About 250 million

people are currently living outside of their home country, and more than 350

million people are cross-border e-commerce shoppers— expanding

opportunities for small and medium-sized enterprises to become “micro-

multinationals.” 18

18 The global forces inspiring a global narrative of progress, McKinsey, 2017 http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-global-forces-inspiring-a-new-narrative-of-progress

16

19801983

19861989

19921995

19982001

20042007

20102013

0

5

10

15

20

25

30

35

Share of trade (imports) in world GDP

RealNominal

Source: World Bank

Numerous studies attempted to assess if the slowdown in world trade is cyclical

(lower world GDP growth) or structural (shorter value chains or protectionism). 19. Available evidence indicates that the slowdown of world trade predates the

GFC and that the main causes are the slowdown of imports of investment goods

due to cyclical reasons, compression of global value chains, the collapse of the

price of natural resources and a China- effect reflecting the rebalancing of its

economy towards consumption and services.

Several studies confirm that world trade growth in general, and exports by

China, had a positive impact in third countries by rising productivity in the

sectors exposed to more competition, reducing the cost of intermediate inputs,,

improving resource allocation and the quality of intermediate inputs and

lowering the price of consumers goods. 20 At the same time, recent studies show,

unsurprisingly, that the so-called China shock destroyed jobs in a few industries

19

Measuring and Analyzing the Impact of GVCs on Economic Development, https://www.brookings.edu/wp-content/uploads/2017/07/tcgp-17-01-china-gvcs-complete-for-web-0707.pdf#page=4&zoom=auto,-79,611 World Bank, 2017

20 https://piie.com/publications/working-papers/global-competition-and-rise-china

17

in the US. 21 That should not be taken as an argument against free trade but,

instead, as a case for more active policies to support labor mobility.

8. Urban world

The fourth driving force is urbanization. It is not only a shift from the West to the

East, but also that from rural areas to cities. For the first time ever, more than

half of the world population lives in cities. The speed of change is impressive.

Since 1990, the share of urban population in the world rose from 43 to 55% and

it is expected to reach 63% in 2030.

19501960

19701980

19902000

20102020

20302040

20500

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Urban areas Rural areas

Source: United Nations

Urban habitants get richer given that they have higher skills on average, they

have the opportunity to perform more specialized tasks and enjoy economies of

scale. The largest 600 cities account for 20 p.c. of the world population but more

than 50 p.c. of world GDP.

Their projected contribution to world GDP growth in 2010- 2025 is 65 p.c.

Among them, stand out the so- called Emerging 440, a group of medium and

large cities in developing counties of which 242 are in China.

21 https://economics.mit.edu/files/9811

18

The growth of the urban population in developing and middle- income countries

creates a tremendous opportunity to develop consumer spending and

investment in areas such as ports, airports and buildings.

In a period when accelerating technological change will destroy jobs, developing

and middle income countries enjoy the cushion provided by the increase in

consumption and investment from rapid urbanization.

Emerging 440; 47Other emerging large cities; 14

Emerging small cities; 13

Developed small cities; 5

600 cities expected to account for 60 p.c. of world GDP growth

Source: McKinsey

9. Climate awareness

The fifth force is climate awareness. There is undisputed evidence that the

climate is changing due to man- made causes, mostly by the release of carbon

from the combustion of fossil fuels and that this may produce effects that are

irreversible and difficult, if not impossible, to quantify. Climate change is a global

externality, the solution of which needs the contribution of all countries and it

does not require only halting the growth of carbon emissions: they must be

halved from current levels in the next decades. This was known in 1997 when

19

the Kyoto protocol was agreed; however progress in international climate

negotiations stalled given the high cost in adopting new technologies, mitigation

in climate jargon, not least by the lack of commitment of large emitters.

Recent data show that, surprisingly, carbon emissions are flat since 2014 as a

result of slower growth of energy consumption, stronger energy efficiency

improvements, development of clean energy sources and the switch from coal to

natural gas. This is positive; markets drive it more than by policies, however it is

clearly not enough.

19651972

19791986

19932000

20072014

0

10000

20000

30000

40000

50000

60000

70000

80000

Emissions by regionCarbon emissions in Asia Pacific MTCO2Carbon emissions in Africa MTCO2Carbon emissions in Middle East MTCO2Carbon emissions in Europe & Eurasia MTCO2Carbon emissions in S. & Cent. America MTCO2Carbon emissions in North America MTCO2Carbon emissions in World MTCO2

Axis Title

Source: Carbon budget

The carbon budget, the maximum amount of CO2 permitted to avoid global

temperature rising by more than 2 C is estimated at 1200- 1500 Gt for a 50%

degree of probability and just 1560- 975 Gt for a 80% degree of probability,

which compares with emissions of around 40 Gt/ year. 22 Time is of the essence.

After many years of slow progress, Paris COP 21 was an important step in the

right direction, although it has limitations. Paris COP 21 is essentially an energy

deal based on a bottom up approach and its success depends above all, contrary

22 https://www.carbontracker.org/reports/carbon-budgets-explained/

20

to common belief, mostly on developing countries. It is a step in the right

direction, although it has limitations. 23

The US pulling out from Paris COP 21 is not a welcome development, however it

is unlikely to derail the global commitment to address climate change. It is likely

to do more harm than good to the US.

10. The energy transition

Last but not least, energy is in a state of flux and the speed of change is

impressive. Since 2008, the cost of solar panels declined by 90% and oil

production in the US rose by the equivalent to more than Russia´s exports.

19651969

19731977

19811985

19891993

19972001

20052009

2013-

2000

4000

6000

8000

10000

12000

14000

US oil production

Source: BP

An energy transition is under way and this trend is unstoppable given that the

power is shifting to technology and demand, although supporting policies remain

extremely important. Climate change acted as a wake up call to raise the

awareness of the need to produce clean energy at an affordable cost and it

created an opportunity that is delivering unexpected positive results. The

precipitous decline in the cost of variable renewable energies (wind and solar),

not to mention the global decline in energy per unit of GDP and the discovery of

abundant natural gas were totally unexpected.

23 https://www.carbonbrief.org/paris-2015-tracking-country-climate-pledges

21

The one bleak spot is that progress notwithstanding 15% of the world

population still has no access to electricity and more than 40% to clean cooking

facilities. In Sub Saharan Africa, less than 40% of the population has access to

electricity.

The energy system is being turned upside down as a result of 4 forces. The US

became the undisputed leader of oil and gas production for many years. China,

by far the largest energy consumer in the world adopted a blue- sky policy based

on the rapid deployment of renewables and, more recently, of electric vehicles.

Variable renewable energies are becoming the cheapest source of electricity

generation and, combined with digital technologies and advances in energy

storage, are producing a decentralized electricity model. World energy

consumption is growing at a slower pace and demand for electricity has been

growing faster than that of primary energy.

The shale oil and gas revolution turned the US in the new Saudi Arabia. At the

same time, China became the largest investor in variable renewable energies, a

dominant force in solar equipment manufacturing, a serious investor in

electricity storage technologies and will shape, to a large extent, the future of

electric mobility.

The cost of variable renewable energies declined precipitously. Wind costs have

fallen 50 p.c. since 2009 and solar module costs by 80 p.c. since 2009.

Unsubsidized solar power was bid at below 28 dollars per kilowatt-hour in

countries with high solar exposure, onshore wind at 30 and offshore wind at 50,

which compares with 120 dollars in the Hinckley Point nuclear power plant in

the UK and is much lower than coal generation.

Overall, the growth rate of world energy demand has fallen by half. Energy

consumption is flat, or even declining, in advanced economies. In middle income,

including China, and developing countries it is growing slower as a result of the

combined effect of more rapid gains in energy efficiency and lower GDP growth.

Everything is becoming more efficient, all along from LED lighting, A+++

appliances and lower fuel consumption by cars.

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1971 1976 1981 1986 1991 1996 2001 2006 2011 20160

500

1000

1500

2000

Primary energy consumption in World MTOE 5 years deltas

Source: BP

Super low cost variable renewables, digitalization and declining storage costs are

turning upside down the traditional utilities model and market design. The

transition will not be easy, as highlighted by the stranded assets in Germany´s

power sector and by the decline of the load factor of thermal generation and

curtailment of renewables in China. The future is difficult to predict given that it

depends to a large extent on 2 factors: the capacity to produce batteries at a

lower cost and the future of mobility. 24 25

Change is accelerating, as witnessed by the decline in the cost of batteries, a top

brand carmaker like Volvo announcing that it will stop using internal

combustion engines in 2019 and the French government that ICE´s will not be

allowed after 2040. 26 This will radically transform the energy system, as we

know it.

Conclusion

24 Back to the future, electric vehicles and oil demand, BP energy economics http://www.bp.com/content/dam/bp/pdf/speeches/2016/back-to-the-future-electric-vehicles-and-oil-demand.pdf

25 http://www.dieterhelm.co.uk/books/

26 Levelized cost of storage analysis 2.0, Lazard https://www.lazard.com/perspective/levelized-cost-of-storage-analysis-20/

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Structural change of the world economy is widespread and is progressing at high

speed as a result of extremely rapid technological change, the shift eastwards of

the economic center of gravity and the evolution of globalization, urbanization,

climate awareness and an energy transition. This creates immense opportunities

and at the same time produces deep uncertainty, raises challenges and requires

policies to support those left behind. At the same time that this transformation is

unfolding, the rules- based order that emerged from World war II is under

pressure, the US being challenged by the rise of China, which became the largest

economy in the world, although it remains a middle income country and is

confronted with serious challenges.

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