Under resource-constrained circumstances and in economic uncertainty, the most economically efficient, sustainable urban development options will be selected and prioritized.
By Andrew McKillop
Published September 09, 2009
Prepared for presentation to the Ecocity World Summit, December 13-15, 2009, Istanbul
All three of these main drivers for urban transition are in crisis, and in transition themselves. Due to this, the outlook is uncertain and the decisional and strategic challenges are yet more intense.
As we often hear or read, "world oil reserves are sufficient for about 30 - 40 years of current consumption", as if present global output would continue in a straight line, then suddenly plunge to zero, and not trace a curve with a peak about now.
Even if reserves last another 35 years, production by 2025 will likely be 25%-33% below today's production. With the global economy we have what the IMF often calls 'the worst economic recession since 1945', truly massive 'Keynesian type' deficit spending to try beating recession, but above all we have extreme incertitude, ambiguities, and lack of visibility going forward.
The climate crisis is now the driver for massive change in the world's energy supply systems, the car industry, and in other industries, and across the economy and society. Climate change is often described as one of the greatest challenges facing humanity. This may be so, but it ignores the long and menacing list of other environmental and ecological risks and dangers facing the human race and the planet.
Taking only food, energy and water supplies for current and future urban systems, we face an accumulated and interlinked series of critical limits on continuing as present, that is 'business as usual'.
Understanding these challenges makes it not only desirable, but obligatory to build ecologically sustainable, low carbon, convivial and economically successful new cities, restructure existing cities, and develop new or restructure existing human settlements of all kinds.
Mapping the likely trends, explaining the context, and identifying strategic options for deciders is difficult and complex but is above all vital to everybody.
As a recent press report (on the BusinessWeek website, August 31) put it: "Plans to construct Eco-Cities around the world were stunted by recession. But green developments are again luring governments and investors. Plans to build ultragreen model cities seem to be reviving, with the recession easing and oil prices rising."
The two highlighted factors, supposedly reviving confidence in low carbon city development, are higher oil prices and the recession apparently easing. As we will see later on, neither of these two trends are sure and certain.
The linkage is, however, clear: some types and kinds of ecocity development spending and investment are energy price and economy-linked. Decision making includes the outlook for oil and energy prices, and the general economic context, but it also includes a large number of other factors.
There are many 'push factors' towards sustainable urban development. This concerns both new city construction, and the restructuring of existing urban habitat, urban resource supplies, transport, food and energy to achieve lower environment impact, more efficient energy utilisation, increased economic sustainability, generate and sustain employment, and reduce CO2 emissions.
These push factors are in fact intensified by a widening set of environmental concerns, which extend from urban and urban regional, to national, international and global environmental issues and factors. The climate crisis is only one element in a very large sweep of environmental concerns, but if we stay with the climate change issue we can see how radically this concern has grown in the space of 15 years.
From an essentially science and policy issue, mitigating climate change has become almost obsessional, almost a crusade. Climate change mitigation is now the long-term focus for almost open-ended change in energy systems, the economy, society - and urban development.
We can start by briefly looking at the ever-rising impact of climate change mitigation on the economy. Taking the case of trading and financial activity in CO2 credits, CDM offsets and derived financial instruments, the World Bank estimates annual turnover in 'carbon finance' as attaining about $125 billion [all figures in US dollars] a year for 2008-2009.
The 2009 Davos Forum in a special report identifying priority sectors (mostly in renewable energy), forecast that investment and spending to fight climate change should quickly rise to an average of about $515 billion a year for the period 2010-2020.
My report to Australia's FINSIA (financial services institute), published in June 2009, on renewable energy and energy saving investment to substitute likely or probable global oil production capacity losses over 2010-2025, of about 25 Mbd, suggested this investment need would grow to at least $750 billion a year.
Reports and estimates published since 2006 by the OECD, by the UN IPCC and by national government agencies in several countries, on climate change mitigation spending needs, range from about $250 billion a year to much higher estimates. Where these forecasts also take specific account of oil depletion and substitution of fossil energy sources with renewable energy, economic restructuring to save energy, and shifting the economy and urban systems towards sustainable bases, many estimates and forecasts rise to as much as $1 trillion a year by 2015-2020.
Looking more closely at these and other estimates and forecasts for spending to combat climate change and the effects of Peak Oil, preserve global biodiversity, and assure future supplies of food, water, minerals and metals, and other resources, we are forced to conclude three things.
These estimates are unsure and uncertain, constantly rising, and are set in a shrinking time horizon. An idea of their huge size is easy to obtain. We can note that the most recent peak year of spending by the world's oil and gas industry (2006-2007) resulted in about $ 400 billion being invested, with only a very small net addition of supply capacities.
IEA estimates for world oil and gas industry investment to maintain or increase combined oil and gas supply levels of about 139 million barrels oil equivalent per day in 2008, are of needs rising to around $ 1 000 billion a year by 2016. We can note that the international motor vehicle manufacturers' organization OICA estimated global car and road vehicle industrial output in the most recent peak year (2007) as attaining about $2 trillion.
Using IMF data, world total GDP in 2008 had a value of about $63 trillion.China's foreign exchange reserves in midyear 2009 were about $2 trillion, and the GDP of India was about $1.3 trillion in 2008. The value of OPEC oil exports at about 28 to 29.5 Mbd, assuming a year average price of $ 100 a barrel would be about $1.05 trillion per year.
To be sure, urban investment needs in coming decades will be high or very high. In a context of low economic growth or recession, finding these resources will present many challenges. The size of investment needs is raised by accumulated and past under-investment, and widening knowledge of the scope and size of problems we face.
The growth of needs is now further increased by the combined need for climate change mitigation spending, investment in energy transition and to fight oil depletion, and investment needs in urban transport, food, water supply and the renewal and increase of economically productive capacities.
By 2030, on current trends, the population of the world's cities may grow by 1.4 billion from the present estimate of about 3.25 billion. This alone sets extreme high investment needs, if we are going to avoid proliferating numbers of slums becoming the norm for future urbanism, with a direct negative impact on economic performance and human security.
Unfortunately however, despite the absolutely key role of cities in national economies, urban investment may be a 'poor cousin' to other spending needs, perceived as more urgent, and especially fighting climate change - and fighting recession. We may find that current economic recession impacts on city development, tending to cut investment budgets worldwide, are not compensated by a return of investor support to a few higher cost eco city projects in a few countries.
In particular, where renewed investment depends on higher oil prices and 'green shoots' recovery, any retracing of global economic growth or fall in oil prices can compromise the return of investment flows, and again make these high profile projects unsustainable.
One basic problem for mapping and forecasting likely trends in sustainable urban investment and development is therefore incertitude. Previously, it concerned decisional inertia and the syndrome of 'its somebody else's problem'.
Taking only the subject of the economy, a lot can be said about the current recession, but the most important starting point for any comment is the global economy's extreme lack of visibility, that has existed all through the period since the crisis started in 2007-2008 and has continued through 2009.
Firstly we can say the recession probably started in 2007-2008 through a combination of high or extreme public, corporate and private debt, and declining economic growth. Other factors triggering the recession probably include the extreme amounts of highly leveraged and opaque, complex financial derivatives that are traded (with a global and nominal value, today, of probably $ 50,000 trillion, not billion).
Surprisingly for sophisticated instruments, these very often generated zero sum game (total loss) outcomes under crisis conditions.
The recession was likely heightened by oil prices peaking around $145 a barrel in 2008. Previous to this, however, during 2004-2007, the steady rise in oil prices and linked commodity prices very likely intensified economic growth through what I call 'petro keynesian growth' impacts.
High oil and energy prices however also intensified resource-linked and environment-linked supply limits for metals, minerals, food and bioresource, and water supplies. Rapidly rising basic resource costs for the economy then tended to further intensify the fall in economic growth.
As we know, energy and food prices are specially focused by economic deciders, due to their role in inflation and economic growth. The problem is that world food, as well as world oil are now in what we could call 'permanent crisis' conditions. As the FAO and entities such as CGIAR and IFPRI report, world food shortage, caused by economic, political, environment and resource factors like oil shortage now affects more than 900 million persons.
Numbers of persons facing acute food shortage grew by about 9% in 2007-2008, while the global economy grew by about 4%. Using IMF forecasts for global economic growth in 2009, which are rising but will at best be 1% for the full year, estimated growth in the numbers of starving and malnourished persons, simply due to recession impacts pushing down food prices, may be less than 1.5% to 2% in 2009.
World agriculture takes about 75% of world fresh water production, and in many countries food production is extremely oil and chemicals intensive, linking food prices very rapidly with any rise in oil prices.
As the Millenium Ecosystem Assessment notes, world food and agriculture focus an increasing number of convergent ecologicial and resource limits on future expansion without a radical change in methods and approaches, featuring resource conservation and low energy.
Several factors, including food prices as the IMF and other sources caution, make it unlikely that global economic growth could quickly return to the 'petro keynesian growth' highs attained in 2004-2007, near to 5% a year, during which oil prices and economic growth rose in a twin spiral.
For oil the reason is simple. The world is very close to peak oil output, meaning that any return of strong economic growth will very rapidly push up demand, driving oil prices back to high levels.
One other key factor probably limiting or capping economic recovery is the vast amounts of new debt, mostly public, that has been created in 2008-2009, to fight recession. One of the causes of the crisis, we can recall, was fast rising and extreme levels of accumulated private and corporate debt.
Public debt growth has now taken over. Several large OECD countries now have government spending deficits equal to or above 10% to 12% of annual GNP. National public debts have grown very fast, by very large amounts, in many countries. World interest rates are at extreme lows and for the moment inflation is low, but this in fact means both can rise and will tend to rise.
In theory, economic recovery should be assured by the unprecedented amounts of 'classic keynesian' deficit spending and intervention in the economy that has taken place in 2008-2009 (probably $4 trillion to date) and that is continuing today.
In theory, the rebound out of global recession could be as sharp, and steep as the entry to recession. Also in theory, economic recovery should be further supported by near-term and large, or very large coming investments in Cleantech and Alternate energy, climate change mitigation, sustainable natural resources production, and sustainable economic development.
This easy conclusion is, however, very far from sure and certain.
The economic outlook is not only uncertain but is also complex. It includes energy prices, but also includes interest rates, the value of the US dollar and other moneys, national and private debt, inflation rates, and investment spending. Gauging what amounts will go to sustainable urban development, without a change in national priorities, is difficult.
We can easily make estimates on spending needs for urban development and restructuring, depending on factors like plot ratios, target population size, per capita energy and resource demand, local or regional resource endowment, site conditions, national and urban economic activity and so on.
Taking the forecast of 1.4 billion additional city residents by 2030, as noted above, and adding sustainable development imperatives this can only result in very high investment needs. Availability of investment funding genrally depends on relatively strong and sustained economic performance. This is, however, far from sure, indicating that needed urban transition investment and spending will demand major changes in national investment priorities and policies.
In other words, the key role of cities means that special frameworks will be needed, exactly like investment for fighting climate change, fighting oil depletion, and fighting recession.
This would rank sustainable urbanism along with these other new priorities. These are all now recognized as so urgent that previous limits on mobilizing resources have been rejected, waived or vastly expanded.
As already noted, more than 50% of the world's population is now urban, and increasing. As already noted, the urban economy is vital to every country on earth. Rising oil prices linked with and driven by anticipations of economic recovery have, as noted above, tended to revive some eco city development projects in some countries.
Any recovery and peaking of oil prices to the 2008 high of about $145 a barrel would almost certainly trigger a new, but this time even deeper global economic recession.
This, however, underlines the uncertainties facing the task of forecasting likely ecocity investment trends. As we know, the radical fall in economic growth and stock market index numbers in late 2008 and early 2009 led to world oil demand falling about 3.5% and oil prices falling about 75%.
To be sure, a 'symmetrical bounce', the other way, could be imagined but is simply not sustainable. Any recovery in oil prices to more than about $100 a barrel, according to Ben Bernanke, the US Federal Reserve president speaking at the August 2009 Jackson Hole meeting of central bankers, would quickly lead to inflation and defensive interest rate hikes.
Any recovery and peaking of oil prices to the 2008 high of about $145 a barrel would almost certainly trigger a new, but this time even deeper global economic recession.
The recent cycle would repeat. Any renewed activity in 'big ticket', high-tech, prestige eco city projects would either be reduced or abandoned.
We therefore have to underline that global economy trends in the 2010-2015 period are almost certainly not going to repeat 2005-2008 trends. To be sure, everyone hopes the global economy recovers, but slowly and without inflation and high oil prices. The immediate problem, here, is that if the recovery is only slow and weak through 2010, the problem of now extreme high national public debt in many countries, for example the USA, Japan, UK, Italy, Ireland, the Baltic states, Ukraine, Hungary, Pakistan and elsewhere will become very acute as unemployment continues to rise.
In some ways, we are condemned to fast economic recovery, to fight public debt and stem job losses, but must not have fast economic recovery, because of its impacts on oil prices and inflation.
Under conditions of economic uncertainty, lower cost and more economically efficient strategies will be more attractive than ever. The Cleantech sector, we can note, is predicated on finding more efficient, lower cost, more intelligent and more sustainable resource and energy solutions.
Forecasting global economic trends and world oil prices is difficult and complex at this time. There are also several counter-intuitive factors in play, in a general context of uncertainty and low visibility.
One clear counter-intuitive factor is the rush to invest in Cleantech and Alternate energy and its impacts on energy prices. This will raise energy prices in the short-term, not reduce them, due to radically rising total energy sector investment needs, and rising levels of carbon taxation.
Higher energy prices are uniformly regarded by government and business deciders as negative for economic growth, food and resource prices, and inflation. Spending as much as $400 or $500 billion a year on renewable energy by about 2011-2012, supposing it was technically and industrially feasible, which is not sure, will itself create high inflation pressures inside the world energy industry. This will again feed back as higher energy prices.
Within the fossil energy sector, we will find that natural gas prices mainly due to fast rising global LNG supply will tend to stay low in the near-term, while oil prices can rise to new extreme highs, if economic growth returns. Coal and uranium demand growth will be high under this scenario, resulting in a high energy price context. In turn, this will tend to draw natural gas prices up, perhaps by 2012.
We can take another counter-intuitive example. This concerns the rush to develop and mass produce electric cars and electric vehicles (EVs). Several major car producers have announced plans to raise EV output to several hundred thousand a year, by early 2011.
The current world car and light vehicle road and land transport fleet, about 98% oil fuelled, numbers about 900 million units. Replacing even one-half of these by EVs within 15-20 years from about 2011-2012 would need the most massive industrial investment effort ever known in peace-time conditions.
Even if supply problems for lithium, neodymium and other rare earth metal resources needed for batteries and motors are overcome, we will have a massive electric power capacity problem for recharging large world fleets of EVs. Recharging say 100 million EVs at any one time (equivalent to 11% of the current world fleet of cars and road vehicles) at a power rate of 4kW to 6kW each, would need about 500 000 MW of new power plant capacity.
As we know, wind energy is a favorite for investors and government deciders, leading to very fast growth (about 5% of total EU27 electricity demand is now supplied by wind). World total installed wind electric power capacity presently stands at around 125 000 MW, but this is only a quarter of potential electric power capacity needs to recharge a world EV fleet equivalent to only 11% of current oil fuelled road vehicles.
Staying with this example, EVs, the rational solutions include targeted and controlled urban fleet utilisation with linked infrastructure development of dedicated park-and-recharge centers using a high proportion of "green" or low carbon electricity. These centers could be located in city transport nodes such as airport areas, large train sidings outside the central area, port areas (where these exist), on recovered land, close to municipal waste dumps with lower land costs and potentials for methane gas recovery - and so on.
Free-for-all development of personal use EVs needing central city battery swap centers or street recharging at all times of the day will generate such large costs and diseconomies that municipal and national authority support to EV development would be outstripped by exploding costs. Private corporations and entities with an interest in urban infrastructures, transport and power supply infrastructures will be advised to search and select the most economically efficient options for urban EV fleet operations.
Once the clear limits on potential upper numbers for EV fleets is known and appreciated, other sustainable urban transport options can be integrated, in resource efficient and economically efficient solutions tailored to each city. Staying with transport and as we know, electric vehicles in the shape of trams and underground metro trains have existed for a long time, and efficiently satisfy a very large amount of urban transport needs in many large cities.
Neither trams nor metro trains are primarily private transport modes. Urban design to limit transport needs in new cities, and restructuring of existing cities to reduce transport intensities will also enable the generation of fully economic and rational solutions, including public-private municipal initiatives and action.
Under resource-constrained circumstances and in economic uncertainty, the economically efficient, sustainable urban development options will be selected and prioritized. These will of course extend right across the issues and concerns covered in this paper, that is sustainable options for energy supplies, food and water supplies, urban transport, habitat construction, restructuring and operation, economic development, and other areas.
In each case, integrative solutions to share upstream infrastructures and their development costs will be favored. This factor is beginning to be recognized and quantified, through analytic frameworks including 'full cycle EROI', that is Energy Return On Investment throughout the upstream-downstream cycle of infrastructures, production, utilisation, end-use wastes, end-of-life dismantling, onward recycling, and so on.
One simple example is food. Most data on the oil intensity of food production only takes account of direct farm, fishing and food production energy inputs. This excludes all or most energy inputs to processing, packaging, distribution, storage, consumption and food waste handling. In several OECD countries even direct energy inputs are high or very high. One extreme example is Japan, where rice production takes about 12 barrels per hectare of direct oil energy inputs, per year.
Ocean deep sea fishing, already impacted by radical falls in fish stocks of many key species due to predatory overfishing, is extremely dependent on direct oil consumption.
When downstream and full-cycle EROI is applied to urban food supplies we find this sector takes far more than the usual figures given, of about 8% to 10% of national oil demand, and will need urgent attention for achieving sustainability.
Rational and efficient choices will always and finally be the most economic, whatever Keynes said about the long-term. In fact, the convergence of energy, resource, environment and climate crises is an example of future shock, due to these critical limits on business as usual being dismissed or downplayed as 'long term' for so many decades.
To these risk factors we can now add economic shock: uncertainty regarding the global economy has rarely or never been as high as today. Moving forward at this time can only incorporate a relatively high level of risk, and will need both determined and clear-sighted decision making.
The need for action is evident, simply due to the accumulation and interdependence of the constraints and pressures weighing on the present and near-term future. Sustainable urban development is already recognized as a key part of the solution, not the problem. Improving the analytical frameworks, data, and range of options for decision making will help create and reinforce the basic lesson of natural ecosystems: stability through diversity, resource efficiency, and resource conservation.