Richard Koo argues that the real reason to study macroeconomics is to be able to identify so-called fallacy-of-composition problems. This is the phenomenon of the right behaviour at the individual level leading to a less favourable outcome at the collective level. One example is the farmer who tries to increase his income by planting more crops. But if all farmers were to do the same, there would be a bumper crop, leading to lower prices, and therefore reduced income for all farmers.
Another example is the experience of football supporters jumping out of their seats to get a better view. They discover that once everybody is standing up, the view has not improved at all. There is a clear difference between the ‘micro’ perspective – one person standing to get a better view – and the ‘macro’ perspective – everyone can’t get a better view together.
In the energy domain, we have two perspectives on energy efficiency. The micro perspective is that energy efficiency reduces global energy use. The macro perspective is that Jevon’s Paradox leads to the same or increasing energy use.
These micro-versus-macro examples abound in the economy, nature, and society. A recent article by Michael Barnard in Clean Technica struck me as a great illustration of the micro versus macro perspective in relation to wind and solar. Barnard was accurate from a micro perspective but completely missed the obvious at a macro perspective.
In summary, Barnard critiqued Vaclav Smil for his failure to recognize the impact of the falling cost of wind and solar, and the speed of the renewable transition. He argued that Smil doesn’t understand renewable economies of scale and the significance of heat rejection. In fact I think Smil understands these things, and much more, very well – but that is another story.
While the article seems an accurate portrayal of the situation from a micro perspective, it seemed to me that he completely misses a systems or macro perspective. Barnard is committing the fallacy of composition. He reasons that a declining price of a sub-system will inevitably lead to a declining price of the whole system. Indeed, he argues that wind and solar will substitute for 90% of final energy demand by 2050 and possibly by 2040 at lower cost.
But wind and solar produce electricity, are variable, and do not substitute one-for-one with fossil fuels. As a share of ‘World total final consumption by fuel’ reported by IEA, electricity comprised 18.8 % in 2016, having risen from 9.4 % in 1973. Indeed, the challenge of electrification of ‘everything’ presents a particular conundrum.
In order for electricity to substitute completely for fossil fuels, energy storage will need to increase by three orders of magnitude.
Maybe Barnard will turn out to be correct in the long run, But we just don’t know, and a micro perspective is not going to give us the answers.