A research Project of the European Commission
The SAUNER project: Overview
The SAUNER project was funded by the European Commission, DG XII, under
the Energy, Environment and Sustainable Development programme of the 4th
Framework. It involved partners from the UK, Germany and Austria, and ran
from June 1998 until September 2000. This page provides an overview of
the basic problem of sustainability and non-renewable resource use, the
broad aims of the project, its methodology, and the main results.
The Problem of Sustainability and Non-renewable resource use
The Problem of Sustainability and Non-renewable resource use
The fact that modern society is currently dependent on the exploitation of stocks of non-renewable energy resources has given rise to fears that, once these stocks begin to become scarce, this will limit production and economic wellbeing. In other words, the fear is that the use of these non-renewable stocks is unsustainable. One of the early expressions of this worry was by Harold Hotelling, in his seminal (1931) article on the economics of non-renewable resource depletion, who noted that "Contemplation of the world’s disappearing supplies of minerals, forests and other exhaustible assets has led to demands for regulation of their exploitation. The feeling that these products are now too cheap for the good of future generations, that they are being selfishly exploited at too rapid a rate, and that in consequence of their excessive cheapness are being produced and consumed wastefully has given rise to the conservation movement."
One may point out that the "sustainable" use of non-renewable resources is impossible, and to a certain extent this is true. However, in the case of energy resources, while the resource itself cannot be used sustainably, it is possible to invest in substitutes for the resource that provide an identical service. That is, given the amount of the non-renewable resource in existence, a certain proportion of the value generated by using the resource may be invested in a substitute, so that at no time does the absolute limit in resource availability mean that economic wellbeing declines.
Attitudes to the problem of sustainability
There are different attitudes towards sustainability, both within and outside economics. Some believe that sustainability policy is irrelevant, since, as natural resources become scarce, their price will rise and it will become profitable to invest in substitutes. Others believe that insufficient attention is paid to the fact that natural resource stocks represent a type of "natural capital" and that depletion of this capital represents a decrease in wealth. This should therefore be compensated for by an explicit policy of investing at least the value of the depleted stocks in alternative stocks of capital. This is known as weak sustainability, and does not require that the investment be in a substitute for the depleted natural resource, but rather relies on the market to direct investment to where it will create most economic value.
This concept has been criticised by those who point out that the manmade capital, in which compensatory investment would often be made, is usually not a substitute for natural resources, but rather a complement in production. Thus, they maintain that for true sustainability, one should ensure that as non-renewable resources are used, investment should be made in an asset that actually provides a substitute for the resource in question. This is known as strong sustainability.
Sustainability and Energy Resoruces
The distinction between the three positions outlined in the section
above is a particularly interesting area of research for the case of energy
resources. One asks whether, as non-renewable energy resource stocks, in
particular oil and gas, are depleted, will the market direct sufficient
investment in alternative energy sources for energy not to constrain, or
reverse, economic growth? Should governments seek to encourage more saving
to compensate for the depletion of these capital stocks (weak sustainability),
or should they go even further and provide incentives to invest specifically
in alternative energy sources (strong sustainability)? These are the questions
that were the basis of the SAUNER project.
The aim of the SAUNER project was to apply the economic theories of efficient and sustainable resource depletion to predicted patterns of natural resource depletion and investment in substitutes. This was in order to form a judgement as to whether or not these patterns are likely to be economically sustainable, either with or without government intervention. If it appears that projected patterns of resource depletion and investment in alternatives use are unlikely to be sustainable without government intervention, then the ultimate purpose of the project is to make policy recommendations as to how the estimated shortfall in required investment might be reduced or eliminated.
The two types of natural resources chosen for this study are Hydrocarbons and Platinum Group Metals (PGM). Hydrocarbons play an essential part in the global economy, and the recent rise in energy prices has re-ignited concern as to the implications for growth and development of the finite stocks of oil and gas. Platinum Group Metals were chosen because, due to their role in many growing sectors, in particular in catalytic converters and potentially in fuel cells, it seemed possible that demand could outstrip supply over this century.
The methodology by which the project aimed to answer the questions outlined above falls into 5 main sections. These were:
The Technical data assessment of oil and gas resource availability
The main objective of this part of the project was to investigate the availability and extraction costs, over the 100-year timescale of the study, of hydrocarbons and platinum-group metals (PGM). The data is compiled into 12 world regions, those being the 11 world regions of the IIASA/WEC study, on which the later analysis of the SAUNER project is based, with the Western European Union region being further divided into the EU-15 and other WEU. The technical data assessment encompasses all of the categories of mineral reserves and resources, both in terms of geological assurance and in terms of economic feasibility of extraction. The data were used to present summary tables of the reserves, both proven and inferred, of conventional oil, and unconventional oil resources including oil shale, tar sand, extra-heavy oil and heavy oil. Current reserves and resources of natural gas are likewise presented, the latter including enhanced gas recovery, coalbed methane, tight formation gas, gas hydrates and aquifer gas. The data gathered are used to construct supply-cost functions, by arranging the quantities of each type of reserve/ resource cumulatively in ascending order of production costs.
Given the long time horizon of the project, accounting for the effects of technological progress is essential in order to provide a realistic path of oil and gas extraction costs. That is, while factors such as the depletion of the most accessible deposits tend to increase extraction costs, these are to some extent being offset by progress in geo-sciences and extraction technology. In order to allow for different assumptions regarding the rate of technical progress, the database is constructed so as to allow the rate of technology-induced productivity gains to be varied. In the SAUNER project, 1% annual productivity gains are considered to be towards the optimistic side, 0.5% is taken as the base case, and a pessimistic, low technology, case of 0% is also considered.
The ultimate product of availability assessments are supply-cost functions
in which discrete reserve/resource quantities are cumulatively arranged
in an increasing order of cost of extraction. Supply-cost curves show what
quantities of a mineral commodity can be supplied at a given price or what
price level will be required to meet a given demand. They are widely used
by resource economists for long-range mineral market analyses. The supply-cost
functions are presented as a Microsoft Excel-based database model of the
long-term supply of oil and gas. These databases are available for downloading
from the results page of this website.
The compilation of scenarios of demand for hydrocarbons,
Various scenarios of demand for oil and gas exist, the most appropriate of which was selected for use by the SAUNER project in order to develop hydrocarbon-use scenarios, using various criteria including the length of time-horizon and range of explanatory variables. The set of scenarios chosen are the IIASA/WEC 1998 scenarios of the International Institute of Applied System Analyses (IIASA) and the World Energy Council (WEC), which cover eleven regions, a timeframe up until 2100 and include six scenarios. The three broad cases of the scenarios incorporated varying assumptions regarding economic growth, technical progress, dependence on hydrocarbons, and transfer to environmentally friendly technologies. All of the scenarios assume relatively optimistic levels of economic growth and identical demographic assumptions, namely that global population grows to 11.7 billion by 2100. The cases and scenarios are described in detail in chapter 3; the cases can be summarised as follows:
Case B describes a future of less ambitious technological improvements and high economic growth; descriptive scenario with no significant
The data presented under this section is used under the next applied
stage of the project, the application of the sustainability rules, which
analyses the sustainability implications of the IIASA/WEC scenarios.
A Review of the literature on Sustainability and Non-renewable Resource Use: Developing "Operationalised Rules for Sustainability"
This section examines the literature on sustainability and non-renewable resource use, and derives from this some "operational", or applicable, rules of sustainability that can be applied using the analysis of the project’s earlier sections. The first task is to review the literature on the efficient extraction of non-renewable resources. We emphasise the fact that this concept is quite distinct from the sustainable use of non-renewable resources. The major result presented here is that of the Hotelling rule for efficient non-renewable resource extraction, which must be modified in a variety of ways to account for complicating factors. We discuss the economic concept of optimality, which is the way in which society chooses among the many efficient paths (e.g. of growth with non-renewable resource use) and go on to discuss the features of sustainable paths of non-renewable resource use.
One of the very important issues that arise is resource rents. Resource rents are the decrease in value of a natural resource stock due to depletion and thus reflect the long-term cost of natural resource depletion. This aspect of sustainability and non-renewable resource depletion has been given most attention in the literature, and the most famous (weak) rule for sustainability and natural resource depletion, the Hartwick rule, is that resource rents should be invested in alternative capital stocks. However, another factor relevant to sustainable investment that has been raised in the theoretical literature is capital gains, which is the effect on the value of an economy’s assets of exogenous increases in price. We see that if natural resource prices are expected to rise, then the effect of capital gains is to reduce the amount of sustainable investment of resource exporters, and to increase the sustainable investments of resource importers. One of the aims of the next section of the project is to assess the relative significance of resource rents and capital gains. If resource rents are more significant, then on a global scale, sustainability and the use of energy resources will come about largely by resource-exporting economies investing the value of depleted resource stocks. If capital gains are more significant, then energy consumers will account for the majority of the investment.
This has political and strategic implications for regional and global sustainability, since it would imply that resource-importing regions like Europe and North America are dependant on resource exporting regions like the Middle East to invest in order to maintain long-term energy supplies. This role of capital gains has been identified in the literature, but very little empirical analysis has been done. Therefore, an important contribution of the SAUNER project is to ascertain the relative importance of resource rents and capital gains, in order to estimate whether investment for sustainability is likely to be a global issue, with resource-exporting regions investing resource rents, or whether each region is likely to be responsible for its own investment.
Finally, this section examines the features of the rules for sustainability
found in the literature. We consider the rules in a variety of contexts,
suggesting both weak and strong sustainability rules in the presence of
energy resource depletion, at the national, regional and global levels.
The application of the operationalised rules to the empirical data
This section brings together the applied analysis of the first two tasks of the project with the theoretical work carried out under the third task. The main objective of this chapter is to "operationalise" these sustainability rules. The first step is to estimate the likely prices of energy over the time period of interest. We do this using several methodologies, in order to estimate a range of potential price paths.
The first methodology is to calculate the value of the marginal product of both electric and non-electric energy, using the economic information provided on the scenarios. These prices represent the theoretical maximum that consumers should be willing to pay for energy. We explore the lower bound of the energy price paths implied by the IIASA/WEC scenarios by calculating a set of "minimum" price paths, which represent the prices required for the energy sector to at least break even. A set of "intermediate" price path is then derived, as the price path with a growth rate between those of the minimum and the maximum price paths. We look briefly at the implications of energy prices remaining constant at roughly the levels prevailing at the end of the year 2000, finding that this is unlikely to be sustainable since costs of hydrocarbon recovery will rise to above this level.
For the maximum, minimum and intermediate set of price paths, we perform a "sustainability analysis" by relating the characteristics of the scenarios to the sustainability rules derived in chapter 4. We analyse the savings and investment required to support the economic growth paths of the scenarios, in order to relate the savings rates required under the scenarios to those that currently prevail. We also use the energy investment data provided with the IIASA/WEC scenarios to calculate the implied interest rate on energy investment, and to compare it with the interest rate that we calculate as being compatible with the scenarios. We calculate and compare resource rents and capital gains on energy resources, and finally discuss the implication of the analysis for the relevance of each of the operationalised rules for sustainability.
Analysis of the policy implications of the results.
Two main potential problems for the sustainability of non-renewable resource use were discussed during the analysis of the demand and supply scenarios. The first is whether or not increasing energy prices is likely to compromise the sustainability of consumers’ wellbeing, and if so whether or not government should take action to avoid this. The second relates to the profitability of the energy sector, and whether, given the price path, the energy sector is likely to be able to deliver the quantities of energy required to support the growth paths of the scenarios. Two potential policy implications follow from these. The first is that if rising energy prices imply lower income in the future, this implies a role for the government in taxing energy, in order to invest in alternative capital stocks, possibly renewable energy, in order to be in a position to compensate consumers in the future. The second is that a shortfall in revenue to the energy sector implies either a role for energy subsidies, in particular for renewable energy, or that energy supply and therefore economic growth may be lower than projected under the scenarios.
The project’s policy analysis therefore consists firstly of measuring the energy tax rates required under each of the scenarios so as to provide sufficient investment to provide an income that will offset the negative effect of increasing energy prices. This can be thought of as a weak sustainability policy, since it relates to whether or not total savings are sufficient to offset the effects of natural resource depletion. Secondly, we examine the subsidies to energy investment that might be provided in order to increase the share of investment that the energy sector receives. This can be thought of as a strong sustainability policy, encouraging investment in substitutes for depleted natural resources.
We measure the rates of tax on both electric and non-electric energy
required to fully compensate energy consumers for the entire effect of
future price rises, showing that for the maximum, intermediate and even
the minimum price paths, the tax levels required are not insignificant,
although they are lower than current energy taxes. We then extend the analysis
to account for the fact that as incomes grow, the effect of increasing
prices is offset. We therefore calculate the taxes required in order to
maintain energy expenditure constant as a proportion of income.