SUSTAINABILITY, ENERGY, AND ECONOMIC GROWTH R. U. Ayres, April 10, 2013

• Part 1. Energy as technology Incubator• Part 2, Energy Futures, Peak Oil• Part 3. Exergy and Useful Work• Part 4. Economic Growth Theories• Part 5. Credit, debt and bubbles • Part 6. Externalities and Climate Change • Part 7. The Neo-Liberal Critique• Part 8. A Win-Win-Win?

Energy Resource Discoveries asTechnology Incubators

• Discoveries of gold, silver and diamonds created new money, but did not finance industrialization

• The slave trade was profitable but it did not finance industrialization

• The discovery and increased demand for coal “incubated” steam engines, first to pump water from mines, and then for other applications, from railroads to ships, steel & electric power.

Ayres IIASA 10 August 2007

Labor productivity grows

Production of iron grows

Price of iron falls

demand for coal growsPrice of coal falls

production & sales of coal grow

Need for pumping

Deeper mines, flooding

Coal replaces charcoal in iron-making

Steam power replaces horses, wind, etc.

Invention of steam engine for pumping (Newcomen)

Iron replaces wood in carts, etc.

The first industrial revolution

Technologies from Coal

• From reciprocal to rotary motion• Boring tools for cannons & steam engines• Blowers for air into blast furnaces• Coke, coke oven gas, town gas• Coal tar by-products, nitrogen fertilizer• Aniline dyes• Otto’s 4-cycle internal combustion engines• Steam turbines and electric power

Technologies from the discovery of petroleum

• Need for a replacement for whale oil• Fractional distillation to obtain kerosine• Application to Otto-cycle ICE by Daimler• Automobiles, trucks, aircraft• Diesel cycle (pressure ignition) • TEL (anti-knock) to increase compression• Gas turbines and jet engines

Other resource discoveries and their consequences

• Opium (morphine, heroin, addiction, crime)• Tobacco (cigarettes, addiction)• Corn (food, corn syrup sweetener)• Potatoes (food, potato chips, obesity)• Anti-biotics (infectious disease control)• Radium and Uranium (nuclear weapons,

nuclear power, proliferation)• Semi-conductors (transistors, micro-electronics)

Part 2: Energy Futures and Peak Oil

• Long history of controversy, since Malthus • Optimists argue that “there is an ocean of oil

out there” and that technology will compensate for dissipative use. Prices have declined since 18th century (until recently)

• Pessimists argue that the earth is finite, fossil fuel resources are finite, and technology has limits. So prices will rise. This will slow or stop economic growth

Source: Bezdek, 2008

Source: Bezdek, 2008

1965 1970 1975 1980 1985 1990 1995 2000year

-30

-20

-10

0

10

20

30

40

50

Gig

abar

rels

ann

ually

Until well into the 1970s, new global oil discoveries were more than sufficient to offset production each year.Since 1981, the amount of new oil discovered each year has been less than the amount extracted and used.

Source: Heinberg 2004, "Powerdown", Figure 5 page 43

Global oil discoveries minus global oil consumption 1965-2003

1980 1984 1988 1992 1996 2000year

0

200

400

600

800

1000

1200

1400

1600B

illio

n ba

rrel

s

proved reservesproved and probable reserves

2004

Global "proved reserves" (wide bars) give the reassuring appearance of continuing growth, but the morerelevant "proved and probable reserves" (thin bars) have been falling since the mid-1980s.

Source: Strahan 2007, "The Last Oil Shock", Figure 13 page 71

The wrong kind of shortage

Saudi reserves 1936-2005

Oil production since 2002 approaching saturation

Source: http://www.theoildrum.com

Source: http://www.theoildrum.com

World oil production projections to 2040

Source: Dave Rutledge, The coal question and climate change : http://www.theoildrum.com 6/20/2007

Hubbert linearization: World oil & gas output 1960-2006

Part 3: Exergy and Useful Work

• Energy is conserved, except in nuclear reactions. The energy input to a process or transformation is always equal to the energy output. This is the First Law of thermodynamics.

• However the output energy is always less available to do useful work than the input. This is the Second Law of thermodynamics, sometimes called the entropy law.

• Energy available to do useful work is exergy.

Exergy and Useful Work, Con’t

• Capital is inert unless it is “activated”. Some capital is always inert (walls, pipes, containers, etc.) Machines are the active components.

• Labor (by humans and/or animals) was once the only source of useful work in the economy.

• But machines (and computers) require exergy to function, in the the form of fuels or electricity.

• Capital and labor without exergy are inert and unproductive. Hence exergy is really a “factor of production”.

Recapitulation: Energy vs. Exergy

• Energy is conserved, exergy is consumed (destroyed) in every process or action.

• Exergy is the maximum available workthat a subsystem can do on its surroundings as it approaches thermodynamic equilibrium reversibly,

• Useful work is calculated as exergy input times exergy efficiency.

1. FOSSIL FUELS(Coal, Petroleum, Natural Gas, Peat)

2. BIOMASS(Wood, Agricultural Products, Algae(?))

3. OTHER RENEWABLES(Hydro, Wind, Geothermal, Tidal, )

4. Uranium, Thorium, Tritium

EXERGY IN THE ECONOMY

Exergy Sources: 1900 -2000Japan, Austria, UK, USA

1900

0%

20%

40%

60%

80%

100%

Japan Austria1920

USA UK

nuclear

natural gas

oil

coal

electricity fromrenewables

renewables (wind,solar, biomass)

food and feedbiomass

2000

0%

20%

40%

60%

80%

100%

Japan Austria USA UK

nuclear

natural gas

oil

coal

electricity fromrenewablesrenewables (wind,solar, biomass)

food and feedbiomass

Exergy input share by source, (UK 1900-2000)

0%

20%

40%

60%

80%

100%

1900 1920 1940 1960 1980 2000year

Biomass

Renewables andNuclear

Gas

Oil

Coal

Resource Substitution

From Coal, to Oil, Gas then Renewables and Nuclear

1900 1920 1940 1960 1980 2000

0

2

4

6

8

10

12

14

16

18

index

USA Japan UK Austria

EXERGY: Austria, Japan, UK & US: 1900-2005 (1900=1)

1900 1920 1940 1960 1980 2000

0

index

10

20

30

40

50

60

70

80

90

USA Japan UK Austria

Useful Work (U) Austria, Japan, US, UK:1900-2000

Exergy Intensityexergy / GDP [GJ/1000$]

0

10

20

30

40

50

60

1900 1915 1930 1945 1960 1975 1990 2005

USA JapanUK Austria

Useful Work Intensityuseful work / GDP [GJ/1000$]

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

1900 1915 1930 1945 1960 1975 1990 2005

USA Japan UK Austria

Conversion Efficiencies (US)

0%

5%

10%

15%

20%

25%

30%

35%

40%

200519851965194519251905

Year

Effi

cien

cy (%

)

Electricity Generation

High Temperature Heat

Mid Temperature Heat

Mechanical Work

Low Temperature HeatMuscle Work

Exergy to useful work conversion efficiency

0%

5%

10%

15%

20%

25%

200519851965194519251905year

effic

ienc

y (%

)

US

Japan

UK

High Population Density Industrialised Socio-ecological regimes

Resource limited

Low Population Density Industrialised New World Socio-ecological regime

Resource abundant

Evidence of stagnation –Pollution controls, Technological barriersAgeing capital stockWealth effects

Useful work types• .

– Electricity– Mechanical drive (motors and engines, mostly for

transport)– Heat (high, mid and low temperature)– Illumination (lighting)– Muscle Work

• N.B.Available work (exergy) and ‘useful’ workare not equal, the latter depends on the exergy efficiency of the conversion process for a given task. Efficiency = useful work / available work.

useful work by use categoriesin shares of total GJ/cap

1900

0%

20%

40%

60%

80%

100%

Japan Austria1920

USA UK

Muscle workNon-fuelOTMElectricityLightLT heatMT heatHT heat

2000

0%

20%

40%

60%

80%

100%

Japan Austria USA UK

Muscle workNon-fuelOTMElectricityLightLT heatMT heatHT heat

Useful work by type(US 1900-2005)

0%

20%

40%

60%

80%

100%

200519851965194519251905year

shar

e (%

)

Muscle WorkNon-Fuel

Mechanical Work

Electricity

High Temperature Heat

Low Temperature Heat

carbon intensities: 1900-2000 in tC/TJ

CO2/exergy [tC/TJ]

0

5

10

15

20

2519

00

1915

1930

1945

1960

1975

1990

2005

USA JapanUK Austria

Useful Work Intensity1900-2000 in tC/TJ

CO2/useful work [tC/TJ]

0

100

200

300

400

50019

00

1915

1930

1945

1960

1975

1990

2005

USA JapanUK Austria

Part 4: Economic Growth Theories

• Standard neoclassical growth theory since Solow’s work in 1956-57 assumes that GDP is determined by a production function of two variables, capital K and labor L, subject to constant returns to scale. The usual form is Cobb-Douglas

Common practice: Cobb-Douglas

Yt is output at time t, a function of,• Kt , Lt , Rt inputs of capital, labor and natural

resource services.• α, + β + γ = 1, (constant returns to scale assumption)

• At is total factor productivity• Ht , Gt and Ft coefficients of factor quality

( ) ( ) ( )γβαtttttttt RFLGKHAY =

Economic production functions

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

year

0

10

20

30

40

50

Index (1900=1)

GDPCapitalLaborExergyUseful Work

GDP and factors of production, US 1900-2005

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

year

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

unexplained Solow residualTPF (1.6% per annum)

Index (1900=1)

Cobb-Douglas Function and Solow Residual USA: 1900 - 2005

GDP Index (1900=1)

1900 1920 1940 1960 1980 2000year

5

10

15

20

25

US GDP

Cobb-Douglas

SOLOW RESIDUAL(TFP)

US GDP 1900-200; Actual vs. 3-factor Cobb Douglas function L(0.70), K(0.26), E(0.04)

Problems with Neoclassical Growth Theory

• No link to the physical economy: only capital and labour are productive.– Energy, materials and wastes are

ignored.• Unable to explain historic growth rates.• Exogenous unexplained technological

progress is assumed, hence growth willcontinue indefinitely “on track”, with – or without – energy inputs.

Our Theory: The Virtuous Cycle driving growth

Lower Prices ofMaterials &

Energy

INCREASED REVENUESIncreased Demand for

Final Goods and Services

R&D Substitution ofKnowledge for Labour;

Capital; and Exergy

ProductImprovement

Substitution ofExergy for Labour

and Capital

ProcessImprovement

Lower Limits toCosts of

Production

Economies ofScale

Lower costs, lower prices, increased demand, increased supply, lower costs

For the USA, a = 0.12, b = 3.4 (2.7 for Japan) Corresponds to Y = K0.38 L 0.08 U 0.56

• At , 'total factor productivity', is set at unity

• Resources (Energy & Materials) replaced by WORK

• Ft = energy-to-work conversion efficiency

• Factors ARE MUTUALLY DEPENDENT

• Empirical elasticities DO NOT EQUAL COST SHARE

⎭⎬⎫

⎩⎨⎧

⎟⎠⎞

⎜⎝⎛ −+⎟⎟

⎠

⎞⎜⎜⎝

⎛⎟⎠⎞

⎜⎝⎛ +

−= 12expULab

KULaUYt

The linear-exponential (LINEX) production function

1900 1920 1940 1960 1980 2000year

0

5

10

15

20

25

PRE-WAR COBB DOUGLASalpha=0.37beta=0.44gamma=0.19

POST-WAR COBB DOUGLASalpha=0.51beta=0.34gamma=0.15

LINEX GDP estimate

US GDP (1900=1)

Empirical GDP from Groningen GGDC Total Economy Growth Accounting Database: Marcel P. Timmer, Gerard Ypma and Bart van Ark (2003), IT in the European Union: Driving Productivity Divergence?, GGDC Research Memorandum GD-67 (October 2003), University of Groningen, Appendix Tables, updated June 2005

Empirical and estimated US GDP: 1900-2000

Empirical GDP

GDP estimate Cobb-Douglas

1900 1920 1940 1960 1980 2000year

0

10

20

30

40

50

PRE-WAR COBB DOUGLASalpha=0.33beta=0.31gamma=0.35

POST-WAR COBB DOUGLASalpha=0.78beta=-0.03gamma=0.25

GDP estimate LINEX

GDP estimate Cobb-DouglasEmpirical GDP

GDP Japan (1900=1)

Empirical GDP from Groningen GGDC Total Economy Growth Accounting Database: Marcel P. Timmer, Gerard Ypma and Bart van Ark (2003), IT in the European Union: Driving Productivity Divergence?, GGDC Research Memorandum GD-67 (October 2003), University of Groningen, Appendix Tables, updated June 2005

Empirical and estimated GDP Japan; 1900-2000

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

year

0

1

2

3

4

5

6

7

indexed 1990 Gheary-Khamis $

COBB DOUGLASalpha=0.42beta=0.24gamma=0.34

GDP estimate LINEX

GDP estimate Cobb-DouglasEmpirical GDP

Empirical GDP from Groningen GGDC Total Economy Growth Accounting Database: Marcel P. Timmer, Gerard Ypma and Bart van Ark (2003), IT in the European Union: Driving Productivity Divergence?, GGDC Research Memorandum GD-67 (October 2003), University of Groningen, Appendix Tables, updated June 2005

Empirical & estimated GDP, UK 1900-2005 (1900=1)

45

33.75

22.5

11.25

01900 1918 1936 1954 1972 1990 2008 2026 2044

year

empiricallowmidhigh

Simulation results using the plausible trajectories of technical efficiency growth as a function of cumulative primary exergy production

GDP (1900=1)

HIGH

Initial ~3% growth rate, for 130% target increase in technical efficiency.

MIDInitial 1.5% growth rate for target120% improvement in efficiency.

LOWShrinking economy at rate of 2 - 2.5% after 2010 if the target technical efficiency is only 115%

greater than the current.

Source: "The MEET-REXS model". Ayres & Warr 2006

REXS model forecast of US GDP:2000-2050

Part 5: Credit, Debt and Bubbles

Part 7: The Neo-liberal Critique

• We have shown the strong link between exergy or useful work and output. The problem for the captain of the great ship Titanic is to avoid an economic collapse while simultaneously cutting carbon-emissions drastically by cutting fossil fuel consumption. The only possible approach is to increase energy efficiency a lot, but at little (or even negative) cost. We need a win-win policy.

The neo-liberal solution, continued

• We postulate the existence of large but avoidable inefficiencies in the economy, corresponding to significant departures from the optimal equilibrium growth path that is commonly assumed. These inefficiencies may result from “lock-ins”, regulatory barriers or monopolies that prevent innovation by upstart start-ups. Eliminating inefficiencies can create “double dividends”

Deadweight

• Deadweight is the term used by economists to characterize the effect of taxes (or subsidies or other barriers) to reduce economic efficiency by reducing “option space” and thus forcing entrepreneurs to make non-optimal choices. We argue that monopolies, obsolete regulations and “lockout/lock in” also cause deadweight losses by preventing optimal innovation.

Disequilibrium = Deadweight loss

• If the economy were really in the standard state of perfect competition, perfect foresight, etc. there would be no inefficiencies and no deadweight losses. In the real world, evidence of double dividend opportunities is evidence of disequilibrium and deadweight losses.

0 10 20 30 40Abatement (percent)

Marginal cost $ per ton of

carbon

Cumulative CostMedium Term

Marginal CostMedium Term

Marginal CostShort Term

-40

-20

0

20

40

60

80

100

0

100

200

300

400

500

Cumulative CostShort Term

Region of NetDollar Savings

Cum

ulat

ive

Cos

t bi

llion

$

Cumulative and Marginal Cost of Abatement in Disequilibrium

0 10 20 30 40 50 60 70-2

0

2

4

6

8

10

12

Potential Electricity Savings (percent total U.S. consumption)

ElectricPowerResearchInstitute

RockyMountainInstitute

80

Cost of new coal-firedpower plant in USA

17

16

15

14

13121110

98

7654321

11109

87654

32

1 1110987654321

Water heating (solar)Space heatingResidential process heatElectrolysisIndustrial process heatCoolingElectronicsDrive powerWater heatingLighting's effect on heating & coolingLighting

1716151413121110987654321

Commercial lightingCommercial water heatingResidential water heatingResidential lightingIndustrial process heating

Residential water heating (heat pump or solar)Residential coolingCommercial water heating (heat pump or solar)Commercial ventilationCommercial & industrial space heatingResidential space heatingElectrolyticsResidential appliancesIndustrial motor drivesCommercial refrigerationCommercial coolingCommercial heating

LawrenceBerkeleyLabs

A

B

C

Three estimates of marginal cost of electricity efficiency (cents per kWh)

0.40.60.811.21.41.61.8

-600

-500

-400

-300

-200

-100

0

100

200

Cumulative Carbon Emissions (GT/year)

$/tonne C

DOE Forecast(1.7 GT)

IPCC(0.5 GT)

Least-Cost(1.3 GT)

11

1098765

4

1

2

3

Source: [Mills et al 1991; Figure 2]

Marginal Cost Curve for GHG Abatement

US mid-range abatement curve 2030

Source: McKinsey & Co.

The cumulative effect of (postulated) deadweight

• Actual E/GDP is much higher than the optimum, due to potential “double dividends” that are neglected

Summary of parts 4 & 5

• Neoclassical growth theory does not explain growth• We model economic growth with useful work as a

factor of production. This explains past growth well• Economic growth need not be a constant

percentage of GDP. It can be negative. • Future sustainable growth in the face of peak oil

depends on accelerating energy (exergy) efficiency gains.

• Future efficiency gains may be inexpensive if existing double dividend possibilities are exploited

Part 6: Externalities and Climate Change

• Externalities are becoming pervasive due to population growth, urbanization, industrialization and pollution. Climate change, sea level rise and loss of natural capital, including biodiversity, are major elements.

• Climate change and sea-level rise are especially driven by the build-up of so-called greenhouse gases (GHGs) in the atmosphere.The major GHGs are carbon dioxide and methane. Both are due to fossil fuel consumption

• The secondary causes are methane releases from agriculture (grazing animals), gas distribution and coal mining. There is a major “feedback” threat from thawing of perma-frost, due to warming itself.

-0.6

-0.2

0

0.2

0.4

0.6

Five Year Average

1860 1880 1900 1920 1940 1960 1980 2000

-0.4

Annual Average

Tem

pera

ture

Ano

mal

y (

C)

Source: Wikipedia "Instrumental Temperature Record"

o

Global Temperatures

1900

Source: AQUA, GLOBO Report Series 6, RIVM

1950 2000 2050 2100

0

10

20

30

40

50

Meters

Glacier & ice caps Thermal expansion Water loss on land

Historical and projected global sea level rise: 1900-2100

Thank you