SUSTAINABILITY, ENERGY, AND ECONOMIC GROWTH R. U. Ayres&B.S.Warr

SUSTAINABILITY, ENERGY, AND ECONOMIC GROWTH

R. U. Ayres & B.S.Warr

• Part 1. Sustainability and Climate Change • Part 2. Energy, Peak Oil• Part 3. Exergy and Useful Work• Part 4. Economic Growth Theories• Part 5. The Neo-Liberal Solution

Part 1: Long Run Sustainability

• Long run sustainability has several dimensions, of which 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 strongly related to fossil fuel consumption

1900

Source: AQUA, GLOBO Report Series 6, RIVM

1950 2000 2050 2100

0

10

20

30

40

50Meters

Glacier & ice caps

Thermal expansion

Water loss on land

Historical and projected global sea level rise: 1900-2100

-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

Var

iatio

n (

C)

Source: Wikipedia "Instrumental Temperature Record"

o

Global Temperatures

Part 2: Energy and Peak Oil

• Actually “energy” is not the problem; the climate problem is mainly due carbon dioxide build-up in the atmosphere and secondarily due to methane releases from agriculture (grazing animals), gas distribution and coal mining. There is a major potential problem due to thawing of perma-frost, due to warming itself. However we focus here on the near-term problem of oil and gas supply.

Source: Bezdek, 2008

Source: Bezdek, 2008

1965 1970 1975 1980 1985 1990 1995 2000year

-30

-20

-10

0

10

20

30

40

50G

igab

arre

ls a

nnua

lly

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

1600

Bill

ion

barr

els

proved reservesproved and probable reserves

2004

Global "proved reserves" (wide bars) give the reassuring appearance of continuing growth, but the more relevant "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. It must be activated. Most economists regard labor as the activating agent.

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

• But machines (and computers) require another activating agent, namely exergy.

• The economy converts exergy into useful work

Recapitulation: Energy vs. Exergy

• Energy is conserved, exergy is consumed.• Exergy is the maximum available work

that a subsystem can do on its surroundings as it approaches thermodynamic equilibrium reversibly,

• Exergy reflects energy quality in terms of availability and distinguishability from ambient conditions.

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

2. BIOMASS (Wood, Agricultural Products)

3. OTHER RENEWABLES(Hydro, Wind)

4. METALS

5. OTHER MINERALS

EXERGY TYPES

exergy by source: 1900 -2000Japan, Austria, USA, UK

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 fromrenewables

renewables (wind,solar, biomass)

food and feedbiomass

1900 1920 1940 1960 1980 2000

0

2

4

6

8

10

12

14

16

18

index

USA Japan UK Austria

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

Exergy Intensity of GDP Indicator

0

10

20

30

40

50

60

200519851965194519251905year

EJ /

trill

ion

$US

PPP

US

UK

Japan

•Distinct grouping of countries by level, but similar trajectory

•Evidence of convergence in latter half of century

•Slowing decline

exergy and useful work intensity

exergy / GDP [GJ/1000$]

0

10

20

30

40

50

60

1900 1915 1930 1945 1960 1975 1990 2005

USA JapanUK Austria

useful 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


Conversion Efficiencies

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 Heat

Muscle 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

Exergy to Useful Work

WASTE EXERGY(OFTEN LOW QUALITY HEAT OR POLLUTION)

1EXERGY INPUT

2x EFFICIENCY

3 USEFUL WORK

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

Useful work types• .

– Electricity– Mechanical drive (mostly transport)– Heat (high, mid and low temperature)– Light– Muscle Work

• N.B.Available work (exergy) and ‘useful’ work are 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 type(US 1900-2005)

0%

20%

40%

60%

80%

100%

200519851965194519251905

year

shar

e (%

)

Muscle WorkNon-Fuel

Mechanical Work

Electricity

High Temperature Heat

Low Temperature Heat

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

1900 1920 1940 1960 1980 2000

0

index

10

20

30

40

50

60

70

80

90


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

USA

0

5

10

15

20

25

30

35

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

Japan

0

5

10

15

20

25

30

35

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

Austria

0

5

10

15

20

25

30

35

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

High temperature heat Medium temp. heatLow temperature heat LightElectricity Other prime moversNon-fuel Muscle work

UK

0

5

10

15

20

25

30

35

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

trends in useful work outputs: 1900-2000 in GJ/cap

exergy and useful work intensity: GJ/$1000

exergy / GDP [GJ/1000$]

0

10

20

30

40

50

60

1900 1915 1930 1945 1960 1975 1990 2005

USA JapanUK Austria

useful 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


carbon intensities: tC/TJ

CO2/exergy [tC/TJ]

0

5

10

15

20

25

1900

1915

1930

1945

1960

1975

1990

2005

USA JapanUK Austria

CO2/useful work [tC/TJ]

0

100

200

300

400

500

1900

1915

1930

1945

1960

1975

1990

2005

USA JapanUK Austria

Income (GDP/cap) and useful work per capita

0

10

20

30

40

50

60

70

0 5.000 10.000 15.000 20.000 25.000 30.000

GDP/cap [1990 intl $]

Use

ful w

ork/

cap

[GJ/

cap]

Part 4: Useful Work and Economic Growth

• Since the first industrial revolution, human and animal labor have been increasingly replaced by machines powered by the combustion of fossil fuels. This strongly suggests that exergy or useful work should be factors of prody=uction, along with conventional capital and labor.

socio-economic data(a) GDP/cap [USD/cap]

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

1900

1915

1930

1945

1960

1975

1990

2005

USAJapanUKAustria

(b) population density [cap/km2]

0

50

100

150

200

250

300

350

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

AustriaUK (excl. Ireland)JapanUSA

(c) population growth [1900 = 1]

0

1

2

3

4

1900

1915

1930

1945

1960

1975

1990

2005

USAJapanUKAustria

(d) capital stocks [billion 1990 $]

0

5.000

10.000

15.000

20.000

1900

1915

1930

1945

1960

1975

1990

2005

USAJapanUKAustria

A. CLOSED STATIC PRODUCTION CONSUMPTION SYSTEMProduction

ofGoods and

Services

Consumptionof Final

Goodsand Services

Purchases

Wages, Rents

Production ofGoods

andServices

InvestedCapita

l

Purchases

Wages, Rents

Savings

Purchases ofcapital

goods

Capitaldepreciation

Purchases

Wages, Rents

Production ofGoods andServices

WasteDisposalTreatment

Extraction

Consumptionwastes

"Raw"materi

alsProduction wastes

Recycled materials

B. CLOSED DYNAMIC PRODUCTION CONSUMPTION SYSTEM

C. OPEN STATIC PRODUCTION CONSUMPTION SYSTEMConsumpti

onof Final Goods

and Services

Consumptionof Final

Goodsand Services

Standard paradigm: Production-consumption systems

Common practice: Cobb-Douglas

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

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

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

tttttttt 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)

GDPCapitalLaborExergy

Useful Work

GDP and factors of production, US 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)

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)

Technological Progress Function and Solow Residual USA: 1900 - 2005

Problems with 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 will continue.• Endogenous growth theory based on ‘Human

knowledge capital’ is unquantifiable – there are no metrics, other than R&D inputs.

The evolutionary paradigm• The economy is an open multi-sector materials /

energy / information processing system in disequilibrium.

• Sequences of value-added stages, beginning with extraction and ending with consumption and disposal of material and energy wastes.

• Spillovers from radical innovation, particularly in the field of energy conversion technology have been among the most potent drivers of growth and structural change.

• Economies of scale, learning by doing, factor substitution positive feedback, declining costs/prices, increased demand and growth.

The Virtuous Cycle driving historical 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 REMOVED

• Resources (Energy & Materials) replaced by WORK

• Ft = energy-to-work conversion efficiency

• Factors ARE MUTUALLY DEPENDENT

• Empirical elasticities DO NOT EQUAL COST SHARE

The linear-exponential (LINEX) production function

12expULa

bKULaUYt

Economic production functions: II

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 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



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

0

1

2

3

4

5

6

7

indexed 1990 Gheary-Khamis $

POST-WAR COBB DOUGLASalpha=0.56beta=0.20gamma=0.24

GDP estimate LINEX



Empirical & estimated GDP, Austria 1950-2005 (1950=1)

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

year

What effect efforts to reduce energy intensity of GDP?Energy Intensity of G DP, USA 1900-2000.

0

5

10

15

20

25

30

2000199019801970196019501940193019201910

year

inde

x

r/gdp

e/gdp

Historical rate of decline in exergy intensity of GDP is 1.2% per annum

0

20

40

60

80

100

120

1950 1975 2000 2025 2050

year

GD

P (1

900=

1)

1.2% per annum1.3% per annum1.4% per annum1.5% per annumempirical

What effect efforts to reduce energy intensity of GDP?

For Business-as-Usual, (1.2% decay rate) – by 2025 GDP doubles and exergy inputs increase by half.With a 1.4% decay rate output doubles ~10 years later, but requires ~50EJ less than 2010 levels

Efficiency ScenariosPossible trajectories for conversion efficiency

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

1950 1975 2000 2025 2050year

tech

nica

l effi

cien

cy (f

)

lowmidhighempirical

Efficiency growth

Low 0.4% p.a.

Mid 0.72% p.a.

High 1.2% p.a.

Resulting trajectories for GDP

0

10

20

30

40

50

60

70

1950 1975 2000 2025 2050year

GD

P (1

900=

1)

lowmidhighempirical

For efficiency growth smaller than 1% p.a. we observe a future decline in GDP, where the historical rate is ~1.1% p.a.

Efficiency growth GDP growth (2030)

Low 0.4% per annum -2.0%

High 1.2% per annum 2.2%

Part 5: The Neo-liberal solution

• 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 artificial regulatory barriers or inappropriate monopolies that prevent innovation by upstart start-ups. “Eliminating inefficiencies can create “double dividends”

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.

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.

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

Relevance and implications for businessOf Historical Trends, Energy Efficiency, Of Useful Work link, Of Growth Assumptions

1. Business needs to understand context, structure, trends (national, global)

2. investments in efficiency reduce costs, risks of future regulation - but also lead to process and product improvement which can be a source of competitive advantage (especially in the long run)

3. any assumption of future growth rates will impact decisions on NPV calculations (period) and decisions over which discount rate to use.

4. focus on energy service (demand and customer side) can provide the best indications of where efficiency enhancements can be linked to value offers (the example of selling comfort rather than electricity, mobility rather than fuel and cars)

5. providing energy services (through energy service contracts) can potentially reduce competition from alternative energy suppliers

6. companies should focus on useful work productivity rather than energy productivity per se (which will necessarily follow)…..

7. Growth industries will be in the efficiency domain (retro-fitting) followed by the renewables domain

Thank you

Documents

SUSTAINABILITY, ENERGY, AND ECONOMIC GROWTH R. U. Ayres&B.S.Warr