Wednesday, September 25, 2013

Economic growth = f{Price of exergy inputs U f(efficiency of input conversion (high cost to low cost)} ~Ayres and Warr


"The contribution of this book, we think, is to offer a fundamental explanation of endogenous growth that is both quantifiable and consistent with the laws of thermodynamics. Moreover, the new theory is consistent with the notion that the causal relationship between GDP and the so-called ‘factors’ (K, L, U) is not simply unidirectional and deterministic, as the standard (Solow) model implies. Rather, the relationship is a two-way street, analogous to Keynes’ oft-quoted misstatement of Say’s law, namely that ‘supply creates its own demand’ (Keynes 1936).(1) In the case of useful work, the idea of growth as a positive feedback process was introduced in Chapter 1 and re-iterated in several places thereafter.

At this point, it is worthwhile to point out that a number of economists have discussed the so-called ‘rebound effect’ of energy efficiency improvements (for example, Brookes 1990, 1992, 1993; Saunders 1992). In brief, the ‘rebound effect’ has been introduced by skeptical economists to counter the claims of so-called ‘efficiency advocates’ in the context of discussions of energy conservation and greenhouse gas reduction policy.(2) The efficiency advocates’ usually cited claim – on the basis of engineering studies – is that improved efficiency can sharply reduce the consumption of energy and hence of fossil fuels, which are the source of greenhouse gases and other pollutants.

The efficiency skeptics point out that improvements in energy efficiency generally result in less energy savings than the efficiency advocates claim, because lower operating costs make energy-using applications more attractive and thus increase demand for energy services over the baseline. In fact, it can be argued that the rebound effect is exactly the mechanism that drives economic growth, under another name.

In a mature economy, the increases in demand are not so great as to compensate for the savings. Econometric studies suggest that a 10 percent gain in efficiency in motor vehicles would only increase demand for vehicle use by 2 percent, not nearly enough to use up all the efficiency savings (Khazzoom 1987). Some other estimates suggest more dramatic rebounds, although the issue is highly contentious.(3) However, there is general agreement that greater efficiency and lower operating costs lead to greater consumption, thanks to a non-zero price elasticity of demand.
By the same token, higher costs will certainly reduce consumption, just as the advocates of carbon taxes assume. However, the consequences of a permanent increase in energy costs and consequent increases in capital and other costs have not yet been taken into account in most long-range economic forecasts.

The most important implication of the new theory, up to now, is that future economic growth is not guaranteed because the efficiency gains that have driven growth in the past may not continue. Economic growth depends on producing continuously greater quantities of useful work. This depends, in turn, upon finding lower-cost sources of exergy inputs or more efficient ways of converting higher cost inputs into low-cost work outputs. In a world where the cheapest sources of exergy seem to be approaching exhaustion, the key to continued growth must be to accelerate the development of lower-cost alternative technologies, and policies, that increase conversion efficiency.

Meanwhile, if the rate of technological advance fails to compensate for the combination of approaching resource (notably cheap oil) exhaustion and policies needed to cut back on carbon dioxide emissions, we have to anticipate the possibility that economic growth will slow down or even turn negative. Global depression in the coming decades seems to us to be a serious risk."

Robert U. Ayres, and Benjamin Warr, The Economic Growth Engine: How Energy and Work Drive Material Prosperity, (Cheltenham: Edward Elgar in association with The International Institute for Applied Systems Analysis , 2009), 296-297.

NOTES
  1. Say really meant that a produced good represents demand for other goods, and not that every produced good will be sold (Say 1821 [1803]).
  2. The best-known advocate is Amory Lovins (Lovins 1977; Lovins et al. 1981; Lovins and Lovins 1987; Lovins 1988; Lovins and Lovins 1991; Lovins 1998). See also Johansson et al. (1989), von Weizsaecker et al. (1998) and Jochem et al. (2000).
  3. A good review of the evidence can be found in a special issue of Energy Policy (2000) edited by Lee Schipper. See also Jaccard (2005).