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Energy and Wealth Creation
[email protected]://sites.google.com/site/rexsgate/
Dr Benjamin Warr, Senior Research Fellow
INSEAD Social Innovation Centre Sustainability Group
Alumni Reunion Energy Network Presentation
22ndOctober 2011
Topic and Objectives
• Reconsider some assumptions of the role of energy
• Provide alternative assumptions: energy as a driver of growth
• Supply and efficiency are critical for growth
• Supply challenges lay ahead
• Efficiency promises are blocked, ignored and unfulfilled
Standard Paradigm
• Closed system in equilibrium with no wastes
• Growth occurs through accumulations of capital and labour
• Both increase in productivity at an exogenous rate (TFP)
Production of Goods and Services
Consumption of Goods and Services
Purchases
Wages, Rents
Invested(Energy Generating)
Capital
GDP Index (1900=1)
1900 1920 1940 1960 1980 2000year
5
10
15
20
25
US GDP
Cobb-Douglas
SOLOW RESIDUAL(TFP)
US GDP actual vs. modeled using a 3-factor Cobb-Douglas
Unexplained Solow residual
TFP (~1.6% per annum)
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
Index (1900=1)
The Solow residual, US 1900-2010
Something is missing ?
• Unable to explain historic growth rates.
• Exogenous unexplained technological progress is assumed, hence growth is assumed to continue.
• No link to the physical economy, only capital and labour are productive.
• Energy, materials and wastes are ignored.
• Energy availability is overcome by investments in capital.
Capital and useful work substitute for labour: the rise of the energy slaves
Our approach
0%
10%
20%
30%
40%
50%
60%
1900 1925 1950 1975 2000
Heat (Hight Temperature)Heat (Low Temperature)Mechanical DriveElectricityLightMuscle Work
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
1900 1925 1950 1975 2000
Coal
Crude Oil and PetroleumProductsNatural Gas
Non-conventional
Biomass (Food and Feed)
0%
5%
10%
15%
20%
25%
30%
35%
40%
2000199019801970196019501940193019201910year
effic
ienc
y
Low Temperature Space Heating
Mechanical Work
Medium Temperature Industrial Heat
High Temperature Industrial Heat
Electric Power Generation &Distribution
SUPPLY USES EFFICIENCY
USEFUL
WORK
0
5000000
10000000
15000000
20000000
25000000
30000000
35000000
40000000
45000000
1900 1925 1950 1975 2000
Heat (Hight Temperature)Heat (Mid Temperature)Heat (Low Temperature)Mechanical Drive
ElectricityLightMuscle Work
Wastes
Exergy (or maximum available work)
The exergy flow from the sun, and the exergy stocks on earth create the resource base for human societies on earth.
Exergy Quality Index
0
10
20
30
40
50
60
70
80
90
100
Poten
tial
Kineti
c Elec
trica
lChe
mical
Nucle
arSun
light
Hot Ste
amDist
rict H
eatin
gW
aste
Hea
tAm
bient
Hea
t
Exergy reflects energy quality in terms of distinguishability and availability
Efficiency
Each transformation involves a loss of available energy (exergy)
Exergy is consumed to provide energy services
A system expressed in energy units looks as though
the room for efficiency improvements is small.
Accounted for in exergy units reveals the loss of available work due to inefficiencies.
Exergy input share by source (US 1900-2000)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1900 1925 1950 1975 2000
Year
Biomass (Food andFeed)
Non-conventional
Natural Gas
Crude Oil andPetroleum Products
Coal
Source: Ayres & Warr, 2009
Useful work by type(US 1900-2000)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1900 1925 1950 1975 2000
Year
Muscle Work
Non-Fuel
Light
Electricity
Mechanical Drive
Heat (LowTemperature)
Heat (HightTemperature)
Source: Ayres & Warr, 2009
0%
5%
10%
15%
20%
25%
200519851965194519251905
year
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 barriers•Ageing capital stock•Wealth effects
Efficiency
Empirical and Estimated GDP US 1900-2000
0
5
10
15
20
25
30
1900 1925 1950 1975 2000
Empirical GDP
Estimated GDP
Source: Ayres and Warr, 2009
Using a LINEX production function with useful work (exergy*efficiency) as a factor
of production.
Corresponds to Cobb-Douglas with Capital share 0.57, Labour share 0.01and Useful
Work share 0.41.
Our growth dynamic
Concerns
• Availability and supply of energy (and specifically oil)• low price elasticity – people need it• increasing costs of production – harder to find and obtain• weak substitutability – alternatives unavailable for various reasons• increasing demand growth rate, global energy equity and poverty
alleviation
• The rate of efficiency improvements• imperfect markets (externalities, subsidies)• wealth effects, the energy-poverty nexus imperative• lock-in and current technology asymptotes• climate, health & safety (real and unreal concerns)• (lack of access to finance)
Oil Supply
0
20
40
60
80
100
-4 -1 2 5 8 11 14 17 20 23 26 29 32 35 38 41Years
Ann
ual D
isco
very
& P
rodu
ctio
n(a
rbitr
ary
units
)
Conv. oil peak is counter-intuitive. It occurs when production is rising, reserves are large, new fields are being discovered, & technology is increasing recovery factors.
From discovery to production takes~ 5 years, starting with the big and easy fields.
0
10
20
30
40
50
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41
Years
Ann
ual P
rodu
ctio
n(a
rbitr
ary
units
)
Produced Reserves
Yet-to-Find
Discovery
Production
Source: Roger Bentley, University of Reading
Peak oil - fluctuating plateau - declineconsumption exceeds discoveries since circa. 1980
Net Energy and EROEI
Impacts on oil price
Long-run costs increasing due to low elasticity of substitution and price
0
20
40
60
80
100
120
1950 1975 2000 2025 2050
year
GD
P (
1900
=1)
1.2% per annum1.3% per annum1.4% per annum1.5% per annumempirical
What effects efforts to increase energy productivity?
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
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
Possible trajectories for efficiency improvements
For efficiency growth smaller than 1% p.a. we obser ve a future decline in GDP. The historical rate of improvement is 1.1% per annum.
0
10
20
30
40
50
60
70
1950 1975 2000 2025 2050
year
GD
P (
1900
=1)
lowmidhighempirical
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
1950 1975 2000 2025 2050
year
tech
nica
l effi
cien
cy (
f)
lowmidhighempirical
Efficiency ScenariosLow 0.4% yr -1
Mid 0.72% yr -1.High 1.2% yr -1
Scenario GDP growth (2030)Low 0.4% yr -1 -2.0%High 1.2% yr -1 2.2%
Oil scarcity, growth, global imbalancesIMF , World Economic Outlook April 2011
2000 05 10 15 20-5
-4
-3
-2
-1
0
1
2000 05 10 15 20-4
-3
-2
-1
0
1
2000 05 10 15 20-4
-3
-2
-1
0
1
2000 05 10 15 20-4
-3
-2
-1
0
1
2000 05 10 15 20-8
-6
-4
-2
0
2
Real GDP (percent difference)
World
Figure 3.10. Alternative Scenario 1: Greater Subst itution away from Oil
Oil Exporter United States Emerging Asia
2000
Euro Area
Benchmark scenario Upside scenario
Real GDP(percent difference)
This scenario considers a higher value for the price elasticity of demand (0.29, compared with 0.08 in the baseline scenario), consistent with greater substitution away from oil.
This scenario considers a higher value for the pric e elasticity of demand (0.29, compared with 0.08 in the baseline). This is consistent with greater s ubstitution away from oil.
2000 05 10 15 20-15
-10
-5
0
5
2000 05 10 15 20-15
-10
-5
0
5
2000 05 10 15 20-15
-10
-5
0
5
2000 05 10 15 20-15
-10
-5
0
5
2000 05 10 15 20-20
-15
-10
-5
0
5
Real GDP (percent difference)
World
Figure 3.11. Alternative Scenario 2: Greater Decli ne in Oil Production
Oil Exporter United States Emerging Asia
2000
Euro Area
Benchmark scenario Downside scenario
Real GDP(percent difference)
This scenario considers the implications of a more pessimistic assumption for the decline rate of oil production (3.8 percentage points annually, compared with 1 percentage point in the baseline scenario).
Oil scarcity, growth, global imbalancesIMF , World Economic Outlook April 2011
This scenario considers a more pessimistic assumpti on for the decline rate of oil production
3.8 percentage points annually compared with 1 p.p. in the baseline.
2000 05 10 15 20-8
-6
-4
-2
0
2
2000 05 10 15 20-5
-4
-3
-2
-1
0
1
2000 05 10 15 20-8
-6
-4
-2
0
2
2000 05 10 15 20-8
-6
-4
-2
0
2
2000 05 10 15 20-10
-8
-6
-4
-2
0
2Real GDP (percent difference)
World
Figure 3.12. Alternative Scenario 3: A Greater Eco nomic Role for Oil
Oil Exporter United States Emerging Asia
2000
Euro Area
Benchmark scenario Downside scenario
Real GDP(percent difference)
This scenario considers a higher contribution of oil to output: 25 percent for the tradables sector (compared with 5 percent in the baseline scenario) and 20 percent in the nontradables sector (compared with 2 percent in the baseline scenario).
Oil scarcity, growth, global imbalancesIMF , World Economic Outlook April 2011
This scenario considers a higher contribution of oi l to output growth.
25% compared to 5% in baseline scenario – consistent with Ayres-Warr model.
Summary
• Neoclassical growth theory does not describe the natural resource dependency of 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 and alternative supplies.
• Future efficiency gains may be inexpensive if existing double dividend possibilities are exploited.
A path forward – a neo-liberal solution
• These results provide the evidence to justify macro-economic (risk-management) policies:
• energy security through appropriate long-run renewable energy policy
• energy productivity through short-term energy efficiency drive• economic stimulus through ‘green’ jobs creation
• Large but avoidable inefficiencies exist corresponding to significant departures from the optimal equilibrium growth path that is commonly assumed.
• Eliminating inefficiencies can create “double divid ends”
Sources
Ayres, R.A. and Benjamin S. Warr, 2010. The Economic Growth Engine: How energy and work drive material prosperity, Edward Elgar.
Smil, V. 2007. Light behind the fall: Japan’s electricity consumption, the environment, and economic growth. Japan Focus, April 2.
Cleveland, C. J. 1991. Natural resource scarcity and economic growth revisited: Economic and biophysical perspectives. In Ecological Economics: The Science and Management of Sustainability. Edited by R. Costanza. New York: Columbia University Press.
Hall C.A.S. and John W. Day, 2009. Revisiting the Limits to Growth After Peak Oil. American Scientist, Volume 97, Number 3, Page: 230.
IMF, 2011. Oil Scarcity, Growth and Global Imbalances. World Economic Outlook 2011.