The Economic Growth Engine Ayres and Warr

1. Lund 29th October 2009
Dr Benjamin Warr
INSEAD Social Innovation Centre
The Economic Growth
Engine

2. The problem
How to avoid an economic collapse
while simultaneously cutting carbon-
emissions?

3. Summary
• Access to energy is essential for prosperity
• Understanding the role of efficiency for growth is
critical
• Some problems with neoclassical growth theory
• Overview of resource exergy utilisation analysis
• An example of modelling economic growth with
useful work as a factor of production
• Forecasts using the Resource Exergy Services
(REXS) model

4. Energy, Exergy and Useful Work
• Energy is conserved, except in nuclear reactions. This is
the First Law of thermodynamics.
• But 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.
• Capital is inert. It must be activated. Most economists
regard labour as the activating agent.
• Labour (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

5. Tracking energy use and emissions by task
Sources: WRI, CAIT, IPCC – data for 2000

6. Exergy input share by source, (UK 1900-2000)
100%
80%
Biomass
60%
Renewables and
Nuclear
40% Gas
Oil
20% Resource Substitution
From Coal, to Oil, Gas then Renewables and Coal
Nuclear
0%
1900 1920 1940 1960 1980 2000
year

7. Exergy to Useful Work, via efficiency
3
1 2
EXERGY INPUT x EFFICIENCY USEFUL WORK
WASTE EXERGY
(OFTEN LOW QUALITY HEAT OR POLLUTION)
THIS FRACTION IS NOT
PRODUCTIVE
EXCLUDE IT FROM
PRODUCTION FUNCTION

8. Exergy conversion efficiencies (US 1900-2005)
40%
35%
Electricity Generation
30% High Temperature Heat
Efficiency (%)
25%
Mid Temperature Heat
20%
15%
10% Mechanical Work
5% Low Temperature Heat
Muscle Work
0%
1905 1925 1945 1965 1985 2005
Year

9. Useful work by type (US 1900-2005)
100%
Muscle Work
Non-Fuel
80%
60%
share (%)
Mechanical Work
40% Electricity
20% High Temperature Heat
Low Temperature Heat
0%
1905 1925 1945 1965 1985 2005
year

10. Economy
• Since the first industrial revolution, human and
animal labour have been increasingly replaced by
machines powered by the combustion of fossil
fuels.
• Technological progress in mechanisation increases
the work output per unit exergy consumed.
• MORE WORK FOR THE SAME EFFORT
• This strongly suggests that useful work should be
factor of production, along with conventional capital
and labour.

11. Economy-wide exergy to useful work
conversion efficiency Evidence of stagnation –
25% Pollution controls,
Technological barriers
High Population Density
Ageing capital stock
Industrialised Socio-
Wealth effects
20% ecological regime
Japan
Resource limited
efficiency (%)
15%
US
10%
UK Low Population Density
Industrialised New
5% World Socio-ecological
regime
Resource abundant
0%
1905 1925 1945 1965 1985 2005
year

12. Exergy Intensity of GDP Indicator
60
•Distinct grouping of
US countries by level, but
50 similar trajectory
•Evidence of convergence in
EJ / trillion $US PPP
40 latter half of century
UK •Slowing decline
30
20
Japan
10
0
1905 1925 1945 1965 1985 2005
year

13. Useful work Intensity of GDP Indicator
3,5
3
US
2,5
EJ / trillion $US PPP
2 UK
1,5
1 1970 to 1973 structural
Japan
change stimulated by price
0,5 spike, but with continuing
effect, despite subsequent
price decline.
0
1905 1925 1945 1965 1985 2005
year

14. CO2 intensity of useful work
CO2/useful work [tC/TJ]
500
USA Japan
UK Austria
400
300
200
100
0
1900
1915
1930
1945
1960
1975
1990
2005

15. 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.

16. Neo-classical estimates of GDP
exponents at factor cost (US 1900-2005)
35
empirical estimate
30
Multiplier effect or technological
progress accounts for 1.5% per
25 annum, in 2005 technology has a
GDP index (1900 = 1)
multiplier effect of 4.8
78% of
20
Solow “technological observed
development will be the motor for growth is
15 economic growth in the long run”. unexplained
BUT IT IS UNDEFINED AND
10
UNMEASURABLE The Solow Residual
5
0
1900 1920 1940 1960 1980 2000
year

17. Exergy-Efficiency-GDP Feedbacks
Learning
Exergy Intensity Exergy Demand -by-doing
of GDP
and Production
Capital accumulation Efficiency
GDP growth
Improvements
Useful Work
Consumption

18. Ayres-Warr Estimates of GDP
60
35
Japan
USA
30
50
25
40
GDP (1900=1)
20
empirical
30
estimate
15
20
10
10
5
0
1900 1920 1940 1960 1980 2000
year

19. What effect policies to reduce energy intensity of
GDP?
30
Historical rate of decline in
25 exergy intensity of GDP is r/gdp
1.2% per annum e/gdp
20
index
15
10
5
0
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
year

20. What effect policies to reduce energy intensity of
GDP?
120
For Business-as-Usual,
1.2% per annum
(1.2% decay rate) – by
1.3% per annum
100 2025 GDP doubles and
1.4% per annum
1.5% per annum
exergy inputs increase
empirical
by half over 2008.
80
With a 1.4% decay rate
GDP (1900=1)
output doubles ~10 years
60 later, but for much
reduced total energy use.
40
20
0
1950 1975 2000 2025 2050
year

21. Coal, technical efficiency experience curve, US 1900-2000
0,4
0,35
0,3
technical efficiency (%)
0,25
0,2
0,15
0,1 empirical
logistic
0,05
bi-logistic
0
0 500 1000 1500 2000
cumulative primary exergy production (eJ)

22. Petroleum technical efficiency experience curve,
US 1900-2000
0,18
0,16
0,14
technical efficiency (%)
0,12
0,1
0,08
0,06
0,04 logistic
bi-logistic
0,02 empirical
0
0 500 1000 1500 2000
cumulative primary exergy production (eJ)

23. Gas technical efficiency experience curve,
US 1900-2000
0,2
0,18
0,16
0,14
technical efficiency (%)
0,12
0,18
0,16
technical efficiency (%)
0,1
0,14
0,12
0,08 0,1
0,08
0,06 0,06
0,04
logistic
0,04 0,02
0 bi-logistic
0 100 200 300
0,02 empirical
cumulative primary exergy production (eJ)
0
0 200 400 600 800 1000 1200
cumulative primary exergy production (eJ)

24. Aggregate technical efficiency experience curve,
US 1900-2000
0,18
0,16
0,14
technical efficiency (%)
0,12
0,1
0,08
0,06
0,04 empirical
logistic
0,02 bi-logistic
0
0 1000 2000 3000 4000 5000 6000 7000 8000
cumulative primary exergy production (eJ)

25. Efficiency Scenarios
Possible trajectories for conversion efficiency
0.35
Efficiency growth
0.3 low
mid Low 0.4% p.a.
high Mid 0.72% p.a.
0.25
technical efficiency (f)
empirical
High 1.2% p.a.
0.2
0.15
0.1
0.05
0
1950 1975 2000 2025 2050
year

26. Resulting trajectories for GDP
70
Efficiency growth GDP growth (2030)
60 low
Low 0.4% per annum -2.0%
mid
high High 1.2% per annum 2.2%
50
empirical
GDP (1900=1)
40 For efficiency growth smaller
than 1% p.a. we observe a
30
future decline in GDP, where
the historical rate is ~1.1%
p.a.
20
10
0
1950 1975 2000 2025 2050
year

27. Summary
•Neoclassical growth theory does not explain growth
•If useful work as a factor of production past growth can
be explained 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
• But strong evidence of stagnation

29. US mid-range abatement curve 2030
Source: McKinsey & Co.