Lund 29th October 2009
Dr Benjamin Warr
INSEAD Social Innovation Centre


The Economic Growth
Engine
The problem

  How to avoid an economic collapse
  while simultaneously cutting carbon-
               emissions?
Summary
• Access to energy is essential for prosperity
• Understanding the role of efficiency for growth is
  critical
• S...
Energy, Exergy and Useful Work
• Energy is conserved, except in nuclear reactions. This is
  the First Law of thermodynami...
Tracking energy use and emissions by task




Sources: WRI, CAIT, IPCC – data for 2000
Exergy input share by source, (UK 1900-2000)

100%




 80%

                                                             ...
Exergy to Useful Work, via efficiency


                                              3
     1             2
EXERGY INPUT ...
Exergy conversion efficiencies (US 1900-2005)
                    40%

                    35%
                           ...
Useful work by type (US 1900-2005)
             100%
                     Muscle Work
                                    ...
Economy

• Since the first industrial revolution, human and
  animal labour have been increasingly replaced by
  machines ...
Economy-wide exergy to useful work
                 conversion efficiency      Evidence of stagnation –
                 2...
Exergy Intensity of GDP Indicator
                        60
                                                             ...
Useful work Intensity of GDP Indicator
                        3,5


                         3
                          ...
CO2 intensity of useful work
         CO2/useful work [tC/TJ]
   500
                                            USA      ...
Problems with growth theory

• No link to the physical economy, only capital and
  labour are productive.
• Energy, materi...
Neo-classical estimates of GDP
                                             exponents at factor cost (US 1900-2005)
      ...
Exergy-Efficiency-GDP Feedbacks

                                                  Learning
Exergy Intensity   Exergy Dema...
Ayres-Warr Estimates of GDP
               60
               35

                    Japan
                    USA
       ...
What effect policies to reduce energy intensity of
GDP?
            30

                                  Historical rate ...
What effect policies to reduce energy intensity of
GDP?
                   120
                                           ...
Coal, technical efficiency experience curve, US 1900-2000

                            0,4


                           0,...
Petroleum technical efficiency experience curve,
                                                   US 1900-2000
         ...
Gas technical efficiency experience curve,
                                                    US 1900-2000
              ...
Aggregate technical efficiency experience curve,
                                                      US 1900-2000
      ...
Efficiency Scenarios
Possible trajectories for conversion efficiency
                              0.35

                 ...
Resulting trajectories for GDP

                  70
                                            Efficiency growth        ...
Summary
•Neoclassical growth theory does not explain growth
•If useful work as a factor of production past growth can
 be ...
US mid-range abatement curve 2030




      Source: McKinsey & Co.
Lund 29th October 2009 The Growth Engine Warr
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Lund 29th October 2009 The Growth Engine Warr

  1. 1. Lund 29th October 2009 Dr Benjamin Warr INSEAD Social Innovation Centre The Economic Growth Engine
  2. 2. The problem How to avoid an economic collapse while simultaneously cutting carbon- emissions?
  3. 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. 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. 5. Tracking energy use and emissions by task Sources: WRI, CAIT, IPCC – data for 2000
  6. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
  28. 28. US mid-range abatement curve 2030 Source: McKinsey & Co.

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