SUMMARY The role of energy in economic growth(Stern) presents a review of literature with respect of energy and economic d...
which it is also shown by Dasgrupta-Heal that with a constant discount rate there is depletionand economic stagnation.The ...
After all, from a macroeconomic view, every activity needs materials and energy. Theelasticities of substitution are highe...
Basically, mainstream economics could not be wrong in their approach for developedcountries or assuming energy not scarce....
the most important factor mitigating the global increase in energy use and carbon emissionsdue to economic growth”The rebo...
“Some research indicates that most of the historical reductions in energy intensity indeveloped economies and China have b...
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The role of energy in economic growth - Stern

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The role of energy in economic growth - Stern

  1. 1. SUMMARY The role of energy in economic growth(Stern) presents a review of literature with respect of energy and economic development,from there, it modifies the Solow model to include an energy component. Its results show thatwhen energy is considered abundant it neither constitutes a limit nor a causal factor ofeconomic growth.(Stern) pretends to evaluate the significance of energy in economic growth and try tounderstand the factors that affects (positively or negatively) the links between them. Theoriesthat have explained growth without taking into account the energy parameter are limited, sothe theories that explain growth entirely by energy supply without considering knowledge,information and institutions are.The first step is to understand the role of energy in production. Based on the laws ofthermodynamics it is impossible to leave aside energy as a essential factor of production. Inaddition there is a limit to substitution due to the generation of entropy between processes.Moreover mass and energy are irreproducible, however theoretically the vector of energy andraw material are reproducible as factors of production though are caused by natural processes(i.e. in human scale are non-reproducible). Anyway energy and materials need to be extracted,which represents a disruption of the natural environment. Information, features of organizedmatter and energy, is not reproducible but it is necessary to support productive processes. Inthis respect, capital and labor are easier to measure than information and knowledge so theycan be used to estimate the latter, but capital and labor are less easy to be measure thanenergy.THE MAINSTREA GROWTH THEORYGrowth theoryThe Solow is the most know model, it present economic growth as a function of capitalaccumulation, labor and other economic variables such as population growth rate, savings rateand depreciation. However the long-run growth stagnates as the economy approaches itsequilibrium state without any technological progress. This model is exogenous since the mainlong run growth variable is created outside the economic system (technology progress).Endogenous models AKSchumpeteriam modelsGrowth models and no technical changeThese models depend ultimately on technological progress since resource extraction dependon it. Capital accumulation must account for the loss of natural resources. Institutionsintervene for the growth sake and technological deployment. Some models attempt tomaximize social welfare or reach sustainability (nondeclining social welfare)Solow show that sustainability is possible if nonrenewable resources are substitutable forcapital. However if there is exhaustion of resources and the economic growth rate falls to zero,
  2. 2. which it is also shown by Dasgrupta-Heal that with a constant discount rate there is depletionand economic stagnation.The main point of these models is that it is understood that decoupling of the economy andresources is possible through technology. However That might be a misinterpretation sincesustainability can be achieved through renewable resources and the absence of populationgrowth.Growth models with resources and technical growthThe technical feasibility of sustainability does not imply real sustainability. Most of thesemodels are aimed to show how technological progress can support sustained consumption.THE ECOLOGICAL ECONOMICS APPROACHIn the ecological economics view, energy is the most important factor of the economy. It isbased on the biophysical foundations of any human activity. Substitution plays a limited roleon compensating scarcity of natural resources. “Increased energy use is the main or only causeof economic growth”. The whole economic system is assumed as a group of energy fluxeswhich defines an creates intermediate productions factors. Other flows such as capital andlabor are maintain and supported by the energy fluxes. Commodities prices are defined bytheir embodied energy within them or correlated to the price of energy.Energy return on investment and economic outputEROI is the energy produced by the energy used for extraction, the higher the better. Fossilfuels and renewable EROI´s are different in benefit of fossil fuels. “Declining EROI wouldthreaten not just growth but also the level of output of the economy and, therefore,sustainability”.Limits to substitution Depend on which type of substitution 1) within category of similar production inputs or 2)between categories. Solow explained that WITHIN substitution is feasible in different energysources. However transition in the micro-level is easier, as well as transition after exhaustion.While for BETWEEN substitution, there are difficulties to measure the elasticities. By empiricalanalysis has been found that the elasticity between capital and energy is less than unity.The thermodynamic limits for substitution can be analyzed easily for individual processes. Forcomplex system, the these limits are found for elasticities less than unity.In this respect the Georgescu-Roegen´s fund flows model recognizes three flows of materialsenergy and information, transformed by two agents (human labor and manufactured capital).It implies a low limit for substitution and lack for opportunities to increase substitution.
  3. 3. After all, from a macroeconomic view, every activity needs materials and energy. Theelasticities of substitution are higher when there is a less aggregated sector , more difficult at amacro level1.Limits to technological changeKnowledge is embodied in the capital accumulated, both manufactured and human. However“there are still thermodynamic restrictions on the extent to which energy and material flowscan be reduced in this way”Knowledge is non-rival in use. This implies constant returns to knowledge while other inputsare under diminishing returns. However knowledge cannot compensate infinitively for thediminishing returns of the others. In addition, knowledge cannot participate without the otherinputs as well.SYNTHESIS(Stern) presents a modified Solow model that tries to explain the long run history of economy.Based on economic transition therories 1) endogenous technical change approach by Galorand Weil, and Lucas 2) slow transition by Hansen and Prescott (transition starts whentechnological progress its own use profitable)The difference between England and Netherlands to lead the industrial revolution was theavailability of coal in the UK. First coal decrease its price with respct to the other conventionalfuels. Then innovation was required and industrial revolution came.The model adds an energy variable that has poor substitutability with K and L, while keeping K-L substitutability at unity. Then energy can be either a constraint or enabler of economicgrowth based on its availability by resources and technological change.Two augmenting indexes are applied “to labor” and “to energy” which reflect technologicalprogress, effective supply and quality in both parameters. Materials are ignored so they areassumed that they can be put together with the energy factor2RESULTS. At abundant energy, economic growth depends on Solow´s considerations, howeverwhen it is scarce it depends on the energy supply and the energy augmenting index. Anotherfactor is the price of energy if decreasing economic growth can be boosted, this is alsosupported by Ayres an Warr as a major driver.The low substitutability between energy and the other inputs is explained since if energysupply were constant it would represent a constraint. Reasons. 1) experiences in Sweden showhow infrastructure act greatly to decrease the effect of energy. 2) it is difficult to differentiatethe energy and labor augmenting factors. 3) ecological economics equilibrium requires amicroeconomic limit of energy for any activity and a macroeconomic limit to compensate fordepreciation.1 IMPORTANT for small scale economies2 How, why?
  4. 4. Basically, mainstream economics could not be wrong in their approach for developedcountries or assuming energy not scarce. At certain point energy should be risen before itstarts being a constraint. Stern´s model proves to be good at macroscale.(Ayres and Warr)’s model contrast to stern’s model. Inputs are seen as q-substitutes versus q-complements. In Stern’s, inputs are q-complements and technical change augments both laborand energy3.FACTORS AFFECTING THE LINKAGEEvidence in several developed economies show decreasing in energy intensity with respect toGDP growth. This evidence can be related to the concept of the Kuznets curve. To identify thefactors, (Stern, 2011) used a general production frontier with separable output and separableenergy and non-energy inputs.Note: the production frontier hasn’t explored the effect of energy in more labor-intensive andin the transition to capital-intensive economy.Substitutability of energy and capital“Apostolaskis concluded that capital and energy act more as substitutes in the long run andmore as complements in the short run”. “studies that included capital, labor and energy buNOT materials as input indicate substitution, while econometric cost functions that alsoinclude materials indicate complementarity.”“the micro-level Hicks elasticity of substitution between capital and energy is less than unity,especially in the short run”. In Kehoe’s model, in the short run there is complementarity in thelong run there is substitutability, based on priceInnovation and energy efficiencyIt can be accounted by the autonomous energy efficiency index AEEI, or by an energyaugmenting technical change. “When there is endogenous technological change, changes inprices may induce technological changes”Energy-saving technology diffusion with decrease in prices can boast energy-using technologydevelopment. If technical change is energy-using the decrease in prices boasts TFP and viceversa (Jorgenson4). “Diffusion [of energy using technologies] tends to follow logistic curve withthe speed of diffusion depending on among other things how well the innovation fits into theexisting infrastructure.”Diffusion of energy efficiency tech could be inefficient over places, time and individuals due todifferences, preferences and technological status, and also due to market failures andbehavioral factors.“Higher fossil fuels reserves are associated with lower energy efficiency. Energy efficiencyconverges over time across countries with growing economies and technological change was3 Doubtedly happening in real life4 Not sure which article of Jorgenson
  5. 5. the most important factor mitigating the global increase in energy use and carbon emissionsdue to economic growth”The rebound effectThere are 3 microeconomic rebound effects and 2 macroeconomic5Energy quality and shifts in composition of energy inputThrough economic development, the energy mix evolves to increase diversity and quality.“Energy quality is the relative economic usefulness per heat equivalent unit of difference fuelsand electricity.” Fuels have a number of physical attributes that will affect their relativequalities, including energy density; power density (rate of heat units produced per unit are perunit time); ease of distribution; the need for a transfer medium; controllability; amenability tostorage; safety; and environmental impacts142–144. Marginal Product of the Fuel depends on theattributes above and prices.There are few studies on energy intensity and GDP. Prices-energy quality and GDP (ratherthan energy SUPPLY -GDP) showed less decoupling evidence, however other studies haveshown that there is a larger role of technological progress than for energy compositionchanges or reduction in energy intensity.Shifts in the composition of outputSince industries have different energy intensities, shifts in output alter the relationshipbetween energy and economic growth. Even service-based industries require large energysupplies. The example of the internet effect but it is not clear in reducing or increasing energyintensity. Households have presented increases of energy intensity over time whereas themanufacturing sector, the opposite. Reduction of energy intensity through shifts in output hasnot been followed by most developing countries because of the diffusion of pollution-intensiveindustries.EMPIRICAL TESTING OF CAUSAL RELATIONSHIPS“Two methods for testing for causality among time-series variables are Granger causality tests165 and co-integration analysis166 Hendry and Juselius 167.”The first method is the most widelyused.CONCLUSION“Energy use and output are tightly coupled with energy availability playing a key role inenabling growth”“The elasticity of substitution between energy and capital is likely to be low”“. The current low price of energy reflects a low marginal productivity because of this heavyuse.”5 Look at the article
  6. 6. “Some research indicates that most of the historical reductions in energy intensity indeveloped economies and China have been due to technical change, but other research finds amuch larger role for structural change.”“Technological change tends to be offset to some degree by the rebound effect”“there is clearly much scope for further research to clarify the prospects for decoupling energyuse and economic growth and for understanding the role of energy in growth.”Words: TFP, LINEX production function, output elasticity of labor, backstage technology,boserupiar response to scarcity.AYRES, R. U. & WARR, B. 2009. The economic growth engine, Cheltenham, Edward Elgar.STERN, D. I. 2011. The role of energy in economic growth. Annals of the New York Academy of Sciences, 1219, 26-51.

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