Elsevier

Energy

Volume 32, Issue 5, May 2007, Pages 634-648
Energy

Energy efficiency, sustainability and economic growth

https://doi.org/10.1016/j.energy.2006.06.005Get rights and content

Abstract

This paper explores two linked theses related to the role energy in economic development, and potential sources of increased energy efficiency for continued growth with reduced greenhouse gas (GHG) emissions. The first thesis is that, while reduced GHG emissions are essential for long-term global sustainability, the usual policy recommendation of increasing energy costs by introducing a carbon tax may be relatively ineffective under current market structures and have an unnecessarily adverse impact on economic growth. Our second thesis is that there exists a practical near-term strategy for reducing GHG emissions while simultaneously encouraging continued technology-driven economic growth. Moreover, this strategy does not require radical new technologies, but rather improved regulation or—more precisely—better deregulation of the electric power sector.

In respect to the first of our two theses, this paper addresses a deficiency in neoclassical economic growth theory, in which growth is assumed to be automatic, inevitable and cost-free. We challenge both the assumption that growth will continue in the future at essentially the same rate (“the trend”) as it has in the past, and the corollary that our children's children will inevitably be richer and better able to afford the cost of repairing the environmental damages caused by current generations [[1]Simon et al., The state of humanity. Cambridge MA: Blackwell Publishers Ltd.; 1995].

Section snippets

Economic background

Energy (actually exergy) is as essential to the functioning of the global economic system as gasoline is to a car or electricity to a light bulb. The evidence is visible and pervasive. It is the sun's energy that drives the most fundamental process in nature, photosynthesis, whereby carbon dioxide and water are converted into carbohydrates, lipids and proteins (biomass). The biomass produced in the distant past was converted by natural geological processes into the fossil fuels we utilize today

Digression: on exergy, power and useful work

Before introducing an alternative perspective on the relationship between energy and economy activity (and growth) it is important to focus on the essential distinction between ‘raw’ energy (e.g. from the sun) and the services actually performed by energy and utilized by the economy. These services are called useful work.4

The growth connection

What is the link between useful work output and economic growth? It is conceptually very simple, though much less simple to demonstrate quantitatively. In brief, as technological progress makes the conversion process from ‘raw’ exergy (e.g. fuels) to useful work more efficient, the cost of ‘useful work’ tends to decline. As costs fall, in a competitive market, prices fall also. Declining prices of work generate increased demand for useful work, throughout the economy. (We have already noted

Policy implications of the new perspective on growth

The policy implications of this new perspective on growth are quite simple and stark. One major implication is that current policy prescriptions by most environmental economists and ‘greens’ are wrong. The need to reduce consumption of fossil fuels and the output of so-called greenhouse gases (GHGs) cannot be denied. But the usual prescription is to ‘get the prices right’—e.g. to raise them—perhaps via a carbon tax. This would presumably cut demand (e.g. [17]). If the standard assumptions about

The case for and against centralized generation of electric power

The majority of the world's electricity is produced at large centralized plants utilizing steam turbines fuelled with fossil energy. A century ago the justification for such centralized generating plants was straightforward: early 20th century steam turbines were capable of converting heat energy into mechanical energy with efficiencies much higher than the small reciprocating steam engines then installed in most factories (and railroad locomotives) with variable loads. Centralized turbines,

Obsolete assumptions about central generation

A fundamental problem blocking reform is that policy-makers, regulators and the public assume that central generation is optimal. This was true early in the 20th century but is true no longer. Several unquestioned and incorrect assumptions underlie this fallacy. They include the following:

Why is so little ‘waste’ energy used in the US and many other OECD countries?

Given the above-market financial returns available in CHP investment (for example, see [30]), not to mention the obvious benefits of reducing air pollution and decreasing grid vulnerability, a question arises: Why is 93% of world wide electric power generated in central plants that reject large quantities of thermal energy? The simple answer is that the costs and losses of moving thermal energy per se long distances (from central plants) are unaffordable. However the technology that permits

Conclusions

This review makes two major points, which are worth repeating and emphasizing. Whereas conventional theories of economic growth do not depend on energy supply, or the demand for energy services, a new, quantitative, endogenous theory of economic growth does incorporate these factors explicitly [11], [13], [14]. In particular, it has been shown that US and Japanese economic growth, since 1900, can be explained endogenously by a production function incorporating a third factor (along with

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