SUSTAINABILITY, ENERGY, AND ECONOMIC GROWTH R. U. Ayres, MAY 26, 2009

1. SUSTAINABILITY, ENERGY, AND ECONOMIC GROWTH R. U. Ayres, MAY 26, 2009 • Part 1. Sustainability and Climate Change • Part 2. Energy, Peak Oil • Part 3. Exergy and Useful Work • Part 4. Economic Growth Theories • Part 5. The Neo-Liberal Solution

2. Part 1: Long Run Sustainability • Long run sustainability has several dimensions, of which climate change, sea level rise and loss of natural capital, including biodiversity, are major elements. • Climate change and sea-level rise are especially driven by the build-up of so-called greenhouse gases (GHGs) in the atmosphere • The major GHGs are carbon dioxide and methane. Both are strongly related to fossil fuel consumption • This lecture cannot adequately survey the subject

3. Global Temperatures 0.6 0.4 Annual Average o Five Year Average 0.2 0 Temperature Anomaly ( C) -0.2 -0.4 -0.6 2000 1960 1860 1880 1900 1920 1940 1980 Source: Wikipedia "Instrumental Temperature Record"

4. Historical and projected global sea level rise: 1900-2100 Meters 50 40 30 20 10 0 1900 2000 2050 2100 1950 Glacier & ice caps Thermal expansion Water loss on land Source: AQUA, GLOBO Report Series 6, RIVM

5. Part 2: Energy and Peak Oil • “Energy” is not the core problem; carbon is. Climate change is mainly due carbon dioxide build-up in the atmosphere and secondarily due to methane releases from agriculture (grazing animals), gas distribution and coal mining. There is a major “feedback” threat from thawing of perma-frost, due to warming itself. However we focus here on the near-term problem of oil and gas supply.

6. Source: Bezdek, 2008

7. Source: Bezdek, 2008

8. Global oil discoveries minus global oil consumption 1965-2003 50 40 30 20 Gigabarrels annually 10 0 -10 -20 -30 1965 1970 1975 1980 1985 1990 1995 2000 year Source: Heinberg 2004, "Powerdown", Figure 5 page 43 Until well into the 1970s, new global oil discoveries were more than sufficient to offset production each year. Since 1981, the amount of new oil discovered each year has been less than the amount extracted and used.

9. The wrong kind of shortage 1600 proved and probable reserves proved reserves 1400 1200 1000 Billion barrels 800 600 400 200 0 2004 1980 1984 1988 1992 1996 2000 year Source: Strahan 2007, "The Last Oil Shock", Figure 13 page 71 Global "proved reserves" (wide bars) give the reassuring appearance of continuing growth, but the more relevant "proved and probable reserves" (thin bars) have been falling since the mid-1980s.

10. Saudi reserves 1936-2005

11. Oil production since 2002 approaching saturation Source: http://www.theoildrum.com

12. World oil production projections to 2040 Source: http://www.theoildrum.com

13. Hubbert linearization: World oil & gas output 1960-2006 Source: Dave Rutledge, The coal question and climate change : http://www.theoildrum.com 6/20/2007

14. Part 3: Exergy and Useful Work • Energy is conserved, except in nuclear reactions. The energy input to a process or transformation is always equal to the energy output. This is the First Law of thermodynamics. • However 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.

15. Exergy and Useful Work, Con’t • Capital is inert. It must be activated. Most economists regard labor as the activating agent. • Labor (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

16. Recapitulation: Energy vs. Exergy • Energy is conserved, exergy is consumed. • Exergy is the maximum available work that a subsystem can do on its surroundings as it approaches thermodynamic equilibrium reversibly, • Exergy reflects energy quality in terms of availability and distinguishability from ambient conditions.

17. WASTE EXERGY (OFTEN LOW QUALITY HEAT OR POLLUTION) Exergy to Useful Work 3 USEFUL WORK 1 EXERGY INPUT 2 x EFFICIENCY

18. EXERGY TYPES • 1. FOSSIL FUELS • (Coal, Petroleum, Natural Gas, Nuclear) • 2. BIOMASS • (Wood, Agricultural Products) • 3. OTHER RENEWABLES • (Hydro, Wind) 4. METALS 5. OTHER MINERALS

19. exergy by source: 1900 -2000Japan, Austria, USA, UK

20. Exergy (E) Austria, Japan, UK & US: 1900-2005 (1900=1) index 18 USA Japan UK Austria 16 14 12 10 8 6 4 2 0 1900 1920 1940 1960 1980 2000

21. Exergy Intensity of GDP Indicator • Distinct grouping of countries by level, but similar trajectory • Evidence of convergence in latter half of century • Slowing decline

22. exergy and useful work intensity

23. Conversion Efficiencies

24. Evidence of stagnation – Pollution controls, Technological barriers Ageing capital stock Wealth effects High Population Density Industrialised Socio-ecological regimes Resource limited Low Population Density Industrialised New World Socio-ecological regime Resource abundant Exergy to useful work conversion efficiency

25. Resource Substitution From Coal, to Oil, Gas then Renewables and Nuclear Exergy input share by source, (UK 1900-2000)

26. Useful work types • . • Electricity • Mechanical drive (mostly transport) • Heat (high, mid and low temperature) • Light • Muscle Work • N.B.Available work (exergy) and ‘useful’ work are not equal, the latter depends on the exergy efficiency of the conversion process for a given task. Efficiency = useful work / available work.

27. Useful work by type(US 1900-2005)

28. useful work by use categoriesin shares of total GJ/cap

29. Useful Work (U) Austria, Japan, US, UK:1900-2000 index 90 80 USA Japan UK Austria 70 60 50 40 30 20 10 0 1900 1920 1940 1960 1980 2000

30. trends in useful work outputs: 1900-2000 in GJ/cap

31. exergy and useful work intensity: GJ/$1000

32. carbon intensities: tC/TJ

33. Income (GDP/cap) and useful work per capita

34. Part 4: Useful Work and Economic Growth • Since the first industrial revolution, human and animal labor have been increasingly replaced by machines powered by the combustion of fossil fuels. This strongly suggests that exergy or useful work should be factors of prody=uction, along with conventional capital and labor.

35. socio-economic data

36. Standard paradigm: Production-consumption systems A. CLOSED STATIC PRODUCTION CONSUMPTION SYSTEM Production of Purchases Consumption Goods and of Final Goods Wages, Rents and Services Services B. CLOSED DYNAMIC PRODUCTION CONSUMPTION SYSTEM Production of Consumption Purchases of Final Goods Goods and Wages, Rents and Services Services Purchases of capital goods Invested Savings Capital Capital depreciation C. OPEN STATIC PRODUCTION CONSUMPTION SYSTEM Production of Consumption Purchases of Final Goods Goods and Wages, Rents and Services Services Consumption "Raw" wastes materials Production wastes Waste Extraction Disposal Recycled materials Treatment

37. Economic production functions ( ) ( ) ( ) = a b g Y A H G L F R K t t t t t t t t Y is output at time t, a function of, t K , L , R inputs of capital, labor and natural • t t t . resource services a b g + = 1, (constant returns to scale assumption) • , + is • A total factor productivity t H , G and F coefficients of factor quality • t t t Common practice: Cobb-Douglas

38. GDP and factors of production, US 1900-2005 Index (1900=1) 50 40 GDP Capital 30 Labor Exergy Useful Work 20 10 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 year

39. US GDP 1900-200; Actual vs. 3-factor Cobb Douglas function L(0.70), K(0.26), E(0.04) GDP Index (1900=1) 25 20 US GDP 15 10 SOLOW RESIDUAL (TFP) 5 Cobb-Douglas 1940 1960 1980 2000 1900 1920 year

40. Technological Progress Function and Solow Residual USA: 1900 - 2005 Index (1900=1) 5.5 5 4.5 TPF (1.6% per annum) unexplained Solow residual 4 3.5 3 2.5 2 1.5 1 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 year

41. Problems with growth theory • Money makes money grow. 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, other than R&D inputs.

42. The evolutionary paradigm • The economy is an open multi-sector materials / energy / information processing system in disequilibrium. • Sequences of value-added stages, beginning with extraction and ending with consumption and disposal of material and energy wastes. • Spillovers from radical innovation, particularly in the field of energy conversion technology have been among the most potent drivers of growth and structural change. • Economies of scale, learning by doing, factor substitution  positive feedback, declining costs/prices, increased demand and growth.

43. The Virtuous Cycle driving historical growth Lower costs, lower prices, increased demand, increased supply, lower costs

44. Economic production functions: II The linear-exponential (LINEX) production function ì ü æ ö + L U L æ ö æ ö = - + - ç ÷ Y U a ab exp 2 1 ç ÷ ç ÷ í ý ç ÷ K U t è ø è ø è ø î þ For the USA, a = 0.12, b = 3.4 (2.7 for Japan) U Corresponds to Y = K L 0.56 0.08 0.38 At , 'total factor productivity', is REMOVED • • Resources (Energy & Materials) replaced by WORK Ft = energy-to-work conversion efficiency • • Factors ARE MUTUALLY DEPENDENT • Empirical elasticities DO NOT EQUAL COST SHARE

45. Empirical and estimated US GDP: 1900-2000 US GDP (1900=1) 25 GDP estimate Cobb-Douglas LINEX GDP estimate 20 Empirical GDP 15 10 POST-WAR COBB DOUGLAS alpha=0.51 beta=0.34 gamma=0.15 PRE-WAR COBB DOUGLAS alpha=0.37 beta=0.44 gamma=0.19 5 0 1900 1920 1940 1960 1980 2000 year Empirical GDP from Groningen GGDC Total Economy Growth Accounting Database: Marcel P. Timmer, Gerard Ypma and Bart van Ark (2003), IT in the European Union: Driving Productivity Divergence?, GGDC Research Memorandum GD-67 (October 2003), University of Groningen, Appendix Tables, updated June 2005

46. Empirical and estimated GDP Japan; 1900-2000 GDP Japan (1900=1) 50 GDP estimate LINEX 40 GDP estimate Cobb-Douglas Empirical GDP 30 20 POST-WAR COBB DOUGLAS alpha=0.78 beta=-0.03 gamma=0.25 PRE-WAR COBB DOUGLAS alpha=0.33 beta=0.31 gamma=0.35 10 0 1900 1920 1940 1960 1980 2000 year Empirical GDP from Groningen GGDC Total Economy Growth Accounting Database: Marcel P. Timmer, Gerard Ypma and Bart van Ark (2003), IT in the European Union: Driving Productivity Divergence?, GGDC Research Memorandum GD-67 (October 2003), University of Groningen, Appendix Tables, updated June 2005

47. Empirical & estimated GDP, UK 1900-2005 (1900=1) indexed 1990 Gheary-Khamis $ 7 GDP estimate LINEX 6 GDP estimate Cobb-Douglas 5 Empirical GDP 4 3 COBB DOUGLAS alpha=0.42 beta=0.24 gamma=0.34 2 1 0 1910 1960 1900 1920 1930 1940 1950 1970 1980 1990 2000 2010 year Empirical GDP from Groningen GGDC Total Economy Growth Accounting Database: Marcel P. Timmer, Gerard Ypma and Bart van Ark (2003), IT in the European Union: Driving Productivity Divergence?, GGDC Research Memorandum GD-67 (October 2003), University of Groningen, Appendix Tables, updated June 2005

48. Empirical & estimated GDP, Austria 1950-2005 (1950=1) indexed 1990 Gheary-Khamis $ 7 GDP estimate LINEX 6 GDP estimate Cobb-Douglas 5 Empirical GDP 4 3 POST-WAR COBB DOUGLAS alpha=0.56 beta=0.20 gamma=0.24 2 1 0 1910 1960 1900 1920 1930 1940 1950 1970 1980 1990 2000 2010 year Empirical GDP from Groningen GGDC Total Economy Growth Accounting Database: Marcel P. Timmer, Gerard Ypma and Bart van Ark (2003), IT in the European Union: Driving Productivity Divergence?, GGDC Research Memorandum GD-67 (October 2003), University of Groningen, Appendix Tables, updated June 2005

49. REXS model forecast of US GDP:2000-2050 Simulation results using 45 the plausible trajectories of technical efficiency growth HIGH as a function of cumulative Initial ~3% growth rate, for 130% 33.75 primary exergy production target increase in technical efficiency. 22.5 MID Initial 1.5% growth rate for target 120% improvement in efficiency. 11.25 LOW Shrinking economy at rate of 2 - 2.5% after 2010 if the target 0 technical efficiency is only 115% 1900 1918 1936 1954 1972 1990 2008 2026 2044 year GDP (1900=1) greater than the current. empirical low mid high Source: "The MEET-REXS model". Ayres & Warr 2006

50. Part 5: The Neo-liberal solution • We have shown the strong link between exergy or useful work and output. The problem for the captain of the great ship Titanic is to avoid an economic collapse while simultaneously cutting carbon-emissions drastically by cutting fossil fuel consumption. The only possible approach is to increase energy efficiency a lot, but at little (or even negative) cost. We need a win-win policy.