No free lunch — Economics on finite planet and a way forward for the “decoupling conundrum”
Supporting detailed analysis and source data available on kaggle. This is the latest version, an earlier analysis was based on total GDP and total population. Data referenced from source article :R.U. Ayres et al. Exergy, power and work in the US economy, 1900–1998 Energy 28 (2003) 219–273 Table A-4c — Fuel mass & exergy database for the US 1900–1998. Many of the ideas presented in this article are drawn from several sources including Kate Raworth 2017 “Doughnut Economics”
In a time when scientists have warned that as a global society we must reduce carbon emissions by 45% by the year 2030 to avoid catastrohpic global warming, a natural question that emerges is at what cost to GDP can we expect from such a dramatic transformation. Is it possible to accomplish dual goals of meeting scientific targets for a safe climate, and simultaneously continue to pursue our ambitions of sustained GDP growth using our current fossil fuel dependent economic model? This is the “De-coupling Question”
Can we de-couple our national ambitions for long term prosperity from atmospheric heating effects of carbon pollution from burning fossil fuels?
The de-coupling could be broken up into decoupling of any of the three component links
1. carbon pollition — Exergy : Switch to non fossil fuel forms of energy and cleaning fossil fuel energy systems using carbon capture
2. Exergy — GDP growth : Energy efficiency, mix of economic services that depend less on materials and external energy sources and instead improve efficiency of income growth from energy efficiency, information technology and a shift to higer skilled services
3. GDP — prosperity : raise the political will to shift to a more agnostic, critical view of GDP as a metric indicator of economic success and open up to the idea that there may be other better ways of measuring human prosperity.
This article addresses the second link in the logic chain, based on historical analysis how closely linked is Exergy as an explanatory factor for GDP growth?
Exergy and Solow’s mysterious technology factor
In 1957 Robert Solow attempted to model economic growth from the factors of labor and capital, and realized that these two inputs alone falls far short of explaining majority of GDP growth, and that another unexplained factor accounted for the majority of the growth. He attributed this third dominant factor as multifactor productivity or “technology”.
The 2003 article by Ayres elaborates into Solow’s technology in more detail from the less ambiguous perspective of thermodynamics by introducing a quantity “exergy” which is the amount of energy that is available for useful work. Heat, energy are absolute quantities that obey the laws of conservation of energy. Not all forms of energy can be readily converted into useful work. Heat at 1,000 C can be used to perform many forms of work, and the opposite is true for heat at 25C. In Ayres article he compiles the total Exergy in the US economy, draws a strong explanatory link between economic growth during the period and growth of total exergy inputs, and he characterizes the growth into two distinct phases. The first phase — from 1900 until 1970 is a period of expanding extraction and conversion for new exergy, while the second phase from 1970 onwards is a trend of increasing efficiency of conversion of exergy into useful economic work (here GDP is taken as a proxy for useful work). The early 1970’s was important economic transition point for the US and co-incided with the breakdown of the Bretton Woods gold standard monetary system and an oil supply shock triggered by the US oil embargo by Iran.
At the conclusion of the article Ayres suggests that there may be some potential to accelerate the trend of decoupling GDP from exergy by means of energy efficiency improvements and information technology to take on a greater share of economic output. At the same time he cautiously questions the extent to which these two factors can fully decouple exergy from GDP given the strong link between the two.
In this analysis of Ayres dataset, exergy and labor alone are able to predict the 20th century data with an R-squared of 0.97, which is considered a high degree of accuracy and suggests that few other variables account for the remaining “residual” of GDP such as other environmental resource inputs, or “technology”. The story of GDP and the story of exergy are intimately connected.
The danger of GDP is that it does not account for the real economic losses from non-energy resource inputs into the economy in the form of minerals, soil, water reserves, pollution and other ecological factors and the social costs. In other analysis not explicitly cited in this short article — some author’s have concluded that after accounting for the total ecological footprint, the total resource efficiency of GDP (labor, exergy, ecological inputs) has not improved significantly (due to technology for example) over the 20th and 21st century and may instead be becoming worse.
In conclusion, if scientists are telling us that we must reduce carbon emissions by 45% in the next 10 years and decouple ecological damage from our ambitions about prosperity, we should not lean to heavily on the idea that we will get there by changing the Exergy-GDP link. While fine as a theoretical exercise and may be possible one day, there is not strong empirical evidence that this can be done predictably in the limited amount of time we have to act.
A way forward — the other two links in the chain
Instead, a more practical question is to take a closer look at the second two links
1. carbon pollution — Exergy : Switch to non fossil fuel forms of energy and cleaning fossil fuel energy systems using carbon capture
3. GDP — prosperity
For link #1 — that of carbon pollution and exergy, is technically possible and there is some hope of progress over some time period — however this quest may at some point reveal an uncomfortable reality that is limited by hard facts of thermodynamics, engineering, physics and natural resource limits on a finite planet.
Which brings us to the fundamental re-examination of our definition of success, a question long overdue. It’s time to open up pandora’s box, it’s time to search for true meaning of what we are aspiring for as a society, why do we exist? To what purpose do we even have an economy in the first place?
GDP is an imperfect measure of prosperity, if at all and that can produce perverse incentives if not taken into context. As an example, the sale of alcohol, tobacco, and firearms all increase with GDP but this growth may not lead to better outcomes for society as a whole if they are allowed to proliferate unquestioned by the state and regulating authorities. It’s creator — Simon Kuznets gave this same warning to political leaders of the time during the Great Depression of the 1930’s. Kuznets warned not to over obsess the significance of the metric and stressed that it should not be a substitute for other more direct measures of human well-being or a singular ambition at the expense of other national priorities.
Its time to shine a skeptical spotlight on GDP in the quest for a more meaningful measure of prosperity that is not in conflict with the ecological constraints of a finite planet.