Net energy ratio, EROEI and the macroeconomy

doi:10.1016/j.strueco.2016.01.003

Structural Change and Economic Dynamics

Volume 37, June 2016, Pages 121-126

https://doi.org/10.1016/j.strueco.2016.01.003 Get rights and content

Highlights

•
We analyse the macroeconomic implications of the quality of energy production.
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The net energy ratio is the part of produced energy available for final production.
•
NER is related to the EROEI concept encountered in energy science.
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The NER value affects the capital requirements of the economy.
•
A decreasing NER exerts a drag on capital accumulation and growth.

Abstract

In an input–output model of a two-sector economy (energy and manufacturing), we analyse the macroeconomic implications of the quality of secondary energy production. We measure it by the net energy ratio (NER for short), i.e. the fraction of produced energy available for net final production. NER is shown to be related to the EROEI concept encountered in energy science and to affect (a) the energy intensiveness of final output, (b) the capital requirements of the two sectors of the economy and the aggregate capital–output ratio, and (c) the rate of capital accumulation and the growth rate of the economy at given saving rate. As a consequence, an energy transition characterized by a decreasing NER would exert a drag on economic growth.

Introduction

As for any being or system, the existence and development of our societies heavily rely on their ability “to gain substantially more energy than [they] use in obtaining that energy” (Hall et al., 2009, p. 25). If several sources of primary energy (i.e. coal, shale gas or solar energy) remain obviously abundant, the extent to which they can contribute to economic prosperity crucially depends on the ease with which man can transform these primary energy sources into a form of secondary energy useful to the economy. All primary energy sources do not offer the same quality in this respect. In order to assess the quality of an energy source, energy scientists have recently favoured¹ the concept of Energy Return On Energy Invested (EROEI for short). The EROEI of an energy production process² is the ratio of the quantity of energy it delivers to the quantity of energy used directly or indirectly by the process. As Cleveland (2008) notes, economies with access to higher EROEI fuel sources (i.e. to energy sources of higher quality) can allocate relatively more of their labour and man-made resources (capital) to other activities than energy production; they so have greater potential for economic expansion and/or diversification.

To the eyes of many energy scientists and energy economists, a declining trend of the global EROEI of energy production seems hardly avoidable. On the one hand, non-renewable energy resources of high quality are progressively depleting and the exploitation of the residual resources is accompanied by a fall in their EROEI, either because their energy density is lower and/or because their processing gets – directly or indirectly – increasingly energy consuming. On the other hand, renewable energies might offer lower EROEI ratios than conventional fossil fuels (see e.g. Cleveland, 2004, Murphy and Hall, 2010). Several authors (e.g. Hall et al. (2009)) suspect that a declining EROEI would have negative implications on the prosperity prospects of our societies.

If widely acknowledged in energy economics, the importance of the quality of energy (or of its EROEI) is little studied in macroeconomics.³ Bridging a gap between these two strands of literature, we analyse the macroeconomic implications of the quality of energy in an input–output model of a two-sector economy (energy and manufacturing). By describing the intra- and inter-sectoral dependancies, the input–output framework makes explicit that a part of the produced energy is absorbed in the intermediary consumption flows and that only a fraction of the produced energy is available for final production. We call this fraction the Net Energy Ratio (or NER for short). In an economy that has access to energy resources of high quality, energy production requires relatively little intermediary consumption of energy (either directly or indirectly) and NER is high. We show that NER is a key determinant (a) of the energy intensiveness of final output and (b) of the capital requirements of the economy. This is also a driver of capital accumulation and growth. Ceteris paribus, an energy transition characterized by a falling NER increases the capital requirements of the two sectors of the economy and the aggregate capital/output ratio; it simultaneously slows down capital accumulation and economic growth at given saving rate.

Section 2 presents the input–output framework and introduces the concept of NER. Section 3 shows that it is closely related to a concept of enlarged EROEI and affects the energy intensiveness of final production. Section 4 analyses the impact of NER on the capital requirements of the two sectors of the aggregate capital output ratio and on the average productivity of capital. Section 5 highlights its impact on capital accumulation and economic growth. Section 6 summarizes our results.

Section snippets

Input–output description of the economy

We consider a continuous time input–output model of a closed-economy consisting of two production sectors: an energy sector (named sector e) and a sector manufacturing other goods and services (named sector y). Sector e transforms primary energy into secondary energy, i.e. a form of energy that can be used in production activities. Variable E denotes sector e output and is measured in units of energy (u.e. in short). Sector y produces intermediary and final products. Variable Q denotes its

Net energy ratio and EROEI

EROEI is the ratio of the quantity of energy delivered by an energy production process to the quantity of energy consumed directly or indirectly by the process. Its value means that allocating 1 u.e. to this energy production process makes [EROEI−1] u.e. available for other uses in the economy. In the present model, EROEI is the ratio of the quantity of energy delivered by sector e to the quantity of energy used by e directly (the energy required to the working of K_e) or indirectly (the energy

NER & capital requirement of the economy

NER affects the capital requirement of each sector and thereby the capital intensiveness of final production:

Proposition 2

In an economy where NER is lower, the production of a given level of net final ouput requires more capital in both sectors e and y: $K_{e} = \frac{a_{ey}}{| A |} b_{e} Y^{n}$ $K_{y} = \frac{1 - a_{ee}}{| A |} b_{y} Y^{n} .$

Proof

(19) follows from (13) and (5); (20) follows from (13), (12) and (6). □

Proposition 2 can be understood intuitively as follows. When |A| is lower, more secondary energy E is necessary to produce a given level of final output (cfr.

Net energy, capital accumulation and growth

In a dynamic perspective, ((19), (20)) (and thus (22)) imply that economic growth will require more or less investment according to the NER of the economy. In this section, we analyse how the NER affects economic growth and the allocation of final output (between final consumption and investment) required to sustain a given growth level.

Let s be the saving rate of the economy $s =_{def} \frac{I}{Y} = \frac{I_{e} + I_{y}}{Y}$

Using (7) and assuming – for analytical simplicity – the same depreciation rate δ in the two sectors, the

Conclusion

In an input–output model of a two-sector economy (energy and manufacturing), we have introduced the concept of net energy ratio (NER), i.e. the fraction of secondary energy which remains available for net final production, given the energy absorbed by the intermediary consumption flows. NER is the determinant of the input–output matrix obtained when capital depreciation is considered as an intermediary consumption flow. NER has been shown to be related to the concept of EROEI encountered in

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