The Role of Energy in the Industrial Revolution and Modern Economic Growth

I wrote this paper with Astrid Kander a few months ago following my visit to Lund, but it has only just been added to RePEc.

In the paper, we develop a simple model of economic growth that allows for a significant role for energy and we apply the model to the Swedish data for the 19th and 20th centuries. To keep things as simple as possible the model is an extension of the famous Solow growth model. Output is measured in terms of gross output without netting out intermediate inputs which allows us to include energy as a regular production input alongside capital and labor. Both technological change and the supply of energy are treated as exogenous in this model but the capital stock evolves endogenously.

We find that the expansion in the supply of energy services over the last couple of centuries has reduced the apparent importance of energy in economic growth despite energy being an essential production input. We find that the elasticity of substitution between a capital-labor aggregate and energy is less than unity, which implies that when energy services are scarce they strongly constrain output growth resulting in a low output steady-state. When energy services are abundant the economy exhibits the behavior of the “modern growth regime” with the Solow model as a limiting case.

This figure, from the paper, attempts to illustrate this point:



It shows the effect of labor-augmenting technological change (the only type in most aggregate growth models) of the size of the optimal capital stock as a function of the amount of effective energy per effective worker. The larger the amount of energy services available per worker the greater the effect of technological change on the capital stock and hence on the output of the economy. Sigma refers to the elasticity of substitution between energy and capital. The smaller it is the sharper the transition from a state where the response of the capital stock is very small to one where it is large. The bottom line is that when energy supply is limited innovation has little impact on growth unless it is innovation directed at increasing the productivity of energy. This is the situation that we argued applied before the industrial revolution.

The expansion of energy services is found to be a major factor in explaining the industrial revolution and economic growth in Sweden, especially before the second half of the 20th century. In the latter period, labor-augmenting technological change becomes the dominant factor driving growth. We can sum this up with a "growth accounting" exercise (not included in the paper):



Capital, labor, and energy are simply the quantities of these inputs. Labor Aug. refers to labor augmenting technological change and energy aug. to energy augmenting technical change. Total factor productivity is a weighted mean of these two components. Energy quality refers to the effects of the shift from lower quality to higher quality fuels over time. Over time capital accumulation and labor augmenting technological change have been more and more important. Increase in energy supply and energy augmenting technological change were most important in the late 19th century, energy quality in the early 20th century. Hence, the claim that energy's importance in growth has declined over time. But it still makes a significant contribution and if energy supply was curtailed in the future could again become more important.

This paper, which we currently are working on a revise and resubmit, is just the first part of what we hope will be an ongoing collaboration on these issues.

Omumbo et al. Revisit Temperature at Kericho, Kenya

Last year I wrote a series of blogposts about the controversy over malaria and climate change in highland East Africa, and most specifically at Kericho, Kenya. Our previous research had shown that there was no signficant trend in temperature in various locations across Eastern Africa and so the increase in malaria morbidity was unlikely to be due to climate change. Our work was challenged and more recent papers claimed that there were in fact trends. We found that among other things newer versions of the CRU database did show trends in temperature. Now Omumbo et al. have analysed a cleaned up version of the data from the weather station in Kericho.



We were reluctant to use this data previously because of the apparent breaks in the series. The graph shows an apparent increase in temperature of around 3/4 of a degree over 30 years. So I think it is settled now that, at least when more recent data is included, temperature has increased at Kericho. The twist is that in the years since our 2002 publications the incidence of malaria has dramatically reduced.

Astrid Kander

There is an article about my collaborator Astrid Kander in the Sydsvenskan newspaper. Apparently the reporter went to the same high school as her. Google's translation into English sounds quite poetic :)

Grattan Institute Report on Australia's Carbon Emissions Reduction Policies

The Grattan Institute has put out a report reviewing the performance of Australia's policies to reduce carbon emissions. Maybe you are surprised to find that there are quite a lot of these, actually, including some semi-market based mechanisms. The most important of these is the Renewable Energy Target. Electricity generators have to generate 20% of electricity from renewable sources by 2020. They can achieve this by purchasing certificates from providers of renewable energy. This isn't exactly a market mechanism for reducing carbon emissions themselves as only renewable sources can be used. But it is better than straight regulation.

Last week I saw a presentation on this work by John Daly (Grattan Institute CEO) at the climate policy conference CCEP held at ANU. I think the key graph is this:



This shows the size of the schemes on the left and the cost per tonne of abatement on the right. Costs are measured in terms of direct payments. Hence, efficiency standards appear to be free, which of course is not really the case. Still we clearly see that the grants and rebate schemes haven't generated much abatement and that rebates have been very costly in delivering those reductions. The market based schemes have generated large reductions at reasonable nominal costs.

If You Only Have 2 Hours to Teach Environmental Economics, What Would You Say?

All of us teaching Introductory Economics face this problem. This is what I'm going to say on Tuesday.

CCEP Working Papers in March 2011

CCEP Working Papers got a nice bounce in hits in March. I think this is partly due to us putting links to RePEc onto the CCEP website as well as releasing some new papers (also see the paper by Eric Knight and Nick Howarth and Hugh Saddler.

Two New CCEP Papers

We have two new CCEP working papers on RePEc:

Inequality, communication and the avoidance of disastrous climate change by Alessandro Tavoni et al.

and


Carbon Pricing that Builds Consensus and Reduces Australia's Emissions: Managing Uncertainties Using a Rising Fixed Price Evolving to Emissions Trading by Frank Jotzo.

We've changed the numbering system from these two papers onwards. Now the numbers have the year as the first two digits. This is because EconPapers appears to ignore the date information in the RePEc file when compiling a list of the papers in a series. The new numbering will ensure that the most recent papers are at the top of the list. Strangely, EconPapers does use the date information to construct a list of papers for an individual. IDEAS behaves consistently in correctly using the date data.

ERA Consultation Part II

I previously submitted comments on the ARC's ranked journal list for the 2012 ERA research assessment exercise. You can also submit more general comments on the ERA process. I only submitted one comment, suggesting that economics should be evaluated using citation analysis. Psychology was the only social science evaluated using citations in the 2010 ERA. All natural science, medical, and mathematical fields were evaluated using citation analysis. Citation analysis is widely used in economics, not least by RePEc, and I think the ARC should definitely think again about applying it to economics. One advantage is that it will save a lot of effort on the part of external reviewers who had to provide peer assessment for the 2010 ERA.

New Journal: Economics of Energy and Environmental Policy

Economics of Energy & Environmental Policy (EEEP), is a new journal published by the International Association for Energy Economics, focusing on policy issues involving energy and environmental economics. The first issue will be published in January 2012 and a call for papers has been issued. The editors are Jean-Michel Glachant (European University Institute in Florence, Italy), Paul L. Joskow (Alfred P. Sloan Foundation, USA) and Michael Pollitt (Cambridge University, United Kingdom). The remainder of the editorial board has not yet been announced.

Japan Nuclear Crisis

Even the Chinese government has suspended it's nuclear power construction program to learn more about what has gone wrong in Japan, but George Monbiot argues that this shouldn't stop us from pursuing nuclear power with certain safeguards. However, the facts are that large earthquakes are possible perhaps anywhere though their probability within any timeframe is lower away from plate boundaries. Many, if not most, coasts are potentially exposed to tsunamis and the chain of events at Fukushima makes me at least wonder how vulnerable nuclear sites, and particularly spent fuel storage areas, are to other threats such as war and terrorism. Not that I haven't wondered about this before of course, but usually have heard reassuring commentary when such concerns have been raised.

P.S.
Our university banned all travel to Japan this morning...

P.P.S.
By far the best coverage I have found of the crisis is on the Guardian newspaper website.

Global Trends in Carbon and Sulfur Emissions

I'm preparing a lecture on environmental economics for both my course "Economic Way of Thinking 1" at the Crawford School and as a guest lecture in an introductory economics course at the Treasury. I'm planning to open the lecture by presenting some global and regional trends, focusing on carbon and sulfur emissions. First the global trends using data from CDIAC and Steven Smith:





and then data by country:





Really the global trends for sulfur and carbon are not that dissimilar. Carbon just trends much more strongly than sulfur so that there is slower growth in carbon in the 1980s and 1990s but a decline in sulfur emissions in that period. On the other hand, I don't think that the reversal in the trend of sulfur emissions that I wrote about a few years ago is yet being fundamentally reversed given recent progress in China, though I could be wrong.

The regional CO2 chart shows the UK with flat and declining CO2 emissions as being the outlier. This pattern is typical of several western European countries. The time path of sulfur emissions is much more similar for the UK and US. Reductions in emissions in Europe have been bigger than in North America. Australia is an outlier among developed countries in seeing rising emissions in recent decades.

Jones and Romer's Stylized Facts

Actually this very readable article is titled: "The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital". Kaldor proposed six "stylized facts" about the economic growth process. Jones and Romer propose six new ones. They are (in bold with my comments in plain text after them):

1) Increases in the extent of the market. Increased flows of goods, ideas, finance, and people—via globalization, as well as urbanization—have increased the extent of the market for all workers and consumers.

On this, the authors sum up: "When nonrival goods (i.e. ideas/technology) are present, the gains from trade are not exhausted until everyone is connected to everyone else". The traditional model of trade based on comparative advantage says that the gains from economic integration are due to differences in productivity that can be exploited through specialization. According to Jones and Romer, new trade theory is really about increasing market size to exploit ideas on a larger scale.

2) Accelerating growth. For thousands of years, growth in both population and per capita GDP has accelerated, rising from virtually zero to the relatively rapid rates observed in the last century.

This is true but it doesn't rule out the level of technology following a logistic curve with us now somewhere on the steep portion near the middle of the curve. In other words, there could still be limits to technological change and growth.

3) Variation in modern growth rates. The variation in the rate of growth of per capita GDP increases with the distance from the technology frontier.

This isn't what a simple version of the Solow model predicts. It is probably due mostly to differences in the diffusion of advanced technology across the poorer countries. Some are open to improving their productivity and some are not.

4) Large income and total factor productivity (TFP) differences. Differences in measured inputs explain less than half of the enormous cross-country differences in per capita GDP.

This fact is the main one that has to be added to the Solow model of growth in order to make some first order sense of the patterns of development and growth across countries around the world.

5) Increases in human capital per worker. Human capital per worker is rising dramatically throughout the world.

This is subsumed into exogenous technological change in the "neoclassical growth model".

6) Long-run stability of relative wages. The rising quantity of human capital, relative to unskilled labor, has not been matched by a sustained decline in its relative price.

In other words, the wages of skilled workers have not declined relative to those of unskilled workers despite the increasing availability of skilled workers. This can be explained if technological change is "skill-biased", which has increased the demand for skilled workers even as their supply has increased too.

For something somewhat similar regarding energy and economic growth see the conclusions of my survey of the topic.

A Small World or Not?

Academia often seems like a small world where everyone knows everyone else. But my experiences on LinkedIn suggest the opposite. Most of the people I am connected to on LinkedIn are only connected to perhaps 1-2 people that I am already connected to and when I browse their lists of connections there are normally only 1-2 other people that I have ever heard of that I'm not yet linked to. So the areas of overlap in our circles of acquaintance are only a few percent at most. I doubt this is just something unique to me and the people I know. So is it really not a small world at all?

Director of LSE Resigns over Libya Connections

As an alumnus of LSE I got an e-mail this morning announcing that the Director had stepped down. Here is the full announcement. Here is more background of what must have forced him out.

It's strange that it was fashionable in the last few years to be involved with Libya in Western circles and now again it isn't.

Australian Data Lacunae

I spent most of yesterday at a workshop sponsored by the Department of Resources, Energy and Tourism on establishing an energy efficiency framework for Australia. The government has made improved energy efficiency a priority but now faces the challenge of being able to measure progress on that goal. My main impression from the meeting was the paucity of data available in Australia on many issues compared to the data available in comparable countries. For example, series on the production of some commodities that were previously produced by ABS have been discontinued. According to ABS staff participating in the workshop this is due to a lack of funding. A lot of data will be available from the new NGERS system. But it wasn't designed for statistical purposes and it won't sample businesses below the reporting threshold. Therefore, extrapolation to the whole economy from the sample of larger businesses could be very misleading.

Introducing BREE

In July 2010 ABARES was formed by the merger of ABARE (Australian Bureau of Agricultural and Resource Economics) and BRS (Bureau of Rural Sciences) two Australian government research agencies. Now ABARES will be effectively dismantled by transferring the resource and energy economics parts of ABARES into the Department of Resources, Energy, and Tourism to form the new Bureau of Energy and Resource Economics or BREE.

"Academic Age" of Authors of American Economic Review Articles

Torgler and Piatti have written a massive paper on the American Economic Review with heaps of tables, graphs, and regression analyses. This is what most caught my eye:



Academic age is the number of years since an author got their PhD. The modal author of an AER article is about 4 years post PhD and there's quite a low probability of publication more than 20 years post-PhD. Maybe this is why people like to hire new PhDs... These results didn't hold up for the superstar authors who published large numbers of AER articles. They published their papers fairly consistently across their career rather than a bunch at the beginning.

How Does CSIRO Compare to Australian Universities?

The Australian government recently released the ERA Report, which compared research at Australian universities to the rest of the world. But this report does not evaluate the performance of CSIRO Australia's system of natural laboratories.

An article by Robin Batterham in the Australian Universities Review does evaluate CSIRO's performance relative to the top Australian universities and the rest of the world. Based on the number of citations in the Web of Science, Batterham finds that the top ten Australian research institutions are the Group of Eight universities, University of Newcastle, and CSIRO.

Overall, he finds that CSIRO is the 7th ranked Australian research institution. Melbourne is top and ANU 5th (This is based on total citations and ANU is smaller than other Go8 universities). Rankings in individual fields vary a lot. CSIRO is the top Australian institution in plant and animal science, environment/ecology, and agricultural sciences. It is bottom among the top ten in clinical medicine, social science, biology and biochemistry, computer science, and space science. Not every institution is featured in each discipline ranking. In social science, CSIRO ranks near the bottom globally.

ANU is top in Australia in geosciences, mathematics, space science, and physics according to this ranking.

Moved Office Again!

My new office is just across the corridor from my old one in Room 2.83 JGC (Crawford Buidling #132). My new phone number is 6125-3366. This is my 4th office since starting at ANU in April 2009!

Article on John List

Saw this article on John List linked at Marginal Revolution and decided to link from here too. List has contributed to both environmental and experimental economics and is famous among job candidates in economics for "publishing up" from his initial job at Central Florida U.

Chinese Energy Intensity Goals

Xinhua, the Chinese official news agency released the following item yesterday (I deleted points that are not relevant to this blog DS):

February 28, 2011

Chinese Premier Wen Jiabao during an on-line chat with the public Sunday answered questions concerning economic growth targets, housing prices, migrant workers, currency exchange rate reform, health care insurance, and other matters.

The following are some important figures he mentioned during the chat:

-- The government is to set its annual gross domestic product (GDP) growth target for the 2011-2015 period at 7 percent.

-- The government aims to reduce energy consumption per unit of GDP by 16 to 17 percent by 2015 from the current levels.

-- The government set a goal of reducing energy consumption per unit of GDP by around 20 percent from 2005 levels by the end of 2010 and achieved a 19.1-percent decrease.

-- The real value of the Chinese yuan has gained 53 percent against the U.S. dollar since the mid-1990s, and 22 percent since 2005 when China initiated its exchange rate reform.

*****

The government previously claimed that the 20% energy intensity target had been achieved. The goal of reducing energy intensity by 16-17% in the next five years means that energy intensity needs to be cut by 11% in 2015-2020 to meet the goal of reducing emissions intensity by 40% between 2005 and 2020 if all the net cut in emissions intensity comes from improved energy intensity.

The final item above is relevant to yesterday's post.

Inflation in China

As a follow up to my post on consumer price inflation in the US here are trends in the last couple of years in China:



Credit: CEIC.

Whereas the US chart showed the levels of price indices this chart shows the rate of inflation. Inflation is China is currently at 4.9%. The fastest rising category is food, which has a much bigger budget share than the in the US, as is typical of developing economies. In contrast to the US, the cost of housing is rising quite strongly too. Inflation in China is not much of a surprise given the policy of undervaluing the RMB (relative to market equilibrium). This tends to be inflationary. One way of understanding things is that what matters is the real exchange rate not the nominal one. Though the nominal exchange isn't adjusting to make prices more equal in China and its trading partners the real exchange rate is adjusting through higher inflation in China than in the developed economies.

For more commentary on China, inflation, exchange rates etc see Michael Pettis' blog.

Synthesizing Diesel Fuel Using Cyanobacteria

A US firm called Joule has bioengineered cyanobacteria to secrete diesel or ethanol. The picture above is from the Washington Post version of the story and shows panels containing the organisms. But as is the case with other recent inventions the economics are not yet clear. The company claims they could produce fuel at $30 per barrel - a third of the current price of crude oil. They also claim that they can produce 128 tonnes of fuel per hectare. Yields of grain crops are usually measured in single digits of tonnes per hectare... Even so, I computed that it would take the area of California, Japan, or Sweden to supply the world with the current level of oil consumption.

Consumer Price Inflation in the USA

The graph shows the increase in consumer prices over the last decade for the eight subcategories in the consumer price index (CPI) in the US and energy. Energy isn't a separate subcategory in the CPI but is included in the transport and housing categories. As you can see, energy prices are very volatile but have increased by more than other spending categories over this decade. The graph gives the impression that prices are still rising but yet the headline inflation figure for the US is very low. This is because housing has a more than 40% weight in the CPI and the cost of housing has been declining since 2008.

Visit the article I took the graph from for more charts and information including a stunning chart of college tuition and fees...

IAmScientist Again

I finally added a profile to IAmScientist, which I mentioned a long time ago in what turned out to be my most popular post.

I was impressed by how it found links to my publications on the web. The site then generates an abstract for each publication. But it doesn't generate links to those publications on the web. You have to upload a copy to IAmScientist.

Also its communication and friending features seem much more limited than those of Academia.com and I couldn't add html code to my page linking to my website. So it is a way to create a quick academic website but it is a bit limited beyond that.