Wednesday, August 19, 2009

Energy Quality

Today I submitted another paper, this time on "energy quality" to Ecological Economics. The paper has been several years in the making. I've kept coming back and changing things, sometimes radically, until I finally came up with something that I thought was submittable. I also simultaneously submitted it to the Munich Personal RePEc Archive.

Energy quality is the idea that different fuels have different economic productivities. Each joule of electricity produces more additional output or utility than each joule of coal. This makes sense - consumers are willing to pay more for a joule of electricity (one watt-second) than for a joule's worth of coal. However, energy is usually just aggregated together according to the amount of heat energy available from each fuel. This assumes that the productivity of one joule is the same irrespective of which fuel that joule is associated with and that all fuels are infinitely substitutable one for the other. The latter is also clearly untrue. A rational consumer would only use the cheapest fuel if they were all perfect substitutes.

The question is then how to measure or model energy quality. We thought we'd figured this out back in 2000 in our paper in Ecological Economics. Just measure the quality of each fuel according to its (real) price which should be proportional to its marginal product. The quality of aggregate energy in the economy can then also be computed using standard indexation methods.

But since then, I've had increasing doubts that this is the only or the best way to measure energy quality. The obvious starting point is the literature on labor quality.

One of the approaches is to treat the quality of each fuel as a coefficient that accompanies that energy type whether in a production function, demand function etc. Unlike prices or marginal products, this concept of quality does not depend on the quantities of the other inputs used or on the amount of the fuel itself used. These coefficients might change over time as new ways of using energy are devised. Electricity wasn't as essentially useful before the invention of computers as it was afterwards. The problem is that very quickly you end up attributing all energy augmenting technological change to a change in energy quality.

So the paper looks at some other approaches too. All have advantages and disadvantages and depending on the elasticity of substitution between fuels they may not all be defined. In the special case of infinite substitutability all the definitions are defined and all of them produce exactly the same unambiguous result, though still there is no obvious way to distinguish between technological change and increases in energy quality.

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