Friday, April 23, 2010

Energy and Growth Survey: Conclusions

We conclude that the theoretical and empirical evidence indicates that energy use and output are tightly coupled with energy availability playing a key role in enabling growth. However, the greater availability of energy, technical progress, and the employment of higher quality fuels has allowed less energy to be used per unit output and has reduced the constraint that energy resources place on the output of the economy and economic growth. Even so, energy remains important.

Energy is important for growth because production is a function of capital, labor, and energy, not just the former two or just the latter as neoclassical growth models or biophysical production models taken literally would indicate. Both theory and time series results support these claims. Furthermore, the elasticity of substitution between energy and capital is likely to be low and energy is needed to produce the other inputs to production, is available in finite quantities on the Earth’s surface, and is non-recyclable.

However, the estimated output elasticity of energy and natural resources in general should be small in recent decades reflecting the market price determined output share. The current low price of energy reflects a low marginal productivity because of this heavy use. Resources have become increasingly abundant since the Industrial Revolution - evidence suggests that the energy cost share has declined continuously since then alongside the energy intensity of GDP.

Various factors have contributed to declining energy intensities but research is less clear on the relative importance of these variables. Different energy qualities have differing productivities. In particular, modeling the effect of electricity on output is important. Part of the reduction in energy intensities in developed economies may be due to the shift to higher quality fuels. Some research indicates that most of the historical reductions in energy intensity in developed economies and China have been due to technical change but other research finds a much larger role for structural change. Technological change tends to be offset to some degree by the rebound effect. Structural change towards more service-intensive economies tends to have less impact than is commonly thought because service industries in fact need energy intensive infrastructures. In fact energy-saving technical progress in manufacturing industry that reduces the apparent share of manufacturing in the economy may be more important.

As this survey shows, there is clearly much scope for further research to clarify the prospects for decoupling energy use and economic growth and for understanding the role of energy in growth.

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