CONCLUSIONS AND IMPLICATIONS
Application of the Divisia index to energy use in the U. S. economy illustrates the importance of energy quality in aggregate analysis. The quality-corrected index for EROI indicates that the energy surplus delivered by petroleum extraction in the United States is smaller than indicated by unadjusted EROI. The trend over time in a quality-adjusted index of total primary energy use in the U. S. economy is significantly different, and declines faster, than the standard heat-equivalent index. Analysis of Granger causality and cointegration indicates a causal relationship running from quality-adjusted energy to GDP but not from the unadjusted energy index. The econometric analysis of the E/real GDP ratio indicates that the decline in industrial economies has been driven in part by the shift from coal to oil, gas, and primary electricity. Together, these results suggest that accounting for energy quality reveals a relatively strong relationship between energy use and economic output. This runs counter to much of the conventional wisdom that technical improvements and structural change have decoupled energy use from economic performance. To a large degree, technical change and substitution have increased the use of higher quality energy and reduced the use of lower quality energy. In economic terms, this means that technical change has been ‘‘embodied’’ in the fuels and their associated energy converters. These changes have increased energy efficiency in energy extraction processes, allowed an apparent decoupling between energy use and economic output, and increased energy efficiency in the production of output.
The manner in which these improvements have been largely achieved should give pause for thought. If decoupling is largely illusory, any increase in the cost of producing high-quality energy vectors could have important economic impacts. Such an increase might occur if use of low-cost coal to generate electricity is restricted on environmental grounds, particularly climate change. If the substitution process cannot continue, further reductions in the E/ GDP ratio would slow. Three factors might limit future substitution to higher quality energy. First, there are limits to the substitution process. Eventually, all energy used would be of the highest quality variety—electricity—and no further substitution could occur. Future discovery of a higher quality energy source might mitigate this situation, but it would be unwise to rely on the discovery of new physical principles. Second, because different energy sources are not perfect substitutes, the substitution process could have economic limits that will prevent full substitution. For example, it is difficult to imagine an airliner running on electricity. Third, it is likely that supplies of petroleum, which is of higher quality than coal, will decline fairly early in the 21st century.
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Finally, our conclusions do not imply that onedimensional and/or physical indicators are universally inferior to the economic indexing approach we endorse. As one reviewer noted, ecologists might raise the problem of Leibig’s law of the minimum, in which the growth or sustainability of a system are constrained by the single critical element in least supply. Exergy or mass are appropriate if the object of analysis is a single energy or material flux. Physical units are also necessary to valuate those flows. Integrated assessment of a material cycle within and between the environment and the economy is logical based on physical stocks and flows. However, when the question being asked requires the aggregation of energy flows in an economic system, an economic approach such as Divisa aggregation or a direct measure of marginal product embody a more tenable set of assumptions than does aggregation by one-dimensional approaches.
SEE ALSO THE FOLLOWING ARTICLES
Economic Thought, History of Energy in • Emergy Analysis and Environmental Accounting • Entropy and the Economic Process • Exergy • Exergy Analysis of Energy Systems • Exergy: Reference States and Balance Conditions • Net Energy Analysis: Concepts and Methods • Thermodynamics and Economics, Overview
Further Reading
Ayres, R., and Martinas, K. (1995). Waste potential entropy: The ultimate ecotoxic? Econ. Appliquee 48, 95-120.
Berndt, E. (1990). Energy use, technical progress and productivity growth: A survey of economic issues. J. Productivity Anal. 2, 67-83.
Cleveland, C. J. (1992). Energy quality and energy surplus in the extraction of fossil fuels in the U. S. Ecol. Econ. 6, 139-162.
Cleveland, C. J., Costanza, R., Hall, C. A. S., and Kaufmann, R. (1984). Energy and the U. S. economy: A biophysical perspective. Science 255, 890-897.
Cottrell, W. F. (1955). ‘‘Energy and Society.’’ McGraw-Hill, New York.
Darwin, R. F. (1992). Natural resources and the Marshallian effects of input-reducing technological changes. J. Environ. Econ. Environ. Management 23, 201-215.
Gever, J., Kaufmann, R., Skole, D., and Vorosmarty, C. (1986). ‘‘Beyond Oil: The Threat to Food and Fuel in the Coming Decades.’’ Ballinger, Cambridge, UK.
Hall, C. A. S., Cleveland, C. J., and Kaufmann, R. K. (1986). ‘‘Energy and Resource Quality: The Ecology of the Economic Process.’’ Wiley Interscience, New York.
Hamilton, J. D. (1983). Oil and the macroeconomy since World War II. J. Political Econ. 91, 228-248.
Kaufmann, R. K. (1992). A biophysical analysis of the energy/real GDP ratio: Implications for substitution and technical change. Ecol. Econ. 6, 35-56.
Odum, H. T. (1996). ‘‘Environmental Accounting.’’ Wiley, New York.
Rosenberg, N. (1998). The role of electricity in industrial development. Energy J. 19, 7-24.
Schurr, S., and Netschert, B. (1960). ‘‘Energy and the American Economy, 1850-1975.’’ Johns Hopkins Univ. Press, Baltimore.
Stern, D. I. (1993). Energy use and economic growth in the USA: A multivariate approach. Energy Econ. 15, 137-150.
