An energy-based macroeconomic model validated by global historical series since 1820

Highlights

• Energy is given its full, extensive importance in the global economy.

• Global energy consumption and GDP grow proportionally over long historical periods.

• A straightforward, original Cobb-Douglas production function fits this trend.

• The productivity of energy has a stepwise pattern.

• Average growth of the productivity of energy is proportional to energy consumption.

Abstract

Global historical series spanning the last two centuries recently became available for primary energy consumption (PEC) and gross domestic product (GDP). Based on a thorough analysis of the data, we propose a new, simple macroeconomic model whereby physical power is fueling economic power. From 1820 to 1920, the linearity between global PEC and world GDP justifies basic equations where, importantly, PEC incorporates unskilled human labor that consumes and converts energy from food. In a consistent model, both physical capital and human capital are fed by PEC and represent a form of stored energy. In the following century, from 1920 to 2016, GDP grows quicker than PEC. Periods of quasi-linearity of the two variables are separated by distinct jumps, which can be interpreted as radical technology shifts. The GDP to PEC ratio accumulates game-changing innovation, at an average growth rate proportional to PEC. These results seed alternative strategies for modeling and for political management of the climate crisis and the energy transition.

Introduction

Energy resources are essential to provide wealth and quality of life to human societies(Cleveland et al., 1984; Smil, 2017). Any economic process consumes energy, i.e. turns energy from a valuable, low-entropy form into a high-entropy, waste form(Cleveland et al., 1984). Nowadays, fossil carbon sources still provide about 85% of primary energy consumption (PEC). Thus, the energy sector remains the principal contributor to climate change through carbon dioxide (CO₂) emissions, as identified since the 1970s(Keeling, 1970; Sawyer, 1972). Replacing CO₂ emitting technologies by carbon neutral solutions is now an urgent goal. New renewable energy technologies (photovoltaic panels, wind turbines) that have been deployed for decades, have only recently become competitive with fossil fuels in several sectors: electricity(Kos et al., 2018), urban mobility, thermal management of well-insulated buildings, to name a few. Additional technologies in other services, notably chemical production from non-fossil resources like atmospheric CO₂,(Kätelhön et al., 2019) justify strong incentive programs to spread low-emission energies(The European Green Deal, 2019). Despite propositions for all-out deployment of fossil-free sources(Jacobson et al., 2017; Hansen et al., 2019) that will be crucial to our future wealth and wellbeing, these technologies still only represent a modest piece of the energy pie(BP Statistical Review of World Energy 2020, 2020). To overcome this worrying gap, a thorough understanding of the reliance of the global economy on energy is a clear research objective. Currently, the macroeconomic field is lacking a universally accepted model that would give energy its proper share as a systemic input. Scenarios such as those reviewed by the Intergovernmental Panel on Climate Change(Masson-Delmotte et al., 2018) are based on “integrated assessment models” where energy is a mere sector of the economy, no larger than its nominal cost share (5 to 10%). Common economic textbooks(Aghion and Howitt, 2008; Jones and Vollrath, 2013; Romer, 2012) generally script capital and labor as the two key factors of production, with a correction factor (residual in the neoclassical Solow model(Aghion and Howitt, 2008; Jones and Vollrath, 2013; Romer, 2012)) accounting for the positive effect of knowledge development. Based on national accounting (USA, Japan, Germany etc.…) indicating that energy consumption is as important as physical capital for production(Kümmel et al., 1985; Kahraman and Giraud, 2014), ecological and biophysical economists have long criticized(Ayres and Miller, 1980; Kümmel, 1982) the negligible role given to energy. Knowing this, macroeconomic models for the energy transition should cease to ignore the systemic role of energy embodied in capital and labor, as repeatedly demonstrated(Costanza, 1980; Stern, 1993; Ayres and Warr, 2010; Keen et al., 2019; Ayres and Voudouris, 2014; Voudouris et al., 2015).

In this paper we present a simple, energy-based macroeconomic model to study the world economy, as an essential step to unravel the economy-environment nexus. Inspired by ecological economics(Cleveland et al., 1984; Ayres and Miller, 1980; Kümmel, 1982; Costanza, 1980; Stern, 1993; Ayres and Warr, 2010; Keen et al., 2019; Ayres and Voudouris, 2014; Voudouris et al., 2015) and neoclassical macroeconomics(Aghion and Howitt, 2008; Jones and Vollrath, 2013; Romer, 2012), this model aims to reconcile both schools. Since the subject of an energy-GDP relation has been treated by many in the last decades, we will start in Section 2 with a review of the literature from which a few teachings and issues emerge. This section will remain short because no previous works used a physical approach like ours that encompasses the subject simultaneously on a worldwide basis and on a long time scale of two centuries. We will then briefly present the data in Section 3 (with a longer discussion given in Appendix A). In Section 4, the model will be described and applied to the data; its significance will be discussed and perspectives will be drawn as to its usefulness in Section 5.