ENERGY EFFICIENCY AND HUMAN ECONOMIC WELFARE

Garry Jacobs, Vice-President, The Mother’s Service Society, Pondicherry, India; Member, Board of Trustees of the World Academy of Art & Science
Ivo Šlaus,
Member, Board of Trustees and President, South East European Division of the World Academy of Art & Science

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This paper examines energy intensity as a measure of sustainability. Energy intensity is commonly measured in terms of energy consumption per unit of GDP. As an alternative, the authors propose the Fossil Fuel Energy Efficiency Index (EEI), which is designed to assess the contribution of a country’s total fossil fuel consumption to human welfare. EEI is a component of the Human Economic Welfare Index (HEWI), a composite index of economic welfare. HEWI measures human welfare by focusing on those aspects of GDP that directly relate to household consumption and savings, welfare-related government expenditure, income inequality, education and employment.

1. Measures of Sustainability

The startling findings presented in the Club of Rome’s report Limits to Growth alerted the world to the imminent danger inherent in the economic model prevalent at the time. Since then many things have changed, but the fundamental premise remains valid. A new theoretical framework is needed which recognizes environmental sustainability as an essential component of sustainable human welfare and identifies the principles by which these apparently disparate objectives can be most effectively reconciled. It is not sufficient to say that we cannot sustain current levels of resource consumption or call for a halt in economic growth. We must also take into account the impact of the change in the composition of economic activity from products to services, the impact of technological advances that develop new energy sources and increase energy efficiency, the impact of education and culture on resource consumption, the rising aspirations of the developing world, and factors influencing changes in life style, as well as the political and social sustainability. New theory means new thought, new conception. Our view of the relationship between human activity and our natural environment must change radically.

M. Max-Neff pointed out that over time more and more economic activity is self-canceling from a welfare perspective. For every society there seems to be a period in which economic growth brings an improvement in the quality of life, but only up to a point – the threshold – beyond which, if there is more economic growth, quality of life may begin to deteriorate.[1] The abrupt differences between GDP and several other indicators, e.g. energy consumption, and quality of life are similar manifestations of the Max-Neff effect.[2] Historical analyses may show that GDP was a very good indicator of economic development earlier in the last century; but today it leads to wrong conclusions and bad decisions resulting in destruction of the environment, missed opportunities and misuse of human capital.

2. Energy-Intensity and Economic Growth

The emergence of the post-industrial service economy is in the process of altering the equations concerning resource consumption, forcing us to reexamine basic postulates regarding sustainable economic growth. Services represent a non-material plane of activities to promote human welfare, while generating employment and creating money. The term service economy encompasses a very broad range of human activities, including basic research, education, health care, transport, communication, retailing, entertainment and tourism. What they have in common is a relatively lesser dependence on material resources to different degrees. The service economy still functions on the foundation of an industrial economy that requires raw materials, infrastructure, machinery and energy for service delivery, but its dependence on material resources is significantly lower in relation to GDP. Figure 1 shows the declining energy intensity in Austria, Japan and the UK over the last century as technology has become more energy efficient and the service economy has become increasingly predominant.

Figure 1: Decrease in Energy Intensity 1830–2000 [3]

In recent decades, this trend has accelerated. For example, the amount of energy needed to produce a dollar's worth of goods and services in the U.S. and U.K. declined by 40% from 1980 to 2005.[4] Between 1980 and 2005 the amount of energy needed to produce a dollar's worth of goods and services declined by 63% in China, 47% in Ireland, 40% in U.S. and U.K. In Japan, which already had very low energy intensity, it fell by another 15%. Energy and sustainability are closely related, because non-renewable fossil fuels remain the primary source of energy of production and the burning of fossil fuels is the main contributor to rising levels of the CO2 in the earth’s atmosphere. The substitution of renewable energy sources combined with continued improvements in energy efficiency have dramatically increased fossil fuel energy intensity (FFEI).

Figure 2 shows the substantial increase in FFEI (fossil fuel consumption per unit of GDP measured in 1990 international dollars) for 12 OECD countries from 1970 to 2008, a period normally denoted as the beginning of the era of the post-industrial service economy. It depicts a 64% decline in FFEI in the U.S., 62% in U.K., 58% in France, 46% in Japan. The average decline is 43%. In spite of these gains, the scope for greater global energy efficiency is still considerable. A study by McKinsey in 2008 found that a global effort to boost energy efficiency with existing technologies could eliminate more than 50% of world energy demand by 2020 and that investment in energy productivity across all major sectors generates excellent returns on investment. [5]

Figure 2: Fossil Fuel Energy Intensity for Selected OECD Countries 1970–2008. [6]

The growing emphasis on education, health and welfare is a major element of the emerging economy, as well as a central pillar in the development of human capital. The continued evolution toward a service economy based more on human capital and less on material resources does not mean that the problem of sustainable energy supplies will be solved merely by a shift in the nature of economic activity. On the contrary, advances in technology, greater public awareness and commitment, changes in public policy and changes in culture are all essential. The wholesale shift from manufacturing to services is more apparent in high income countries than in those at an earlier stage of economic development. It has long been assumed that full-scale industrialization is a necessary presage to the modern service economy and, therefore, that reduced energy intensity in the most economically advanced nations would have little impact on rising energy consumption in the developing world. The remarkable progress of countries such as India in developing highly sophisticated IT and financial sectors suggests the possibility that emerging nations may be able to leapfrog from agrarian to post-industrial economies, avoiding at least some of the excessive energy demands of industrialization. The emphasis placed on raising levels of education and increasing research is one crucial determinant of this transition.

3. Energy Intensity and Human Welfare

Many attempts have been made to incorporate measures of sustainability in composite indices. GPI and ISEW discount consumption for the depletion of or damage to environmental resources by deducting estimated costs associated with water, air and noise pollution as well as those resulting from the loss of wetlands, farmland, primary forests, CO2 damage and ozone depletion. Natural resources depletion is valued by measuring the investment necessary to generate a perpetual equivalent stream of renewable substitutes. Sen and Stigliz observed that these and similar measures such as Green GDP do not characterize ecological sustainability per se or assess how far we are from achieving sustainability targets.[7] Another composite index, the Ecological Footprint (EF), attempts to measure the impact of human activities on the regenerative capacity of the biosphere by calculating the amount of biologically productive land and water area required to support a given population at its current level of consumption and resources. EF couches the results in units of land rather than market prices. These approaches offer valuable insight into the true costs and sustainability of current economic activity. At the same time they introduce elements of complexity and subjective valuation which prevent their widespread acceptance and adoption as the basis for policy-making. They also depend on access to reliable data which is not available for most countries.

There is certainly a need for indices that assign value to natural resources and the costs associated with pollution, as well as the inherent risks and uncertainties of current economic models. While recognizing the value of these comprehensive efforts to sustainable economic activity, the authors propose a more modest and limited approach to factoring environment concerns into a composite index of economic welfare, one which can be adopted worldwide based on available data. For this purpose, we focus on a single dimension of sustainability, fossil energy efficiency.

The objective here is to measure human economic welfare rather than sound environmental practices or quality of life per se, however important these goals may be. Sustainability of economic activities is an essential aspect of economic welfare. Therefore, it is essential that it be reflected in any measure of economic welfare. The authors propose an Energy Efficiency Index (EEI) designed to promote policy-decisions that will reduce dependence on fossil fuels, while promoting improvements in the overall efficiency of all forms of energy consumption as a contribution to economic sustainability. The index takes into account only energy generated from fossil fuel sources, since fossil fuel based energy consumes non-renewable resources and releases CO2 into the atmosphere.

Some may argue that the effort to assign value to reduced dependence on fossil fuels is necessarily subjective and arbitrary, and therefore inappropriately included in a composite measure of economic welfare. This points to the underlying insufficiency of the prevailing economic concept of value. As Club of Rome member Orio Giarini has so aptly stressed, economic value in a modern service economy cannot be divorced from risk and uncertainty. No greater risk or uncertainty confronts economy today than the future risks of ecological disaster. We need only reflect on the central purpose and methods of valuation employed by the insurance industry to realize that we assign concrete economic value to risks and uncertainties all the time. That value may be related to the anticipated costs of avoidance or the costs of remediation or some less tangible value of security.

3.1 EEI: Linking Energy Efficiency to Human Welfare

In order to assess efficiency of energy usage for economic welfare rather than for economic growth, EEI is based on the ratio of fossil fuel energy consumption (FFEC) to total human economic consumption expenditure (HWE) – not to GDP. EEI is calculated as the percentage change in the ratio of fossil fuel energy consumption to HWE over time. Like education, investments in energy generation have a long gestation period, which ranges from about one year for wind turbines to 5 years or more for nuclear power, and an even longer period of utilization, which averages 30 years. Thus, each increase in the percentage of fossil fuel energy efficiency represents a long term investment in sustainability with repercussions for many years to come. Since improvements in energy efficiency can also be achieved by short term measures such as use of energy efficient lighting or refrigeration, we estimate the life span of the enhancements at a much shorter period of 10 years, though the real figure is probably much higher.

The index measures the changes in fossil fuel energy efficiency over time, where FFEC1 and FFEC0 represent fossil fuel energy consumption in year one and the previous year, and HWE1 and HWE0 represent human welfare consumption expenditure in year one and the previous year.

FFER is the ratio of fossil fuel energy consumption (FFEC) to HWE. FFERΔ1 is the change in the ratio for year one. FFERΔ-1 is the change in the ratio for the previous year. FFERΔ-2, etc. are defined analogously.

EEI for any year assigns present value (VFFER) to changes in FFER during the previous 10 years as represented by FFERΔ-1, FFERΔ-2 … FFERΔ-10. VFFER starts with a value of 1 and diminishes at the rate of 0.1 per year. Thus, VFFER-1 = 1, VFFER-2 = 0.9, VFFER-3 = 0.8, ….. VFFER-11 = 0.0.

Energy Efficiency Index EEI1 = 1 – [(VFFER-1 x FFERΔ-1) + (VFFER-2 x FFERΔ-2) +……..( VFFER-10 x FFERΔ-10)]

Energy Efficiency Index EEI1 = 1 – [(0.1 x FFERΔ-1) + (0.2 x FFERΔ-2) +…….(1.0 x FFERΔ-10)] ----------(2)

As EEI increases, the number within brackets becomes more negative in value. EEI increases either as a result of improving overall energy efficiency per unit of HWE or by replacing fossil fuel with renewable energy sources, i.e. either by decreasing FFEC or by increasing HWE.

3.2 EEI Country Comparisons

Table 1 shows fossil fuel consumption (FFEC) per unit of human consumption expenditure (HWE), FFEC as a % of total energy consumption, and the derived Energy Efficiency Index (EEI) for select countries for the year 2005. FFEC as a % of total energy consumption indicates the extent of dependence on fossil fuel energy sources vs. renewable energy sources, which ranges from a low of 37% in Sweden to a high of 9century; bunts i/su3ates the extent of dependence so be5 Comconsreindicatesb> + (0.2 x Fcing r unituthorssources, wcieno3 BtureindFcing 9century; bunts i/su3at2= <181 BtureindFcing 9ceextenlobal e5otedoncernu3at6ien /li> <6nd by on a and sever fuel eneall energntury;bstitP. Figel energy sources vs. renewable energy soPI and shows bunextents of counges rd, and faand sever fuedintiesntury;bstitx measncy per unit of HWE or by .r assigns pr fossil fuel energyrevious cons/ 0.her sainty conh, EEub>) dependeincreasing H lightirily subjecti![envalue.2 EEI Countrvalue oextenbstitconsrratio = 1,able ossRto cnbstits presens rep growtt 95-ub>(0/p> Figure 2:EEI for a484 year assign the atmoel consEnergy Inteman Welfare,ensity f per unit of human consumption expenditure (HWE), FFEC as a % of total energy consumption, and the derived Energy Efficiency Index (EEI) fare countries for the year 2005. FFEenergy teringBTUreindFcing .i (0PPP>0.her sature tage changΔ-1 s, this tdinbstitconsrratioof economendex prthe>= 4. Opositioin developtudieced enotral the Ecar.= 8t of dependence9so 9ences beretioin develo-1

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