Exernomics is a concatenation of two words, economics and exergy. Economics is a discipline, with scientific aspirations, concerned with the production, distribution and consumption of goods and services in human society. It is also concerned with markets, trade and prices. It has been called “the dismal science” (by Thomas Carlyle), because of the Malthusian argument (c. 1799) that human population will always grow faster than food supply, whence the future of mankind was destined to be constrained by poverty and starvation. That didn’t happen during the following two centuries. So, in recent years Malthus has become an object of derision by mainstream economists, who have adopted a contrary doctrine of perpetual growth driven by unending innovation and substitution.
But the mainstream has ignored the fact that one resource has no substitute. It is “useful energy” or – in techno-speak – exergy.
You probably know that some kinds of energy are more useful than others. For example, the ocean contains a lot of heat. But the heat energy in the ocean is not very useful for doing useful work. Physicists call the useless part anergy and the useful part exergy. Exergy is that component of energy capable of doing work. Some work is useful to humans, i.e. to raise pyramids, drive locomotives, drill holes in the ground, reduce ores to their elements, manufacture ammonia for fertilizers, and so on. Other kinds of work include creating hurricanes, eroding seashores and separating carbon dioxide into carbon and oxygen by photosynthesis.
All kinds of work, both those essential to all economic activities, and those peripheral to the industrial economy, are subject to the laws of thermodynamics. Every economist needs to understand at least the basics of those two (actually three) laws. (The third law can be neglected for now.) The first law of thermodynamics, conservation of mass/energy, says (among other things) that all industrial processes — extraction, reduction, synthesis, shaping and forming — generate waste residuals. The mass of residuals from industrial activity, far exceeds the mass of materials embodied in “final products”, all of which eventually also become wastes. This means that “zero waste” is a far distant goal that can never be achieved in the real world. It also means that the quantity of wastes can be calculated from measures of inputs and useful outputs. This “mass-balance principle” is a useful accounting tool for engineers and scientists (Ayres and Ayres 1998, 1999).
The second law, known as the entropy law, says that every process in the universe converts order (low entropy) into disorder (high entropy). This means that economic processes that seem to produce local order (think patterns) do so only by increasing global disorder. That, in turn, means that all economic processes generating useful goods and services can only do so by consuming – literally destroying – exergy. The exergy has to be supplies from “outside”, meaning the sun or geothermal heat. In principle, the exergy supply from these sources is still far more than ample for human purposes. But it is limited in practice by another factor, notably the fact that those two exergy resources are extremely diffuse.
To concentrate them and put them to practical use also requires exergy. The two dominant forms of exergy in economic life are electric power – almost “pure” exergy – and liquid fuels for internal combustion engines. Most petroleum is converted into liquid fuels for the engines that drive cars, buses, trucks, aircraft and even ships. Metals and chemicals, including iron and steel, aluminum, plastics and synthetic fibers can be regarded as “embodied exergy”. Thus economic growth depends on technology for producing a surplus of useful exergy (available for growth purposes).
Currently human civilization is supported by exploiting high quality natural resources, partly from agriculture (as food, feed and timber) and partly as the metal ores and fossil fuels. The metal ores were generated by geothermic or biological processes that occurred billions of years ago, while the fossil fuels–coal, oil and gas – are left over from biological photo-synthesis that occurred hundreds of millions of years ago during the “carboniferous” age.
Dependence on fossil fuels, in particular, generates immediate combustion wastes, especially carbon dioxide (plus sulfur and nitrogen oxides). These wastes do not disappear (thanks to the first law of thermodynamics). Instead, they are recycled to the oceans or accumulate in the atmosphere. There they absorb and re-radiate infra-red radiation (heat) from the earth. This causes the so-called “greenhouse” effect that keeps the Earth from freezing and also drives climate change today. The consequences of climate change, primarily due to human economic activity, may also bring about economic damage such as increased storminess, more frequent droughts, desertification and rising sea levels. Shifting temperature-rainfall patterns will also affect agriculture and enable fast reproducing pests to overcome slower reproducing livestock and wildlife. These changes, if allowed to proceed too far or too fast, could ultimately bring economic growth – or even human life — on Earth to an end.
Several essays hereafter provide indications as to how this subject matter, abstract and arcane though it may seem, has immediate implications for economic theory and policy. In the first place, it is important to realize that with few exceptions, when people talk about energy, especially in the context of use or consumption, it is really exergy that they mean. The word may be unfamiliar, but the subject is not.
Secondly, the exceptions do matter, because if they are not taken into account, serious misunderstandings may occur.
Efficiency and Exernomics
This applies, in particular, to the concept of efficiency. It is important to quantify energy efficiency, because if the efficiency of energy use is already very high – as some seem to believe – than it is important to increase the energy supply. This was a widely shared view back in the 1960s and ‘70s (when nuclear power advocates were pushing for nuclear-favorable policies. (The fact that all the R&D was subsidized, and that nuclear power plants do not have to pay for ultimate disposal of their waste is another example.) That particular policy dispute remains unresolved in the background even today.
But the efficiency issue is still important, because there are other disputes, for instance, as to whether increasing energy efficiency will save energy, overall, whether the so-called “boomerang” or effect—higher efficiency, lower, cost, increased demand – will dominate? The answer is case-specific, and it is necessary to carry out rather detailed life-cycle studies to answer the question. Such studies require careful and precise technical arguments, where sloppy language is not acceptable.
To illustrate this point, consider two different calculations of energy (exergy) efficiency for the US.
The next diagram comes from an annual publication of the US Energy Information Agency (USEIA).
The energy flows are divided into “rejected” and “useful” categories, which add up to the total. The ratio of “useful” to “total” is “first law” efficiency, as shown in the following table. However, when “useful” energy is further broken down to allow for internal irreversibility losses due to the “second law” we get a different result. That result is shown in the right hand column (in red) of the following table.
It is interesting to look at the table more carefully. Notice, in the first place, that the aggregate first law efficiency, bottom row, (assumed by the EIA) has actually decreased since 1950. This contradicts common sense (and reality). It reflects only the crudeness with which that professional-looking “spaghetti diagram” above (prepared by Livermore National Laboratory) has actually been drawn. In actual fact all of the numbers with the exception of the electricity generation, have been chosen “out of a hat” without any underlying analysis, The discrepancy between EIA numbers (80%) and my number for residential housing (10%) were explained roughly in my example of the water heater. In the case of transportation, it is likely that the number chosen by the EIA reflects textbook diagrams showing the theoretical efficiency of the gasoline engine operating at optimal speed. This does not reflect additional losses due to “stop-start” operations on real roads, losses in the transmission system and tires, not to mention parasitic loads.
The report of the 1975 American Physical Society summer study “Efficient Use of Energy: A Physics Perspective” set the “second law” efficiency of automotive vehicles at around 10 to 12 percent, depending on the size and weight of the car. In recent years cars have become considerably more efficient. But the 10 percent number refers to vehicles, not passengers or payloads. Given that the payload for a typical automobile is less than 10 percent of the weight of the car, the overall efficiency of automotive transport is around 1 percent, more or less. Trucks, buses and trains are more efficient. Of course, but we don’t have enough data to make precise estimates of payload efficiency. As regards energy efficiency in industry, the recent report of the Global Energy Assessment by IIASA (to which I contributed) puts the second law efficiency of the major energy-consuming industries (cement, iron and steel, aluminum, petrochemicals, etc.) in the 30 percent range.
This is not the place for more detailed arguments about how to calculate efficiency. More precisely, economic activity – end economic growth – depends upon growth in the consumption of “useful work”. Useful work can be thought of as energy in its most useful form, which is exergy. For example, electric power is a kind of useful work. Useful work performed in the economic system, in the thermodynamic sense, is the product of primary energy (exergy) input to the economy times the efficiency with which it is converted. The efficiency with which electric power is generated globally is only around 30% or so, depending slightly on the age of the power plant and the parasitic load (e.g. for pollution control). Other kinds of useful work, such as space heating (in buildings) and transportation, are much less efficient. For the US economy as a whole, the exergy efficiency is now about 13%. (Japan and Western Europe are higher, around 20%). Developing countries are generally less efficient than the US. But the crucial fact is that more than 80% of the primary exergy input from all sources s currently being wasted worldwide. This wasted exergy has to be recovered and put to productive use. Putting it another way, we (the world) need to extract much more useful work from each ton of coal or barrel of oil than we get now. I have discussed the potential for doing so at some length in my most recent book (with my brother Edward), “Crossing the Energy Divide”. (The quantitative analysis underlying this statement are available in my published journal articles and in my 2009 book, with Benjamin Warr “The Economic Growth Engine”).
Every government and every company nowadays wants and demands faster economic growth. Economists have assured us that growth is automatic – that “our grand-children will be much richer than we are.” In fact, some have gone so far as to suggest that it would be “almost criminal” for this generation to spend money on preventing climate change (for Instance), since future generations will be so much better able to pay the bills. Of course, the future generations could make the same argument for not paying.
But what is the source of this economic growth that mainstream economists are so confident of? Standard economic theory says that it is due to the accumulation of qualified labor and capital plus “technological progress”, automatic, unspecified and undefined. A lot of people seem to believe that technological progress nowadays is faster than ever. That is only true, if at all, in the domain of information technology, where Microsoft, Google and Apple operate.
Technological progress in other areas probably peaked in the 1870-1910 period. Now it is slowing down, not accelerating. Between 1850 and 1950 the changes in agriculture, manufacturing, transportation, medicine, and communications were literally revolutionary. Since 1950, the only truly revolutionary change has been information processing and the Internet.
The unrecognized truth is that those technological changes that allowed for enormous population growth without the mass starvation that Thomas Malthus predicted back in 1798, have all depended on the discovery and exploitation of new sources of primary energy, starting with coal but especially petroleum. Natural gas has become available in the 20th century, but the great hope of nuclear power, once expected to be “too cheap to meter” has
turned out to be much more expensive (and problematic) than originally thought. Fusion power remains as remote as it was in the 1950s.
In recent years, economic growth has been driven by consumption. The consumption has been partly paid for by borrowing against future growth. In short, a lot of countries – especially (but not only) the US – have been spending money not yet earned. This borrowing has been permitted by governments, based on the assumption by politicians, based on advice from economists, that future growth, due to automatic technological progress, is assured. Standard economic “growth theory” supports this risky assumption.
Future historians – if there are any – will see the beginning of the 21st century as a period of global crisis comparable, perhaps, to the Thirty Years’ War in Europe that marked the end of Roman Catholicism as the universal church in Europe, the rise of nation states and the rise of capitalism. We now face a comparable – but global — convergence of three powerful trends that individually cannot continue and that together constitute a crisis that threatens civilization itself.
The first unsustainable trend is borrowing against future growth that is no longer assured. The current global financial crisis is not just about derivatives and mortgages. It is complex in detail, but the elephant in the room is the mountain of debt – private, corporate, municipal and sovereign – that was, somehow invisible until recently. This debt is quite simply unpayable without rapid economic growth well beyond the 3% per year that most economists hope will happen automatically (but that probably won’t.) The only possible escapes from the debt problem are (i) printing money, which eventually results in hyper-inflation (ii) deflation, large-scale debt repudiation by governments and widespread bankruptcy by borrowers or (iii) accelerated economic growth.
Only the third is acceptable, although it will be very hard to achieve because of the next two unsustainable trends.
Before mentioning the other two trends, it is important to point out that economic growth in the past, today and for the immediate future depends upon growth in energy consumption, at ever decreasing cost. Economic activity today may seem to be predominantly in the service sectors, but services like communications, transportation and retail trade require energy (exergy). They depend upon infrastructure, machines, houses and products that must be manufactured or constructed, Moreover, they depend upon fuels to produce heat, to drive engines (these are called “prime movers”) that extract minerals and fuels, plant and harvest crops, move people and goods and produce electricity.
Nowadays electricity is almost as essential as food and water. The internet is fast becoming one of the major consumers of electric power. Useful work in its various forms has declined dramatically in cost, since the first industrial revolution. But those halcyon days are over. Everything, from policy interventions (like a carbon tax) or subsidies for “renewables” points to a reversal in that long term trend.
The second unsustainable trend is increasing resource consumption, in the face of resource exhaustion and, especially “peak oil”. “Peak oil” may be with us already, as some believe, but it is virtually certain to occur before 2030. Notwithstanding assertions by some economists, who assume that there is always a substitute for anything that looks scarce, the cheap high quality oil is running out and there is no low cost substitute. Canadian tar sands and deep sea drilling are a lot more costly and less efficient. The energy return on energy investment (EROEI) was very large (around 100-fold) when the really big oil discoveries were made in Texas and the Persian Gulf and the returns are still quite large (around 16-fold, globally) but EROEI is declining rapidly. Energy prices will rise, choking growth, unless efficiency gains are fast enough to over-compensate for declining primary resource availability. There is no evidence, so far, that this is happening.
The third unsustainable trend is atmospheric accumulation of greenhouse gases (GHGs), mainly from the combustion of fossil fuels. It is absolutely imperative to reduce carbon dioxide emissions quickly, to prevent a global temperature rise above 2 degrees Celsius, and there are some climate scientists who believe that the “tipping point – beyond which temperatures will rise much higher – is imminent. In short, the benign global climate that has enabled a global population of six billion (expected to rise by at least another 50%) to feed itself, is at risk. A global temperature rise of 2 degrees Celsius may be survivable (with difficulty) but a rise of 9 degrees Celsius would certainly make large parts of the earth’s surface uninhabitable.
To summarize, faster economic growth is imperative. But economic growth depends on increasing the availability of “useful work” at ever lower cost. New sources of ultra-cheap energy are not on the horizon. The need to reduce emissions of greenhouse gases (GHGs) will add to costs.
For the above reasons, a drastic increase in energy efficiency is essential to the global survival of habitability (of the earth), of capitalism (in anything like its present form), of poverty alleviation and probably of democracy and even civilization. It is the only safe – in fact, the only possible – way forward. The world needs to invest in substantially increased energy efficiency, even if it is not profitable at the moment.
The good news – the only good news – is that there are a lot of opportunities to increase efficiency at negative cost. Even the management consultancy McKinsey has recognized this, and hopes to profit from that recognition. Unfortunately, most of the opportunities are currently blocked by structural, regulatory and cultural barriers of various sorts.
So this brings us to the core question: If efficiency pays, (and it can) why isn’t it happening?
Economists so far have had little to offer, since they are taught to believe that the economic system is open, competitive, and in or near equilibrium, whence if the saving opportunities were real, they would have been be exploited by entrepreneurs.
The evidence overwhelmingly suggests otherwise. Markets are not perfect, competition is actively prevented by monopolies and oligopolies (mostly legal), government regulators focus too much on preventing innovation, and the economy is far from equilibrium. The opportunities to save energy profitably are real but they are not exploited because of a variety of barriers, especially monopolies and principal-agent conflicts of interest. The various surveys and analyses that have been done, and that will be quoted, blame lack of expertise, lack of capital and managerial deficiencies.
These surveys all fail to address the single most important barrier of all: the fact that (despite economic theory to the contrary) firms do not try to maximize profits; they try to maximize growth . They do so in the belief that failure to grow invites predators and that large size is the best guarantee of survival. What this means is that during periods of overall economic expansion, firms will invest all available capital to increase output and maintain or gain market share. During periods of economic downturn, they reduce investment and cut employment to save money. There is no place in the business cycle for investment in energy efficiency.
In short, the growth imperative is also at the core of the problem. What governments and international agencies must do in the future is to find ways of making markets work better, encouraging competition, reducing barriers to entry, changing regulatory policy to reduce barriers to innovation, break up monopolies, inhibit mergers and acquisitions, and otherwise induce manufacturing firms to focus on profits. Given such a focus, firms will actively seek – and find – ways of saving energy profitably, rather than on growth that is unsustainable in the long run because of resource limitations and climate-related restrictions.
– Robert Ayres, Paris. 15 October 2014
– – > For more see the article “The exergy-efficiency connection” which follows
About the author:
Robert Ayres’s career has focused on the application of physical ideas, especially the laws of thermodynamics, to economics; a long-standing pioneering interest in material flows and transformations (Industrial Ecology or Industrial Metabolism); and most recently to challenging held ideas on the economic theory of growth. [More at https://en.wikipedia.org/wiki/Robert_Ayres_(scientist)