6  Economics As If Energy Matters

1. Introduction   Economic engines are driven by goods and services, not by money. Money or currency does facilitate market transactions, but an economy can function without it. The Aztecs had a flourishing urban-based empire that did not use currency. To move one step deeper, it is the energy embodied in goods and services that drives an economy. Currency flow is only as powerful as the counter flow of energy associated with the goods and services. Therefore, we need to study systems of energy and energy flows to understand an economy.

2. Economics, Externals and Nature   Conventional economics is homocentric. It ignores or largely underestimates nature's energy contributions such as sun, rain and tides. These are fancifully called externals, presumably because they are external to the human-designed system.
      The measure of well-being is based on the Gross Domestic Product or GDP. This is the annual flow of dollars spent on all domestic goods and services. The general perception of conventional economists and most of the rest of us is: The bigger the GDP, the better. The costs associated with dump detoxification, oil-spill cleanups, and the recovery of ravaged species fatten the GDP. The goods and services of undoing pollution are added to the goods and services that led to the pollution!

3. Costs - Energy vs Dollars   When economists talk about cost-cutting and efficiency, they are talking about money. If the energy that goes into production is subsidized by government, nature, or cheap labor, this translates into lower dollar costs of production or more efficient production.  Business and economics see money as the basis for determining efficiency and for determining the value of goods and services. Washington Post columnist William Raspberry touched on this issue while interviewing economist and futurist Robert Theobald (The Tallahassee Democrat, 16 Sept. 1997). “Power elites believe in maximum economic growth [and] want maximum productivity. The rest of us want a higher quality of life . . . ”
       A lower cost of production should mean lower energy demands, and an increase in efficiency of production should mean an increase in energetic or thermodynamic efficiency. In other words, energy should be our basis for determining the value of goods and services.

Figure 1   “Efficiency” of production vs thermodynamic efficiency

     These two methods are not entirely at variance with each other. In many economic activities such as manufacturing, there is fairly good tracking between BTU’s and dollars. A serious mismatch occurs when a significant part of production is provided essentially free by nature, the so-called externals. Government hand-outs come in the form of providing access to nature’s largesse, and this artificially reduces dollar costs.  Three glaring examples are:
 •·  Cattle ranchers & beef -- subsidies via cheap grazing lands
 •·  Lumber companies & paper -- subsidies of via cheap trees and free roads
 •·  Desert agriculture -- subsidies via cheap water for irrigation
      Conventional economists sometimes forget that the content of their field is as bound as engineering by the laws of nature. The economist and Nobel Prize winner N. Georgescu-Roegen has dealt with this at length in “The Entropy Law and Economic Process” (1971). The field of Ecological Economics is making an effort to do a realistic cost accounting of nature’s contributions.

4. How Much Is Nature Worth?   This heading is the title of New York Times (26 May 97) article by W.E. Stevens. The effort to put a price tag on the free services of the natural world was led by Robert Costanza, head of the Institute for Ecological Economics at the University of Maryland. The international, interdisciplinary team estimated that nature’s services were worth $33.3 trillion (1012) to human welfare. How did the team make such an estimate?
      The services were divided into 17 categories. Some of the categories are, soil formation, pollination, and water purification & supply. A dollar value was estimated by what it would cost if the human system had to provide it. For example, it would cost $4 billion to carry out the cleansing of water for downstate NY that the Catskill mountains do for free.
       Radical environmentalists and others have criticized Costanza’s efforts to attach dollars to nature’s gifts. Money measure extrinsic values, while nature’s contributions have intrinsic values. ( A house has extrinsic value -- the market determines its dollar value. A home has intrinsic value. It is difficult, perhaps impossible, to reduce it to dollars. A similar contrast could be made for an engagement ring or a child’s teddy bear.) The critics claim that intrinsic values cannot (or should not) be reduced to dollars.
      Costanza answers that immeasurable moral values are not damaged by his team’s calculations. The goal is to make people realize that nature’s free services should be included in an economic accounting -- the GDP includes far more than the business, industrial, and human service sectors.

5. Money, Time and Energy   Money and time are readily correlated by both individuals and the economic system. You will refuse a job unless it pays what you judge your time is work. A company will not pay an employee more than his services are worth. The link between money and energy is more troublesome.
      How many dollars is a BTU worth . . . ?  The answer is distorted by government subsidies to keep fuel prices low. It has been estimated that the US government spent 270 billion dollars defending foreign oil fields and maintaining highways for our cars and trucks ( J. H. Kunstler, “Zoned for Destruction”, NY Times, 9 Aug. 1993).
      Economics is subject to the same energy laws as the physical sciences. The irony is that these laws are inadequate to explain such a complex field.  For example, the empirical disciplines do not distinguish between the energy in --
    •· One BTU of peat or one BTU of hard coal
    •· A dozen sterile factory eggs or a dozen fertile barnyard eggs
    •· A stack of papers printed with random characters or a similar stack with a proof of Fermat's Last Theorem  
     How is the energy in a piece of wood or an egg measured . . . ?  It is measured by incineration in a bomb calorimeter, reducing the energy of the material to its thermal content.  Context, quality, historical record -- all such measures of potential for useful exchanges are obliterated when an energy source is reduced to its heat content.  Heat content is measured by such units as Calories or BTU’s. A BTU (British Thermal Unit) is the energy required to heat a pound of water 1° F.  It is not such a good idea to use the “Gertrude Stein” approach (A rose is a rose is a rose) to correlate energy and economic value --

6. Embodied Energy   Systems ecologist H.T. Odum introduced the concept of embodied energy to deal with the difficulties discussed above. An energy-accounting method for economic well-being must go beyond congruent energy units, or sheets of grey & green paper with “In God We Trust” printed on them.  A new accounting method should measure the potential to do useful work, credit Nature’s free contributions, and even reflect the energy in such things as information.
      Odum’s method is basically historical -- his intent is to measure the upstream contributions to goods, services, and living things.  He starts with sunlight, which is the base of our energy hierarchy --

The embodied energy of a given unit of energy

is

the number of solar energy units it takes to generate it.

     The energy chain in Fig.2 shows that it takes 40,000 units of solar energy units to produce one unit of coal energy. Therefore, one BTU of coal embodies 40,000 solar BTU.  It takes four BTU of coal to produce one BTU of electricity. Therefore, it takes 4x40,000 = 160,000 solar BTU to produce one BTU of electricity.  One unit of electrical energy has embodied in it 160,000 units of solar energy.

Figure 2  An Energy Chain

Coal has also been used as a basis for calculations because it scales the numbers down to a reasonable size.  For example, one unit of electrical energy has embodied in it ony four units of coal energy. [ In the last few years Odum has gone back to reducing all energies to solar energies.]
      The crucial point is that Odum gives us a method for measuring, in some form, the concentration, quality or value of energy. This provides a way to correlate energy values and market values.  It is all based on a fundamental insight --

All BTU’s are not equal.

The concept of embodied energy will be tracked further in chapter 9.

Exercise 6.1   It takes two units of wood energy to produce one unit of coal energy. Draw the diagram with a wood-producing box in the energy chain between the solar source and the solar-to-coal box.

Exercise 6.2   The questions refer to the table below.
a)  Do the average household figures indicate a change in the standard of living?
b)  How would you assess the change?
c)  Is the average householder better-off or worse-off?   Provide a numerical estimate.

(Figures from On Your Birthday, Spectrum Unlimited, San Francisco, CA.)