Useful exergy is key in obtaining plausible APFs and in recognizing - PowerPoint PPT Presentation

1 Useful exergy is key in obtaining plausible APFs and in recognizing the role of energy in economic growth: Portugal 1960-2009 Science & Energy 2018 João Santos 4 th Science and Energy Seminar (joao.dos.santos@tecnico.ulisboa.pt) March 4 th -9 th 2018 Tiago Domingos Tânia Sousa Miguel St. Aubyn

2 Summary ▫ Motivation: � The role of energy in contrasting approaches to economic growth; � Accounting for energy flows: exergy and useful exergy; ▫ Methods: � Cointegration analysis; � Criteria for statistically significant and economically plausible APFs; ▫ Results: � Macroeconomic and energy data; � Results and interpretation. ▫ Conclusions

3 Neoclassical theory of economic growth Economic growth explained through accumulation of capital ( � ), labor force growth ( � ), and mostly exogenous total factor productivity ( ��� ). Aggregate � � production Energy resources are either downplayed or ignored function altogether, and do not significantly contribute to economic growth.  “ Cost-share theorem ”: factors of production are � paid according to their productive power. � � 100% ����� �≅ �/�� Single-sector growth model 80% 60% Solow, R. M. (1957). Technical change and the aggregate production function. The review of Economics and Statistics, 40% 312-320. 20% Swan, T. W. (1956). Economic growth and capital ������� �≅ �/�� accumulation. Economic record, 32(2), 334-361. 0% 1960 1970 1980 1990 2000 2010

4 The role of energy in production: Ecological Economics Real-world economic processes cannot be fully understood without accounting for energy use, i.e. energy is essential to production The economic system is embedded within a larger, environmental system, with interactions grounded on the laws of thermodynamics. The importance of energy to growth is higher than suggested by its cost share ( ! 10% ). Aggregate ����� � � production function Environment Economy � � �

5 Aggregate Production Function critique “…the estimation of aggregate production functions is problematic, to say the least.” “…all those areas of neoclassical macroeconomics that use the aggregate production function (…) have no theoretical or empirical basis.” • Existence of an homogeneous degree one APF linking output and inputs to production is often merely assumed; • Conditions under which APF can be written are stringent enough to doubt its existence; • Aggregate measurement of capital inputs Felipe, J., & McCombie, J. S. (2005). How sound are the foundations of the aggregate production function?. Eastern Economic Journal, 31(3), implies adding up incomparable 467-488. heterogeneous assets: Felipe, J., & McCombie, J. S. (2013). The Aggregate Production Function and the Measurement of Technical Change: Not Even Wrong . Edward  Cambridge capital controversy ; Elgar Publishing.

6 Energy, exergy, and useful exergy 20% Useful Energy Final Energy 40% Heat 80% Primary Energy 60% Waste Heat Coal (30 g) Light Electricity 0.27 kWh Lightbulb Power station 0.08 kWh 0.02 kWh 20% Useful Exergy 40% Heat Exergy Final Exergy 40% Primary 40% Destroyed Exergy 30% Heat exergy 30% exergy 30% Destroyed exergy

7 Exergy and useful exergy: Portugal 1856-2009 Useful exergy / GDP Useful exergy / GDP (MJ/2010€) Final exergy / GDP (MJ/2010€) Final exergy / GDP Despite shifts in composition, useful exergy intensity is stable. Serrenho, A. C., B. Warr, T. Sousa, R.U. Ayres, T. Domingos (2016). Structure and dynamics of useful work along the 7 agriculture-industry-services transition: Portugal from 1856 to 2009. Structural Change and Economic Dynamics, 36, 1-21.

8 Exergy and useful exergy: Portugal 1960-2009 Useful Exergy / GDP Useful exergy / GDP (MJ/2010€) Final exergy / GDP (MJ/2010€) Final Exergy / GDP Using a GDP-deflator instead of a Consumer Price Index, stability of UE intensity is clearer. Serrenho, A. C., B. Warr, T. Sousa, R.U. Ayres, T. Domingos (2016). Structure and dynamics of useful work along the 8 agriculture-industry-services transition: Portugal from 1856 to 2009. Structural Change and Economic Dynamics, 36, 1-21.

9 Cointegration: a drunk and her dog Murray, M. P. (1994). A drunk and her dog: an illustration of cointegration and error 6 correction. The American Statistician, 48(1), 37-39. 5 % & ' % &() * + & Drunk: 4 & ' &() * , & Dog: 3 Each corrects his path so as not to stray too far from the other. 2 Cointegration: 1 % & ' % &() * + & - . &() ' % &() 0 & ' &() * , & - / % &() ' &() 1960 1970 1980 1990 2000 2010

10 Cointegration tests: Johansen* procedure and working variables *Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of economic dynamics and control, 12(2-3), 231-254. The Johansen procedure to test for cointegration requires all time series to be ��1� . The order of integration can be tested resorting to – 4 Economic output unit root tests: – 5 Capital inputs • Augmented Dickey-Fuller; • Philips-Perron. – � Labor inputs – 6 Energy inputs Likely to be ��2� For time series with different order of integration, a set of ��1� working variables can be defined to test for cointegration using the Johansen procedure: 3 * ln � 2 * ln � � * ln � � � � Adoption of this set of working variables will impose constant returns to scale on APF formulations considered in our analysis.

11 From cointegration to aggregate production functions The simplest model: Cointegrating relationship (vector): B, D 8 ) 3 ' 8 9 2 ' : * 0 • Output and capital (no energy); • No linear time trend; 3 * ; < · 2 - : > • At most one cointegration vector. @ A � � * exp�: > � · � � * ? · � @ A · � )(@ A � ? Aggregate production function criteria Aggregate � � 1) Cointegration between factor inputs and output; production function 2) Output elasticities must be positive and significant; 3) Granger causality between inputs and output; � Output elasticities E cost shares. 4) � �

12 From cointegration to aggregate production functions The simplest model: Cointegrating relationship (vector): B, D, L 8 ) 3 ' 8 9 2 ' 8 I � ' : * 0 • Output, capital, and energy; • No linear time trend; 3 * ; < · 2 - ; J · � - : > • At most one cointegration vector. @ A @ K � � * exp�: > � · � · � � * ? · � @ A · � @ K · � )(@ A (@ K � � ? Aggregate production function criteria Aggregate � � � 1) Cointegration between factor inputs and output; production function 2) Output elasticities must be positive and significant; 3) Granger causality between inputs and output; � Output elasticities E cost shares. 4) � �

13 From cointegration to aggregate production functions The simplest model: Cointegrating relationship (vector): B, L 8 ) 3 ' 8 9 � ' : * 0 • Output and energy (no capital); • No linear time trend; 3 * ; J · � - : > • At most one cointegration vector. @ K � � * exp�: > � · � � * ? · � @ K · � )(@ K � ? Aggregate production function criteria B, L Aggregate Aggregate � � � � � 1) Cointegration between factor inputs and output; production production function function 2) Output elasticities must be positive and significant; 3) Granger causality between inputs and output; � Output elasticities E cost shares. 4) � � �

14 From cointegration to aggregate production functions The simplest model: Cointegrating relationship (vector): B, D 8 ) 3 ' 8 9 2 ' λN ' : * 0 • Output and capital (no energy); • Linear time trend; 3 * ; < · 2 - λ′N - : > • At most one cointegration vector. @ A � � * exp�: > � · exp�λ > N� · � � * ? · exp�λ > N� · � @ A · � )(@ A � ? Aggregate production function criteria Aggregate � � 1) Cointegration between factor inputs and output; production function 2) Output elasticities must be positive and significant; 3) Granger causality between inputs and output; � Output elasticities E cost shares. 4) � �

15 From cointegration to aggregate production functions The simplest model: Cointegrating relationship (vector): B, D, L P8 ) 3 ' 8 9 2 ' : ) * 0 8 I 2 ' 8 Q � ' : 9 * 0 • Output, capital, and energy; • No linear time trend; • At most two cointegration vectors . @ A � > � · � � * exp�: ) R� * ? ) · � @ A · � )(@ A � � * ? 9 · � S · � )(S S � > � · � � * exp�: 9 � Aggregate � � Aggregate production function criteria production 1) Cointegration between factor inputs and output; function 2) Output elasticities must be positive and significant; � 3) Granger causality between inputs and output; � � Output elasticities E cost shares. 4) �