“Spending more money” has long been considered a fair reward for creating and accumulating wealth. But, as I’ve argued in my work that spans more than six decades, how we make money is more important than how we spend it. If the goods and services we produce leave behind a vast trail of waste, this can easily outweigh their benefits to society and ultimately make the world a poorer place, not to mention a more perilous place.
Humans produce more waste than ever. The oceans are a dump of plastic and industrial pollution chokes the air. We inject massive amounts of fertilizers to grow plants and neglect the toxic consequences for freshwater aquifers. Vital rainforests are being destroyed to clear land for logging, cattle ranching and livestock. The consequence is the loss of habitat for many species of animals and birds that we – and our children – would like to preserve.
Alarmingly, some well-known economic models predict that global warming of the planet by a few degrees Celsius can be “accommodated” by the economy as it is. These models predict that GDP would decline only marginally if global temperatures increased by two degrees. These academics dangerously underestimate the impact of climate change on all industries and our economies.
Exergy is what matters
We know that climate change is primarily a consequence of the buildup of carbon dioxide in the atmosphere. The burning of fossil fuels like coal, oil and natural gas is the main culprit. One of the reasons the levels are so high is our inefficient use of nature’s energy. This is where the concept of exergy comes in.
All transformations on earth require exergy to be “activated”. It is the part of energy that can be used productively, i.e. to do “useful work” (overcoming inertia) in the technical sense, such as pumping water, lifting weights or propel a ship. Exergy comes directly from the sun in the form of photovoltaic electricity, indirectly as energy from rain and flowing water, or as biomass from photosynthesis.
Exergy is the fundamental and unique “factor of production”: it is the only “substance” necessary to drive any transformation of material inputs into material outputs. According to the first law of thermodynamics, materials can change, but do not disappear. All possible transformations are driven by the dissipation of exergy; so transformations consume exergy to do useful work. The second law of thermodynamics tells us that degraded materials can be recycled (consuming exergy) but degraded exergy cannot be reused.
Economists need to account for externalities
While some raw materials are reconstituted through natural processes, many rare elements are not. Not only do we use – but do not recycle – limited natural resources, but our current industrial production processes leave behind hazardous waste. If these are not effectively eliminated or detoxified, they will impose an increasing cost on our children and grandchildren. These costs have been referred to as “externalities” in a article I published with Allen Kneese in the american economic journal over 50 years ago.
In this now widely cited article, we have argued that economic models must recognize harmful by-products of consumption and production, such as waste and emissions, within a total cost framework. We have argued that the benefits of current activities should always consider hidden future costs. The most obvious example, but not the only one, is the cost of climate change.
Five decades later and later, economic theorists have not sufficiently adjusted their mindsets and models. This is concerning because policy makers rely on these theories to make policy decisions. As a result, governments still have not put in place regulations to seriously repress the externalities associated with exergy consumption. This neglect has hindered the necessary transition to sustainability and further fueled the climate crisis we currently find ourselves in.
Our economy is an “island of order” far from equilibrium
Current economic models, based on ideas dating back to 1870, generally view the economy as a closed system where whatever is produced in the system is consumed in the system. In such a balance, all economic activity can continue indefinitely without anything changing. The economy works like a Swiss clock that does not need to be wound.
Such the models incorporate three false axioms that have catastrophic implications. First, at the entry stage they do not take into account the “free” contributions that the earth makes to the economy thanks to nature’s recycling capacities. Second, they assume that the global economy is always approaching equilibrium. Equilibrium growth is thermodynamically impossible.
Third, existing models do not consider all externalities generated by processing decisions, from production to consumption of finished products. Therefore, they ignore the accumulation of waste in the atmosphere or in the oceans.
Instead of thinking of the economy in terms of sustainability, it is more accurate to describe the economy as an “island of order” that exists far from thermodynamic and economic equilibrium. This is in accordance with the views of physicist chemist Ilya Prigogine, who received the Nobel Prize in Chemistry in 1977 For his work.
The economy is a living and dynamic system, constantly changing and seeking order at the cost of increased complexity and interconnectedness.
Exergy as the main driver of economic growth
Neoclassical economists consider capital and labor to be the main “factors of production”, even though most of the work of converting raw materials into useful products is done by machines driven by exergy. Without taking exergy into account, everything happens as if the economy were not affected by energy constraints. It also erroneously implies that energy-related emissions, such as greenhouse gases, can be reduced or eliminated without consequences for growth.
Previously studies, Benjamin Warr and I demonstrated that exergy is crucial in predicting economic growth. By analyzing the energy inefficiency of economies such as the United States, we demonstrated that energy consumption can explain the share of economic growth that was typically (and magically) attributed to endogenous “technological progress”. sources that the economic system needs to provide its goods and services.
Unfortunately, knowing that exergy has always been the source of economic growth tells us little about the future. We need to know how much will be used for space heating, mining, manufacturing, transportation, distribution, agriculture, health services, education, entertainment, defence, law, IT, etc. And it greatly depends on the efficiency of converting energy into exergy. Only then can we estimate future growth rates and energy inputs per unit of output produced in each sector, in each country.
Reducing greenhouse gas emissions is important, for climate reasons, and the world increasingly understands this. What we don’t fully realize is that energy efficiency is likely to be the central strategy for economic growth in the future. We can see that space heating and transportation are obvious opportunities to increase efficiency. Vertical farming is an example of how built cities can reduce the environmental impact of agriculture and improve its energy efficiency.
The stark reality is that if we continue on the current path of extremely inefficient use of energy, we are headed for social, economic and environmental disaster. The “good” news is that our current energy efficiency being low, significant improvements are possible. We need to better rely on and harness the common renewable energy sources that electrify and energize the planet, such as solar power, wind power, hydropower and even ocean power.
By integrating the laws of physics with economic theory and recognizing the open nature of the economy, I sketched Over the past five decades, economic theory will do a better job of countering the current climate crisis.