MARCH 4-9, 2018 MACROECONOMIC MODELING OF ENERGY TRANSITIONS (ACCOUNTING FOR MONEY AND ENERGY)
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1 MARCH 4-9, 2018 MACROECONOMIC MODELING OF ENERGY TRANSITIONS (ACCOUNTING FOR MONEY AND ENERGY) 4th Science and Energy Seminar at Ecole de Physique des Houches Les Houches, France CAREY W. KING, PH.D. Research Scientist & Assistant Director, Energy Institute, The University of Texas at Austin
2 Two words: Trump socks! 2
3 A paper of possible interest: Test of energy-complexity theory for modern U.S. economy King, Carey W. Information Theory to Assess Relations Between Energy and Structure of the U.S. Economy Over Time. Biophysical Economics and Resource Quality, 2016, 1 (2).
4 Goals for macroeconomic modeling Explain if/how the finite Earth is affecting economic trends (investment, wages, debt) energy flow trends Mimic broad historical trend agrarian fossil/industrial economy.. to then have basis to inform fossil renewable (or low-carbon) economy 4
5 Goals for macroeconomic modeling Explain if/how the finite Earth is affecting economic trends (investment, wages, debt) energy flow trends Mimic broad historical trend agrarian fossil/industrial economy.. to then have basis to inform fossil renewable (or low-carbon) economy A very broad validity check 5
6 Declining energy & & food costs are the characteristic trend of the industrial era Preindustrial: food and fodder were major energy supply for mechanical power from humans and animals Energy Expenditures: Fouquet, R. (2014) REEP 8(2). Figure: King, C. W. (2015) Energies 6
7 Biophysical Models Population Natural Resources Capital (sometimes) Economic Models Population Capital Wages Employment Debt (sometimes) Research Approach Combine models: Link resource consumption to debt, employment, and output 7
8 BIOPHYSICAL MODEL 8
9 HANDY model Motesharrei, S., Rivas, J. & Kalnay, E Human and nature dynamics (HANDY): Modeling inequality and use of resources in the collapse or sustainability of societies. Ecological Economics, 101, Equation State xሶ c = births deaths xሶ e = births deaths y ሶ = nature regeneration extraction w ሶ = extraction consumption Population (workers) Population (elites, non-workers) Nature Wealth (nature extracted but not yet consumed) 9
10 HANDY model Motesharrei, S., Rivas, J. & Kalnay, E Human and nature dynamics (HANDY): Modeling inequality and use of resources in the collapse or sustainability of societies. Ecological Economics, 101, Equation xሶ c = β c x c α c (w)x c xሶ e = β e x e α e (w)x e y ሶ = γy λ y δx c y w ሶ = δx c y C c w C e w State Population (workers) Population (elites, non-workers) Nature Wealth (nature extracted but not yet consumed) 10
11 Finite-world feedbacks λ = maximum resource size Equation xሶ c = β c x c α c (w)x c xሶ e = β e x e α e (w)x e y ሶ = γy λ y δx c y w ሶ = δx c y C c w C e w State Population (workers) Population (elites, non-workers) Nature Wealth (nature extracted but not yet consumed) 11
12 Finite-world feedbacks λ = maximum resource size My death rate (α) is a function of resource extraction rate Equation xሶ c = β c x c α c (w)x c xሶ e = β e x e α e (w)x e y ሶ = γy λ y δx c y w ሶ = δx c y C c w C e w State Population (workers) Population (elites, non-workers) Nature Wealth (nature extracted but not yet consumed) 12
13 Finite-world feedbacks γ = regeneration rate λ = maximum resource size My death rate (α) is a function of resource extraction rate Equation xሶ c = β c x c α c (w)x c xሶ e = β e x e α e (w)x e y ሶ = γy λ y δx c y w ሶ = δx c y C c w C e w State Population (workers) Population (elites, non-workers) Nature Wealth (nature extracted but not yet consumed) 13
14 Finite-world feedbacks γ = regeneration rate λ = maximum resource size My death rate (α) is a function of resource extraction rate Equation xሶ c = β c x c α c (w)x c xሶ e = β e x e α e (w)x e y ሶ = γy λ y δx c y w ሶ = δx c y C c w C e w State I change to function of Population extraction (workers) capital, K e Population (elites, non-workers) δ: extraction rate Nature parameter Wealth (nature extracted but not yet consumed) 14
15 HANDY: A moderate extraction parameter leads to sustainable steady state (Motesharrei, et al., 2014) 15
16 HANDY: A high extraction parameter leads to nature depletion and collapse of the population (Motesharrei, et al., 2014) 16
17 ECONOMIC (GROWTH) MODEL 17
18 Capital & Debt Each sector has its own capital (K), investment (I), and debt (D) K ሶ = I P g γk = investment depreciation ሶ D = I Π = investment profit 18
19 Investment Investment (for each sector) is a linear function of profit share, κ(π) Per Steve Keen, Gaël Giraud I = κ 0 + κ 1 π π i = П i /VA i = profit / value added П i = VA i wages i interest payments i depreciation i 19
20 Wages Wage (ω) is a function of employment (L/x) (i.e., Phillips curve) ω ሶ = f Τ L x ω f L x L/x 20
21 Nature Consumption Nature to operate K extract Extraction capital (K extract ) Net Output ($) (Y = C + I) Investment for K extract Total Nature Extraction Depreciation Nature to operate K goods Goods capital (K goods ) goods Price ($/ good) Investment for K goods Consumption of Goods Nature Depreciation Nature embodied in capital Nature for human consumption goods Price ($/ nature) Investment goods (capital is made of nature) Consumption of Nature 21
22 Value Added Net Output Goods Extraction Consumption Investment Total output Goods P g A gg X g P g A ge X e C g I e + I g P g X g Extraction P e A eg X g P e A ee X e C e --- P e X e Profit Π g Π e Wages wl g wl e Interest rd g rd e Depreciation P g γk g P g γk e Total output P g X g P e X e 22
23 Value Added Net Output Goods Extraction Consumption Investment Total output Goods P g A gg X g P g A ge X e C g I e + I g P g X g Extraction P e A eg X g P e A ee X e C e --- P e X e Profit Π g Π e Wages wl g wl e Interest rd g rd e Depreciation P g γk g P g γk e Total output P g X g P e X e A ee = nature to operate K e total extraction output 23
24 Value Added Net Output Goods Extraction Consumption Investment Total output Goods P g A gg X g P g A ge X e C g I e + I g P g X g Extraction P e A eg X g P e A ee X e C e --- P e X e Profit Π g Π e Wages wl g wl e Interest rd g rd e A ee = nature to operate K e total extraction output Depreciation P g γk g P g γk e Total output P g X g P e X e A ee = η ek e CU e δyk e CU e = η e δy = [nature] [nature] 24
25 Value Added Net Output Goods Extraction Consumption Investment Total output Goods P g A gg X g P g A ge X e C g I e + I g P g X g Extraction P e A eg X g P e A ee X e C e --- P e X e Profit Π g Π e A eg = A o eg + AI eg Wages wl g wl e Interest rd g rd e Depreciation P g γk g P g γk e Total output P g X g P e X e 25
26 Value Added Net Output Goods Extraction Consumption Investment Total output Goods P g A gg X g P g A ge X e C g I e + I g P g X g Extraction P e A eg X g P e A ee X e C e --- P e X e Profit Π g Π e Wages wl g wl e Interest rd g rd e Depreciation P g γk g P g γk e Total output P g X g P e X e A eg = A o eg A o eg A o eg + AI eg = nature to operate K g total goods output = η gk g CU g = η K g CU g /v g v g = [nature] g [goods] 26
27 Value Added Net Output Goods Extraction Consumption Investment Total output Goods P g A gg X g P g A ge X e C g I e + I g P g X g Extraction P e A eg X g P e A ee X e C e --- P e X e Profit Π g Π e Wages wl g wl e Interest rd g rd e Depreciation P g γk g P g γk e Total output P g X g P e X e A eg = A o eg A o eg A o eg AI eg I A eg + AI eg = nature to operate K g total goods output = η gk g CU g = = η K g CU g /v g v g = [nature] g [goods] nature embodied in capital total goods output = (I g+i e )/P e K g CU g /v g = [nature] [goods] 27
28 SIMULATION RESULTS: CAUTION: MODEL IS NOT CALIBRATED TO ANYTHING IN REAL WORLD!!!!!! 28
29 SIMULATION RESULTS: CHANGING NATURE INPUT EFFICIENCY FOR OPERATING CAPITAL (INVESTMENT = PROFIT NO DEBT ACCUMULATION) 29
30 30
31 Increasing operating efficiency 31
32 Increasing operating efficiency 32
33 Increasing operating efficiency 33
34 Increasing operating efficiency 34
35 NEPR: Net External Power Ratio Increasing operating efficiency = Net nature output from extraction sector Nature input into extraction sector = Gross nature extraction Nature to operate extraction capital, K e Nature to operate extraction capital, K e Nature embodied in investment for extraction, I e Nature embodied in investment for extraction, I e 35
36 SIMULATION RESULTS: CHANGING INVESTMENT FUNCTION: I > PROFITS I = κ 0 + κ 1 π [κ 0 =0, κ 1 >0] 36
37 Investment = profit κ 1 =1.0 Increasing (κ 1 ) investment and debt accumulation κ 1 =1.33 κ 1 =1.2 κ 1 =1.2 κ 1 =1.33 Increasing (κ 1 ) investment and debt accumulation Investment = profit κ 1 =1.0 37
38 38
39 SIMULATION RESULTS: WHAT IF YOU FIND 2X MORE RESOURCES? (λ = 2λ 0 ) No Debt (Red): I = κ 0 + κ 1 π = 1.0π With Debt (Orange): I = κ 0 + κ 1 π = 1.2π 39
40 Energy Spending / GDP Max resources increase Energy Expenditures: Fouquet, R. (2014) REEP 8(2). Figure: King, C. W. (2015) Energies 40
41 No Debt (Red): I = κ 0 + κ 1 π = 1.0π With Debt (Orange): I = κ 0 + κ 1 π = 1.2π 41
42 No Debt (Red): I = κ 0 + κ 1 π = 1.0π With Debt (Orange): I = κ 0 + κ 1 π = 1.2π 42
43 No Debt (Red): I = κ 0 + κ 1 π = 1.0π With Debt (Orange): I = κ 0 + κ 1 π = 1.2π 43
44 No Debt (Red): I = κ 0 + κ 1 π = 1.0π With Debt (Orange): I = κ 0 + κ 1 π = 1.2π No debt accumulation With debt accumulation: Find more nature you can pay more to labor With debt accumulation: Find more nature Debt seems less important No debt accumulation Interest payments 44
45 Employee Compensation (% of GNI) U.S. Energy Consumption (MMBtu/yr/person) 68% 66% 64% 62% 60% 58% 56% Compensation Share U.S. Data %
46 Employee Compensation (% of GNI) U.S. Energy Consumption (MMBtu/yr/person) 68% 66% 64% 62% 60% 58% 56% Compensation Share U.S. Data %
47 Employee Compensation (% of GNI) U.S. Energy Consumption (MMBtu/yr/person) 68% 66% 64% 62% 60% 58% 56% Compensation Share U.S. Data Energy Consumption per person %
48 Carey W. King, Ph.D. Research Scientist & Assistant Director, Energy Institute Jackson School of Geosciences Lecturer, McCombs School of Business & LBJ School of Public Affairs King, Carey W. Information Theory to Assess Relations Between Energy and Structure of the U.S. Economy Over Time. Biophysical Economics and Resource Quality, 2016, 1 (2). energy.utexas.edu
49 Extra
50 Motivation for macroeconomic research Bridge economic and physical science communities Explicitly represent resources in macroeconomics There is a need to communicate to both economic and physical science communities This can lead to better communication to policymakers and business 50
51 Population Pressure = Population Pressure Population maximum population that can be fed Energy Expenditures: Fouquet, R. (2014) REEP 8(2). Population Pressure: Turchin and Nefedov (2009) Secular Cycles. Figure: King, C. W. (2015) Energies 51
52 Prices V X P X ሚA T P X Γ P P = X 1 ሚA T Γ 1 V 52
53 Energy: a major part of the long-term economic story Most discussions of secular stagnation make almost no mention of energy or resources Yes Demographics Debt (time, endogenous money sometimes) Education Wages No (usually) Energy & food costs Net energy consumption Efficiency of conversion to services The Economist, February 20-26,
54 Modeling approach: Population (with birth &/or death rates endogenous) Natural Resources Gross extraction and net output from energy sector Capital Sector 1: goods production using extracted resources as input Sector 2: extraction of resources Debt (firms) Debt is endogenous money (banks lend firms money = savings by households) Stock-flow consistency (conservation of resources & money) 54
55 Consumption and death rates are constant until wealth/person goes below a defined threshold (w th ) (Motesharrei, et al., 2014) 55
56 Consumption and death rates are constant until wealth/person goes below a defined threshold (w th ) (Motesharrei, et al., 2014) Later blended macromodel no longer independently defines consumption in this manner. 56
57 Intermediate Consumption Capital for nature extraction Net Output (Y = C + I) Depreciation Nature Nature Extraction wealth (stored nature) Depreciation Capital for goods production Price ($/ nature) Consumption of Goods Investment (capital is made of nature) Consumption of Nature 57
58 Intermediate Consumption Capital for nature extraction (K extract ) Net Output (Y = C + I) Investment for K extract Depreciation Nature Extraction wealth (stored nature) Depreciation Capital for goods production (K goods ) Investment for K goods Consumption of Goods Nature Price ($/ nature) Capital for goods production (K goods ) Investment goods (capital is made of nature) Consumption of Nature 58
59 Intermediate Consumption Extraction capital (K extract ) Net Output (Y = C + I) Investment for K extract Depreciation Nature Extraction wealth (stored nature) Depreciation Goods capital (K goods ) Investment for K goods Consumption of Goods Nature Nature embedded in capital Price ($/ nature) Investment goods (capital is made of nature) Consumption of Nature 59
60 For the economists I solve in this order Assume functions of gross production for each sector (X) Assume technological matrix, A, coefficients (two are functions, two constant) Net output (Y) is now determined I assume a function for investment (I) Household consumption (C) is residual: Y - I 60
61 61
62 Decreasing efficiency 62
63 Decreasing efficiency Decreasing efficiency 63
64 Increasing efficiency 64
65 65
66 66
67 67
68 68
69 Find more nature you can pay more to labor Find more nature you can pay off debt 69
70 Employee Compensation (% of GNI) U.S. Energy Consumption (MMBtu/yr/person) 68% 66% 64% 62% 60% 58% 56% Compensation Share U.S. Data Energy Consumption per person %
71 Employee Compensation (% of GNI) U.S. Energy Consumption (MMBtu/yr/person) 68% 66% 64% 62% 60% 58% 56% Compensation Share U.S. Data %
72 Employee Compensation (% of GNI) U.S. Energy Consumption (MMBtu/yr/person) 68% 66% 64% 62% 60% 58% 56% Compensation Share U.S. Data Energy Consumption per person %
73 Wages as % of GDP U.S. Energy Consumption (MMBtu/yr/person) 52% 50% U.S. Data % 46% 44% 42% Wage Share %
74 Wages as % of GDP U.S. Energy Consumption (MMBtu/yr/person) 52% 50% U.S. Data % 46% 44% 42% Wage Share %
75 Wages as % of GDP U.S. Energy Consumption (MMBtu/yr/person) 52% 50% U.S. Data % 46% 44% Wage Share % Energy Consumption per person %
76 No Debt (Red): I = κ 0 + κ 1 π = 1.0π With Debt (Orange): I = κ 0 + κ 1 π = 1.2π 76
77 Wages as % of GDP U.S. Energy Consumption (MMBtu/yr/person) 52% 50% U.S. Data % 46% 44% 42% Wage Share %
78 Wages as % of GDP U.S. Energy Consumption (MMBtu/yr/person) 52% 50% U.S. Data % 46% 44% 42% Wage Share %
79 Wages as % of GDP U.S. Energy Consumption (MMBtu/yr/person) 52% 50% U.S. Data % 46% 44% Wage Share % Energy Consumption per person %
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