Thinking Big about Energy Efficiency

By John A. “Skip” Laitner, Visiting Fellow

Observers of U.S. energy policy might think of energy efficiency as a useful investment strategy to smartly manage the growth of energy consumption. They might also see it as a cost-effective means to ease our transition into a post-carbon world. And yes, the evidence does support both of these notions. But there is also emerging evidence that demonstrates that energy—and especially the more efficient use of that energy—plays a much more critical role within the economic process than is generally understood.

Building on the work of a number of noted economists and physicists, the new ACEEE report, Linking Energy Efficiency to Economic Productivity: Recommendations for Improving the Robustness of the U.S. Economy, explores the productive use of energy as it affects the robustness of the larger U.S. economy. It also explores the need for a more critical accounting of how work—that is, the transformation of matter into available goods and services—is enabled by the efficient conversion of high-quality energy called exergy. If exergy flows are neither properly measured nor adequately tracked, then business and policy leaders may be misreading the real dynamics of economic activity. That may lead to policy prescriptions that are suboptimal and dampen the economic well-being of the United States.

Current Levels of Inefficiency Constrain a More Robust Economy

The U.S. economy is not especially energy efficient. Of the total high-quality energy consumed to support economic activity in 2010, only 14 percent was converted into useful work. In other words, the American economy wasted 86 percent of all the energy used that year in the production of goods and services. One can easily imagine that waste of this magnitude creates an array of costs that weakens the nation’s economic and social well-being. More to the point, when properly measured the conversion efficiency has flattened in the last several years. The lagging rate of efficiency improvement may be among the critical reasons for a slumping economy. The key data found in Appendix A of the above-mentioned report are summarized in the figure below

Conversion Efficiency—Total Exergy to Useful Work

Starting at 8 percent in 1950, the rate of exergy conversion grew four percentage points from 8 to 12 percent by 1980. Economy-wide productivity increased an average of 2.25 percent per year during that same 30-year period. Over the next 30 years through 2010, however, the conversion efficiency grew just two percentage points even as economy-wide productivity slumped to 1.72 percent annually. When spread over a 30-year period, even a few tenths of a percentage point can have a very big impact on the productivity and the size of the economy.

In 2010, for example, the actual size of the nation’s Gross Domestic Project (GDP) was an estimated $13,240 billion (measured in constant 2005 dollars). Had the U.S. economy maintained a productivity improvement of 2.25 rather than 1.72 percent over the period 1980 to 2010, the nation’s GDP would have been more than $2 trillion larger than actually recorded. As discussed in the report, it appears the annual productivity of the economy may be weakening even further. Without investment policies that improve energy or exergy efficiency, GDP growth may hover closer to 2 percent per year rather than the 2.6 percent that might be otherwise projected, or even the 3.0 percent many hope for.

The Need for an Improved Tracking and Accounting of Annual Energy Flows

The job of evaluating the necessary data to provide meaningful insight is a difficult chore as two relatively unfamiliar tasks must be undertaken within the nation’s economic accounts before an appropriate examination can be completed. The first task is a review of appropriate terms and concepts that facilitate a better understanding of energy at work.

What most people call energy, for example, is what physicists and engineers are more likely to call exergy, or high-quality energy that is available to do work. Energy that is either wasted or useless—in effect, energy that has no capacity to perform work such as the heat in the atmosphere—is referred to as anergy. High-quality exergy may degrade into useless anergy (a process called entropy). Total energy within a system or economy is the sum of exergy plus anergy.

Once the concepts are properly defined, the second task is to ensure that all high-quality energy (exergy) that is necessary to perform work is tracked. As it turns out, the usual tracking of energy commodities only accounted for about 80 percent of the exergy necessary to power the U.S. economy in 2010. Thus, the economic accounts now provide an incomplete reference to the full set of resources that enable work or economic activity.

Critical Policy Steps for a More Robust Economy

The ideas advanced in this report challenge the conventional accounting of energy consumption. One especially useful step to continue examining such issues would be the convening of a national workshop or conference specifically designed to explore the economic aspects of both energy and exergy. Notwithstanding useful insights that might emerge from such a workshop, or from a further assessment of the link between exergy flows and a more robust economy, the evidence underscores one very critical idea—the U.S. economy will be better off by “Thinking Big” about energy productivity.