User:Biophyseco/sandbox/Biophysical economics

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Biophysical economics is the study of the ways and means by which human societies procure and use energy and other biological and physical resources to produce, distribute, consume and exchange goods and services, while generating various types of waste and environmental impacts. These ways and means vary in time and space according to the internal structures of societies and economies, and according to the patterns of energy and resource use by their various components and constituents. Biophysical economics is a trans-disciplinary field that builds on both social sciences and natural sciences to overcome some of the most fundamental limitations and blindspots of ‘mainstream economics’. It provides an alternative view of how the economy works, based on a systemic approach to the long-term role of energy and matter in the economic process. It identifies and analyses biophysical requirements and framework conditions for economic growth and for societal sustainability, as well as related constraints and boundaries. It sheds a different light on economic history, as well as on current and future economic prospects and challenges.

History and development

The term 'biophysical economics' was first coined in the 1920s by American mathematician, physical chemist and statistician Alfred J. Lotka (1880-1949). However, the roots of the biophysical reading of the economic process can be traced to the 18th-century Physiocrats, the first organized school of economic thought, which had as its main principle that natural resources, and fertile agricultural land in particular, were the source of value creation and material wealth. The perspective further developed in the 19th century with the discovery of the laws of thermodynamics and the first attempts at using thermodynamics and energy flows to explain social and economic development. It expanded in the 20th century with a growing body of work devoted to the analysis of the role of natural resources in human affairs, and particularly in economic production. In addition to Alfred Lotka, notable authors included Nobel laureate in chemistry Frederick Soddy (1877-1956), political scientist and sociologist W. Fred Cottrell (1903-1979), geologist and geophysicist M. King Hubbert (1903-1989), mathematician, statistician and economist Nicholas Georgescu-Roegen (1906-1994), and ecologist Howard T. Odum (1924-2002). In more recent years, biophysical economics has become based on a growing body of research, led in particular by physicist and economist Robert U. Ayres (born 1932) and systems ecologist Charles A.S. Hall (born 1943). Biophysical economics is based on a growing body of interdisciplinary research. An International Society for BioPhysical Economics (ISBPE) was created in 2015, gathering researchers from a variety of fields. A dedicated, peer-reviewed journal called 'BioPhysical Economics and Resource Quality' was launched in early 2016, edited by Charles A.S. Hall, Italian physicist Ugo Bardi and French economist Gaël Giraud. In 2017, an international public policy think tank was established to promote biophysical economics in the public debate and the policy conversation, called BiophysEco - The Biophysical Economics Policy Center.

Topics and concepts

Mainstream economics analyzes the economy and its evolutions on the basis of a limited set of functions and parameters that are internal or ‘endogenous’ to the economic process. It typically envisions the economy as the process of producing goods or services using essentially two ‘factors of production’: capital and labor. The production of economic output is seen as a ‘function’ of capital and labor, i.e. as resulting from the combination of those two factors and how this combination evolves over time. Economic growth, in this perspective, essentially results from the expansion of the supply of labor and capital inputs and from the rise of the productivity of their use. Labor and capital are the only factors that limit or determine the patterns of scarcity, and most other inputs into the economic process are considered as ‘exogenous’, secondary and largely immaterial to the long-term trends of the economy. Biophysical economics considers that this conception is inconsistent with the fact that, in addition to labor and capital, a number of other important inputs always have to be brought into the economic process for goods and services to be produced, distributed and consumed. The most important of these inputs is energy, defined as the capacity of a physical system – be it a human or animal body, a car, a plane, a computer, a factory, a power grid, an economy, etc. – to perform work and/or to transform matter. Far from being a secondary input, energy is a fundamental input that is needed for all human activities, without exception. Capital and labor are functionally inert without energy input, and they can only be brought together to produce and distribute goods and services through the use of energy. This has two key consequences: first, the productivity of capital and labor, and of their combination, depends to some extent upon the cost, quantity and quality of the energy input; second, the expansion of economic activity typically requires procuring and using increasing quantities of energy. In fact, economic growth has historically been closely correlated with the capacity of the countries and regions that experienced it to harness and use ever-growing amounts of energy. In order for goods and services to be produced, distributed and consumed, energy however needs to be combined with other inputs – labor and capital inputs, but also various types of matter, i.e. biological and physical substances obtained, directly or indirectly, from natural resources such as land, water, soil, plants, animals, and minerals. The relation between the use of these biophysical resources (including energy resources) and the economy is however complex and difficult to apprehend, and the contribution of energy and matter to the economic process remains largely overlooked by mainstream economics. Biophysical economics aims to conceptualize and quantify this contribution. To this end it puts energy at the centre of the economic process, and analyzes how the flows of energy and matter shape and are shaped by the economy’s structures and evolutions.

It is based on a number of key principles:

The economy is a complex, ‘dissipative’ system

Rather than as a simple and closed circular system, biophysical economics sees the economy as a complex system whereby energy and matter get procured from various sources in the environment and then converted and used – in combination with other inputs, including labor and capital – to produce, distribute and consume the goods and services that provide sustenance, security, comfort, mobility and entertainment to human beings, creating various types of waste at all stages. In other words, the economy is a ‘dissipative’ system, i.e. a thermodynamically open system that ‘exchanges’ energy and matter with its surroundings. As a consequence, economic activity is necessarily constrained, at global level, by the laws of thermodynamics, i.e. the inescapable physical laws that govern how heat (or thermal energy) is converted to and from different types of energy, and the effect that this can have on various forms of matter. These laws in fact imply that human beings can never create energy but only harness it from sources present in nature, and that their use of energy sources present in nature always generates an irreversible dissipation/degradation of energy, from ‘usable’ to ‘unusable’, and a parallel increase of entropy, i.e. systemic randomness or disorder, in particular in the form of environmental degradation.

Economic processes are ‘metabolic’ in nature

The economy can be viewed as a set of metabolic processes, i.e. processes by which human societies – and their various components – ‘exchange’ energy and matter with their biophysical environment and between themselves, and use them in various ways and for various purposes. These metabolic processes vary considerably in time and space according to the internal structures of societies and economies, to their ‘metabolic patterns’ (i.e. the patterns of energy and resource use by their various components and constituents) as well as their trade patterns.

Energy sources and uses impact economic structures and performances

Primary energy sources take many forms, including nuclear energy, fossil energy (oil, coal and natural gas) and renewable sources such as wind, solar, geothermal and hydropower. How energy is procured and used in a given society or geographical region depends on the availability of usable energy resources on its territory or the possibility of importing them, the extent and type of energy needs to be met, as well as the characteristics of its energy system(s), which are influenced by historical, economic, social, demographic, environmental and geopolitical factors. Energy supply and use are thus influenced by a society’s patterns of production and consumption, but they also contribute to shape them and to support or constrain their evolutions.

Energy sources and resources are not perfectly or easily substitutable

The composition and evolution of the primary energy supply – or ‘energy mix’ – impacts the economy in various ways. While mainstream economics views energy as a mere ‘commodity’ – i.e. an easily substitutable marketable item that can be bought, sold, and traded across a market with little or no qualitative differentiation – biophysical economics recognizes that energy comes from various sources and in various forms that have very different physical properties and capacity to generate economic and social value, especially when problems of scale and resource dependency are factored in. Key attributes include availability and affordability, energy density (amount of energy stored per unit volume or mass), power density (rate of energy flux obtained per unit of spatial area used), versatility of use, including fungibility (equivalence and interchangeability of all units), storability (capability to be stored for significant time without loss of usability), transportability (capability to be moved around by multiple means with limited loss), convertibility (capacity to be efficiently converted into other forms of usable energy), and scalability (capacity to be scaled up or down efficiently, cost-effectively and without adverse impact). All of these attributes make fossil fuels, and most particularly petroleum, very convenient, economic, powerful and versatile sources of energy and explain why they have become the master energy sources of the modern world. They also explain why all units of energy are not necessarily equal and interchangeable in an economy at any point in time, and why attempts at substituting dominant energy sources with alternative ones – or even a specific type of energy resource (e.g. conventional oil) by another with different properties (e.g. unconventional oil) may not lead to the intended outcome when net economic effects (including system/infrastructure costs) are considered. In other words, the theoretical potential of an energy source or resource base is not always equal to its economic potential, let alone to its practically realizable potential. Energy transitions are therefore complex and lengthy processes that affect the structures and functioning of the economy in ways that cannot necessarily be understood in purely monetary terms and captured in money-based cost-benefit analyses.

Energy sources tend to supplement rather than replace each other

Historically, new energy sources have always, at global level, supplemented rather than replaced or substituted preexisting ones. Even if coal supplanted water power and petroleum supplanted coal as the world’s dominant energy source in relative terms, they never replaced them in absolute terms. Instead, coal was added to the existing and growing fund of water power, and petroleum was added to the total when it became available. Since then, natural gas and nuclear power have been added to the global energy mix as well, and “modern renewables” (wind and solar power) are now being added to already existing energy sources without, so far, replacing any of them at global level – even if a limited partial replacement may be occurring at national/regional level in some cases. All these energy sources add up to each other to meet a total energy consumption that has been rising since the Industrial Revolution and that keeps rising. The expected partial or total replacement this century of fossil fuels by “modern renewables”, in absolute terms, would therefore constitute a systemic change without any precedent in human history, which would profoundly impact the structure and functioning of the global economy in multiple ways.

Economic growth cannot be fully decoupled from increasing energy use

The economic value and contribution of the energy supply depends on its composition, but also on its metabolic pathway, i.e. how efficiently primary energy gets converted by the various components of an energy system (i.e. various types of power plants, solar panels, wind farms, etc.) into usable ‘secondary energy’ sources or ‘energy carriers’ (i.e. electricity, fuel for transportation, natural gas), which in turn get transported and distributed to the point of use where they provide ‘energy services’ (e.g. heating, cooling, lighting, mechanical power, and electricity) to consumers, businesses and governments. Those energy services are then used to produce a wealth of private and public goods and services. It is widely acknowledged that the efficiency of energy use at all these stages can be raised, in particular through technological progress and system design, making it possible to produce more goods and services per unit of energy used, i.e. to increase the ‘energy productivity’ and decrease the ‘energy intensity’ of the economy. However, the potential for energy efficiency gains is bounded by physical laws as no energy-using economic process can take place without dissipation and loss of energy. In addition, historical evidence shows that investments in energy efficiency are subject to the law of diminishing returns – meaning that the financial and energy investments needed to achieve a given amount of efficiency improvement tend to rise over time – and that energy consumption is subject to a so-called ‘rebound effect’ (also called ‘Jevons Paradox’) – meaning that efficiency gains in the use of a given resource tend to increase rather than decrease its rate of consumption. As a consequence, there are limits to how much economic growth can be ‘decoupled‘ from increasing energy use and from resulting environmental impacts.

‘Energy quality’ varies between resources and over time and space

Only part of the total energy input can actually be converted into ‘useful work’ that can effectively contribute to the economic process – in the form of muscle work, mechanical and electrical power, and heat delivered to the point of use. Some of the raw energy input is indeed either too low quality to do actual work or gets degraded or wasted in the process of conversion, transformation and transport. Physicists and engineers call ‘exergy’ the energy that is effectively available to produce ‘useful work’ in a system. Only ‘useful exergy’ – i.e. exergy made available at the use stage and after transformation and conversion – effectively serves to provide ‘energy services’. Different energy resources have different capabilities to generate work (and hence different amounts of exergy), and therefore different relative economic usefulness per unit. The ratio of exergy to energy in a substance or an energy resource can thus be considered as a measure of ‘energy quality’. Research shows that the increased availability of cheaper and higher quality forms of exergy inputs, and the rising efficiency of their conversion to useful work, have historically played a key role in driving productivity and economic growth in industrialized and emerging economies.

The ‘net energy gain’ of energy resources and systems varies over time and space

The procurement and delivery of energy to the economy is a process that itself requires using significant amounts of energy, meaning that only part of the total energy supply can effectively be used for doing other things than finding, extracting, processing, converting, transporting and distributing energy. This amount is sometimes called ‘net energy’ or ‘surplus energy’. Different energy resources have different capabilities to generate net energy, which impacts their relative economic usefulness for society. A metric often used to measure the net energy ratio of various types of energy resources is the ‘energy return on (energy) invested’ (abbreviated EROI or EROEI) i.e. the ratio between the total amount of energy delivered by an energy resource during its working lifetime and the amount of energy invested in obtaining and delivering it. Net energy is difficult to measure, and EROI calculations can vary significantly depending on the accounting methods and boundaries used and on whether corrections for energy quality are made. In addition, the net energy returns of certain energy resources can evolve in a non-linear way depending on a variety of factors including technological progress, production pathways and change in resource base. The economic value of net energy delivered by a given resource at the point of use may also vary in time and space depending on system/infrastructure costs and on the various potential uses of energy. Most analyses nevertheless show that the net energy gain of fossil fuels has historically been relatively high but is decreasing over time as resources get depleted and remaining resources decrease in quality and get more difficult to extract, whereas alternative energy resources tend to have lower net energy ratios that can in some cases rise over time with technological advancement. Research suggests that the increased availability of high net energy resources – i.e. fossil fuels, and most particularly oil – has historically represented a key driver of economic growth as well a key enabler of growing economic and societal complexity as the resulting surplus energy available to society made it possible to develop a wealth of activities that would not have been otherwise possible.

Energy gets ’embodied’ in all goods and services produced and exchanged

Energy gets ’embodied’ into all goods and services produced, in direct and indirect ways. ‘Embodied energy‘ can be understood as the sum total of the energy necessary to make goods and services, from extraction to production. It may also be accounted for, however, over the entire product life-cycle, including raw material extraction, transport, manufacture, assembly, installation, distribution, disassembly, deconstruction and/or decomposition, as well as secondary resources and the energy costs of labor and government services. The concept of embodied energy can be useful to assess the effectiveness of energy-producing or energy-saving devices as it allows to compare the amount of energy produced or saved by the product in question to the amount of energy consumed in producing, operating and disposing or decommissioning it. Embodied energy is also useful to determine and analyze the flows of energy between various societies, countries, or social groups as these flows are not limited to energy products but also include the energy embodied in the goods and services they exchange with others.

Energy, money and finance are interconnected

As energy gets ’embodied’ in direct and indirect ways into all goods and services produced and consumed, it plays a crucial role in the process of value creation across the whole economy. Money, which is the standard measure of value in modern economies, may be viewed as a ‘claim on energy’, i.e. a token representing a claim on a certain amount of biological and physical work, usually already done, that was accomplished through the use of energy. Similarly, credit can be understood as a claim on future biological and physical work, to be accomplished through the future use of energy and therefore dependent upon the availability and quality of future energy resources. The monetary value of a good or service in market transactions may of course differ from its energy cost, but research suggests that over the long term there is a strong statistical relation between economic value and embodied energy content if energy calculations include, in addition to direct energy use, an estimate of the quantity of energy indirectly used in production (e.g. energy costs of labor and government services) as well as of unaccounted ‘externalities’ (e.g. environmental degradation or resource depletion). Therefore, there is a connection – even if a loose one over the short term – between energy flows and money flows, which tend to move in opposite directions, and between a society’s energy metabolism and its financial system. Over the long term, factors affecting the metabolic pattern of a given society may have a significant impact on the stability and sustainability of its financial system, and factors affecting the financial system may have an impact on energy provision and use, especially as energy and commodity markets get increasingly ‘financialized’ (i.e. subjected to the risk appetite and returns expectations of financial investors, rather than just to supply and demand fundamentals).

The flows of energy and matter are interdependent

As a master resource for human activity, energy affects the production and use of all other biological and physical natural resources that are also required for goods and services to be produced, distributed and consumed in modern economies (e.g. plants or plant-based materials, water, minerals, etc.). The provision of those material resources may in turn impact the quantity and quality of the energy supply. Therefore, a certain degree of interdependence exists between the availability and use of energy resources and the availability and use of other natural resources, to the point of constituting a ‘nexus’ in some cases (e.g. the ‘water-energy’ nexus). A close relationship exists, for example, between the energy and metals sectors, as a significant and rising share of metals extracted are used by the energy sector (in particular renewable technologies that require large amounts of matter, including both common and rare metals), and a significant and rising share of energy is used for metal extraction and processing as depletion progresses and mineral ore grade goes down.

Non-renewable biophysical resources are exhaustible and subject to depletion

A number of biological and physical natural resources – including energy resources – are non-renewable (or only partly or slowly renewable), and therefore stock-based and exhaustible. As their use increases, their reserves are subject to a phenomenon of ‘depletion’, which tends to make them scarcer, degrade the quality of the resources obtained, and render their procurement (extraction or harvesting) more expensive and resource-intensive over time. This may in some cases end up making their use uneconomic (i.e. unprofitable). Mainstream economists view resource depletion as an ‘externality’, i.e. an element that is external to the economic system and for which producers and consumers bear no direct costs. They typically deny that resource depletion may impose constraints on the ability of the economy to expand, as they argue that the price system and appropriate market mechanisms and/or government intervention can ensure that depleting resources get ‘substituted’ in due time by other near-equivalent natural or man-made resource(s) in order to satisfy demand. Biophysical economics on the contrary recognizes that the principle of substitutability only partially applies to exhaustible natural resources (including exhaustible energy resources), and that replacement resources may not be able to provide the same services and value to society or only with increasing price and/or energy use. Attempts at substituting critical resources may thus impact the economic system’s ‘metabolism’ and growth potential in various and complex ways.

The use of biophysical resources induces environmental degradation

The extraction, transformation, transport and use of biological and physical natural resources – including energy resources – as well as the production, distribution, consumption and disposal of goods and services that they make possible, generates various types of ‘waste’ or ‘pollution’, which are returned to the biological and physical (i.e. biophysical) environment. This use of the environment as a ‘sink’ for waste energy and matter often tends to negatively impact the biophysical ecosystems from which these resources are obtained, and can in some cases weigh on society’s capacity to extract or use them. In mainstream economics, environmental degradation – including climate change – is considered as an ‘externality’ for which producers and consumers bear no direct costs. Economists typically assume that the price system and appropriate market mechanisms and/or government intervention can ensure that environmental degradation gets minimized or corrected. Biophysical economics, on the other hand, recognizes that the degradation of the biophysical environment resulting from the economic process – and hence from economic growth – conveys costs that do not appear in business or national accounts but that are significant and growing over time and may end up weighing on the capacity of the economy to develop and expand, or even to sustain itself.

Building on those principles, biophysical economics provides an alternative view of how the economy works, grounded in biological and physical reality and different from the view commonly admitted and propagated by mainstream economics. It studies how energy contributes to the economic process and to economic growth – a contribution that goes beyond the ‘cost share’ of primary energy (i.e. the level of primary energy expenditures as a share of GDP) that is commonly considered in mainstream economics. In fact, biophysical economics suggests that the relation between energy use and output growth, rather than a simple correlation, might be one of co-integration (meaning that the two tend to converge over a relatively short period of time) and of bidirectional causality. A growing body of research also suggests that energy might explain a large part of the ‘Solow residual‘, i.e. the ‘residual’ economic growth that economists cannot explain through capital accumulation or increased labor, which historically constitutes the larger share of economic growth, and that they tend to attribute to difficult-to-quantify ‘technological progress’ or ‘total factor productivity‘.

Differentiation from other schools

Biophysical economics is not a variant or a synthesis of ‘energy economics’, ‘resource economics’ or ‘environmental economics’, which apply mainstream economic principles to energy, resource or environmental issues respectively. Biophysical economics may appreciate and use some of their components or outcomes, but proposes a different interpretation of how the economy fundamentally operates.

Biophysical economics is not a variant or subset of ‘ecological economics’, even if it shares some of its theoretical underpinnings. Like ecological economics, it is a trans-disciplinary field that sees the human economy as a subsystem of the global ecosystem, and accepts that there are biophysical limits or constraints to the throughput of resources from the ecosystem, through the economic subsystem, and back to the ecosystem as wastes. Like ecological economics it recognizes that the human economy is a complex system, whose analysis at all space and time scales conveys significant and irreducible uncertainty and in which certain processes are irreversible and affect the functioning of the system. However, it differs from ecological economics in its objectives and focus. Ecological economics aims to improve and expand economic theory by integrating the earth’s natural systems, human values and human health and well-being, with the ultimate goal of advancing towards ‘sustainability’ with a high quality of life for all of the earth’s inhabitants (both humans and other species) within the material constraints imposed by its natural systems. To this end it focuses primarily on the preservation of natural capital through the valuation and pricing of ‘ecosystem services’, and on the advancement of ‘environmental justice‘. Biophysical economics, on the other hand, aims to provide a more reliable foundation for economic analysis, based on a systemic approach to the long-term role of energy and matter in the economic process and on a biophysical framework that acknowledges energy and resource constraints as well as uncertainties. To this end it focuses primarily on the central role of the flows of energy and matter through the economic system, and on the role they play in its functioning and prospects.

User:Biophyseco/sandbox/Biophysical economics

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