Can the Energy Transition Be Smooth? A General Equilibrium Approach to the EROEI

Abstract

The concept of energy return (EROEI ratio) is widely used in energy science to describe the interactions between energy and the economic system but it is largely ignored in macroeconomics. In order to contribute to bridging a gap between these fields of research, we incorporate these metrics into an endogenous growth model with two sectors (energy and final goods) and use this model to analyze the macroeconomic implications of a transition to lower EROEI resources. An approach in terms of net energy allows us (1) to explicitly link the EROEI to macroeconomic variables, (2) to show how it is related to the growth rate of GDP and (3) to obtain a closed-form solution for its long-run value at a general equilibrium level. There is furthermore a tight and decreasing long-run relationship between the EROEI value and the share of investment that must be allocated to the energy sector. Hence, a transition to lower EROEI resources intensifies the rival use of capital in the energy and non-energy sectors and leads to major economic changes, both in the inter-sectoral capital allocation and in the allocation of final output between consumption and investment. We show that a protracted economic contraction may occur before the completion of the transition to renewable energy. We analyze how (1) the magnitude of this contraction and (2) the possibility of an ulterior recovery depend on the initial stock of non-renewables, the potentials of technical progress in the energy and non-energy sectors and the substitutability between capital and energy.

Feasibility and Economic Impacts of the Energy Transition

“…This increase is significant since s increases from 25 to about 40% at the end of the ET. This figure is similar to those of Režný and Bureš [19] and of Fagnart et al [17].…”

“…Some models, such as GEMBA [15,16] and MEDEAS [10], belong to systems theory. Others belong to the economic theory of growth [17,18]. Unlike the former, they assume market equilibrium and explicitly model the behaviour of economic agents.…”

Trends in Scientific Literature on Energy Return Ratio of Renewable Energy Sources for Supporting Policymakers

“…Specifically, the authors will focus on the energy return ration (ERR) and some its typologies, such as the net energy ratio (NER) or renewability factor (RF), the net energy gain (NEG) or net energy value (NEV), and the energy returned on investment (EROEI) applied to biomass, solar and wind energy. They will not consider hydroelectric power production, since it is a mature technology and the possibility of improving further its energy efficiency is limited (Fagnart et al 2020). The reason of this choice is due to the fact that these indices are able to assess the amount of useful energy that remains after energy consumed to drill, pipe, refine, or build infrastructure (including solar panels, wind turbines, dams, nuclear reactors, and drilling rigs) and that subtracted from the total quantity of energy produced from a certain source.…”

Hicksian traverse revisited: Conditions for the energy transition

“…Finally, the traverse study itself delivers an important message especially in the bad case, and especially when energy limits viable economic states. The translation of the classical Hicksian bad traverse in the energy terminology draws a fresh look at both the traverse narrative (Henry and Lavoie, 1997) and how an energy transition can fail or be problematic (Fagnart and Germain, 2014). One may easily play with our generic analysis to draw the scenario which seems the more relevant to him.…”

“…This is explicitly recognized as a source of risk: transition risk (Carney, 2018). We are precisely interested in productivity and technical structural change and wave away many other challenges raised by energy transitions (see Fagnart and Germain (2014) for a complementary approach).…”