Energy Transition Scenarios and Their Economic Impacts in the Extended Neoclassical Model of Economic Growth

Abstract

Introduction: Energy return on energy invested (EROEI) of fossil fuels has been declining sharply, while modern renewable energy sources generally have even lower EROEI than fossil fuels. It has been repeatedly proven that economic growth expressed in the form of growth of real Gross Domestic Product (GDP) is closely related to intensified energy consumption and escalated usage of natural resources in general. This problem remains scarcely explored in pure economic modelling. Objectives: This study presents a novel model titled Energy Extended Neoclassical Growth Model (EENGM), which focuses on the consequences of declining quantity and quality of extractable fossil fuels and lower quality of the succeeding renewable energy technology for economic growth. Method: The Neoclassical growth model is translated into a system dynamics format and is extended by important feedback mechanisms, which are identified as important from the literature and mostly missing from the analyzed system dynamics models with a similar scope. Two scenarios assess the EENGM performance: business as usual (BAU) and the sustainability strategy (SUS). Results: Sensitivity analysis is performed for the Energy Return on Energy Invested (EROEI) parameter and results in the investment share in GDP varying between 27 and 40%, while the energy sector investment largely displaces investment in other economic sectors. The EENGM is associated with new behavior whereby the underperforming energy sector limits GDP growth and seizes most of the available investment. The adoption of the SUS strategy causes 28% lower cumulative fossil fuel aggregate consumption which still corresponds to higher than 1.5 °C global warming compared to the preindustrial levels. Conclusion: The share of consumption in the GDP of an economy undergoing energy transition can approach levels previously seen only in totally war-oriented economies. Even omitting other negative environmental feedback, the feasibility of the successful energy transition of the system in its contemporary form, with the currently available renewable energy technology, seems to be highly uncertain.

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

“…The transition to lower EROEI resources is characterized by important changes both in the inter-sectoral capital allocation and in the allocation of final output between consumption and investment (savings). In our baseline scenario, for instance, the savings rate rises from 25% to more than 40%, in accordance with the Business as Usual scenario explored in [19]. A lower EROEI constrains the economy to allocate more capital to energy production and the resulting tensions between the use of capital in the energy and non-energy sectors exert a drag on economic growth: a more capital intensive energy production slows down investments in the final goods sector ceteris paribus and thereby, the production of future capital goods used in energy and non-energy sectors.…”

“…The transitory dynamics of GDP in our model are qualitatively similar to that obtained in [19,29] but our contribution explores more extensively what contributes to an economic contraction and to its magnitude. The transition to lower EROEI resources is characterized by important changes both in the inter-sectoral capital allocation and in the allocation of final output between consumption and investment (savings).…”

“…With respect to the partial equilibrium model of [29] and recent contributions to DSAET [19], the first original contribution of our article is to allow us to explicitly link the EROEI metrics to macroeconomic variables and to obtain analytical results regarding the determinants of the EROEI value and its economic implications (a.o. on the GDP growth rate).…”

“…Articles interested in the EROEI metrics (e.g., [8,[15][16][17]) usually propose partial equilibrium analyses. The GEMBA model developed by Dale et al [18] and the model proposed by Režný and Burešis [19] are exceptions, but they belong to the system dynamics approach. Contrary to what is usually done in macroeconomic growth theory, they do not explicitly model the economic agents' behaviors and the formation of market prices.…”

Anthropization and Growth of the Electricity Grid as Variables for the Analysis of Urban Infrastructure

“…Most technological developments follow and S-shaped growth curve, that can be divided into four phases: pre-development, take-off, acceleration, and stabilization [64][65][66]. Therefore, the study cases uses a sigmoid function g(t, x) to adjust the power network growth data [67]:…”