Exergy & Economics

Previous: What is exergy?

How does exergy relate to the economy and human development? Energy and exergy of course play a vital role in producing and providing the goods and services demanded of society, but the centrality of energy within this process is contested and, we argue, often overlooked by mainstream economists. In short, we believe that over the last few centuries, the ability to use successively higher quality forms of energy (i.e. energy carriers with greater exergy content) has played a more important role in economic growth and human development than previously thought.

Energy in the Economy: Orthodox vs Ecological Economics

Much research on energy-economy interactions are firmly rooted within ecological economic thinking, which promotes the interdependence of human economies and the natural ecosystem.  In one sense, orthodox economics envisages the production process as a closed, linear system of resource extraction; production and provision of goods and services; and the output of waste materials.  In this model, economic growth and improvements to productivity derive from increasing inputs of capital and labour to production, as well as changes in the quality of these over time and technological change.  The role of energy is thought to be minimal, given the observation that the shares of payments to the energy industry within national accounts are relatively small – generally around 5-10% (Ayres et al., 2013).  It is also argued within mainstream economics that the resource demands of production (and consequently, adverse environmental impacts) can be minimised by substituting new technology for such resources (e.g. by using more energy-efficient machines, or entirely new types of technology which have a lower energy demand).


Fig. 1: Simplified conceptualisation of the human economy as situated within the ecosphere

Ecological economics, on the other hand, situates human economies within the Earth’s biosphere, or natural environment, and highlights the energy flows into and out of the biosphere – i.e., incoming solar radiation and outgoing low-grade heat – as the overarching and “ultimate” inputs and outputs to both of these systems.  Economic processes are sustained by the uninterrupted flow of high-quality energy – whether directly captured by solar PV devices or in the fossilised remnants of flora and fauna – which are returned to the biosphere in a degraded (low exergy) form.

Useful Exergy: Providing for the Demands of Energy Services

In one respect, exergy economics attempts to reconcile some of the thermodynamic aspects of the natural world with human societies and economies, yet we argue that it goes further by placing useful exergy – i.e., the exergy which is delivered to end users, after all transmission and conversion losses have occurred – as an intrinsic and fundamental driver of economic growth (for a fuller explanation of the ‘useful’ stage of energy and exergy, see Chapter 1 of the Global Energy Assessment). It is useful exergy which is required as an input to the energy service needs of society. Users do not demand energy itself, but rather these services – e.g. passenger transport, thermal comfort, the creation of structures, etc. Advances in technology, as well as the level of exergy available for human exploitation, have dramatically increased both the quantity and quality of energy services available to us. It could even be reasonably argued that on an individual level, the economic system ultimately exists for the fulfilment of these services.

We argue, then, that the conversion of energy from one form to another (or equivalently, the destruction of exergy) is central to every economic process – from those within manufacturing and industry to retail and financial transactions. And more fundamentally, energy is required to sustain biological life: In pre-industrial eras, the degree to which incoming solar energy could be harnessed to feed the working population placed a constraint upon human development (Wrigley, 2013).  The subsequent technological innovations which enabled the “unlocking” of high levels of exergy (the steam engine with coal, the automobile with oil, etc.) then facilitated the explosion of population and welfare seen in recent centuries.

The Significance of Exergy Economics

There is an increasing amount of evidence to support the view that useful exergy is an overlooked contributor to economic growth. Robert Ayres and Benjamin Warr, who together have pioneered the a methodology for accounting for useful exergy at the national level, claim that by including useful exergy as a factor of production in their ‘linear exponential’ aggregate production function, they can account for economic growth in the US over a 100-year period without the need for a so-called ‘Solow Residual’ – an exogenous income multiplier which makes up for the discrepancy in growth if one considers only increases in capital and labour inputs over the time period.


Fig. 2: Demonstration of primary energy decoupling in the UK. Left: Total primary energy supply, red (Source: IEA) and real GDP, blue (Source: ONS), 1960-2013. Right: Decline in the ratio TPES/GDP.

There are some significant implications which follow from the centrality of useful exergy to economic growth. In recent decades a phenomenon of the decoupling of (primary) energy from economic growth has been witnessed in developed economies, i.e. successive units of GDP growth since around 1970 have required fewer units of energy input (equivalently put, the ratio of primary energy to GDP has declined – see fig. 2). However, evidence has begun to emerge (see Serrenho et. al., 2014) that if one focuses instead on the amount of useful exergy used, rather than primary energy, then this ratio displays a much more constant trend, suggesting that each unit of GDP may require a roughly constant amount of useful exergy. The difference between these two observations is explained by the increasing primary to useful exergy efficiency of countries over this time period. However, as other research (Brockway et. al., 2015) has suggested, this efficiency increase may reach a point of saturation due to ‘efficiency dilution’, which has potential negative implications for the feasibility of decoupling future economic growth from energy use (and hence environmental impacts). This growing body of research also supports the ecological economics view that substitution between energy and technology may be more difficult than has been previously suggested.