A theoretical framework to study the economic importance of energy
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1 A theoretical framework to study the economic importance of energy Benjamin Leiva - bnlc@uga.edu September 24th, 2018 Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
2 An empirical regularity Costanza & Herendeen (1984) Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
3 An empirical regularity Liu et al. (2008) Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
4 An empirical regularity Gutowski et al. (2013) Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
5 Why are prices proportional to embodied energy? Energy is absent from the core of neoclassical micro theory (Samuelson & Nordhaus, 2004; Silberberg & Suen, 2001; Mas-Colell et al., 1995;) Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
6 Why are prices proportional to embodied energy? Energy is absent from the core of neoclassical micro theory (Samuelson & Nordhaus, 2004; Silberberg & Suen, 2001; Mas-Colell et al., 1995;) Energy s cost share is low (<10%) (Csereklyei et al., 2016; Ayres et al., 2013; Lindenberger & Kummel, 2011) Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
7 Why are prices proportional to embodied energy? Energy is absent from the core of neoclassical micro theory (Samuelson & Nordhaus, 2004; Silberberg & Suen, 2001; Mas-Colell et al., 1995;) Energy s cost share is low (<10%) (Csereklyei et al., 2016; Ayres et al., 2013; Lindenberger & Kummel, 2011) An energy theory of value creates more problems than it solves (Huettner, 1982; Alessio, 1981; Webb & Pearce, 1975) Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
8 Summary of the paper Why are prices proportional to embodied energies? Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
9 Summary of the paper Why are prices proportional to embodied energies? Building of a theoretical framework Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
10 Summary of the paper Why are prices proportional to embodied energies? Building of a theoretical framework Marginal energy costs as goods opportunity costs Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
11 Summary of the paper Why are prices proportional to embodied energies? Building of a theoretical framework Marginal energy costs as goods opportunity costs Prices as social representations of marginal energy costs Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
12 Summary of the paper Why are prices proportional to embodied energies? Building of a theoretical framework Marginal energy costs as goods opportunity costs Prices as social representations of marginal energy costs Marginal energy costs are related to average embodied energies Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
13 Two key ideas Goods are material rearrangements (Ryan & Pearce, 1985; von Mises, 1949) Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
14 Two key ideas Goods are material rearrangements (Ryan & Pearce, 1985; von Mises, 1949) Means are energy transfers (when they further human purpose) Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
15 Two key ideas Goods are material rearrangements (Ryan & Pearce, 1985; von Mises, 1949) Means are energy transfers (when they further human purpose) Only when they further human purpose Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
16 Intertemporal utility maximization The agent s main objective is with max U(Q F 1, Q F 2,...,Q FT ) Q FT s.t. τft A Q Ft E t t T Q ft : Final good f during period t τft A : Good f s average energy cost during t E t : Energy surplus during t Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
17 Intertemporal utility maximization The FOC to chose optimal quantity of Q ft is with U ft λ t = τ ft f F, t (1) λ t : Marginal utility of energy surplus during t τ ft : Good f s marginal energy cost during t Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
18 Minimization of direct energy transfers Given the energy budget constraint, a secondary objective is to minimize direct energy transfers subject to productive and prime mover constraints. The FOC of this problem is τ kt = ψ kt + θ kt k, t with ψ kt = 1 L ɛl g lkt : Average direct energy transfers at the margin θ kt = 1 L φlt g lkt : Average indirect energy transfers at the margin Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
19 Other secondary objectives Energy surplus maximization τ et = β t1 δ e e, t Prime mover accumulation τ lt = Energy surplus assignment T i=1 β ti φ li+1 d i 1 l l, t τ ft = (1 ρ t )Λ ft f, t Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
20 Gains from trade Following conventional ricardian logic, if agent 1 exchanges q B units of good B for q C units of good C with agent 2, and both consume the same as under autarky, gains from trade are GT = (τb 2 τ B 1 )dq B + (τ 1 C τ 2 C )dq C TC Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
21 Gains from trade Following conventional ricardian logic, if agent 1 exchanges q B units of good B for q C units of good C with agent 2, and both consume the same as under autarky, gains from trade are GT = (τb 2 τ B 1 )dq B + (τ 1 C τ 2 C )dq C TC Under broad conditions GT > 0 Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
22 The commodity price Maximizing GT choosing q B and q C yields τ I i = τ E i + MTC i (2) with τi I : Marginal energy cost of good i = B, C of the importing agent MTC: Marginal transaction cost of good i = B, C Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
23 The commodity price Maximizing GT choosing q B and q C yields τ I i = τ E i + MTC i (2) with τi I : Marginal energy cost of good i = B, C of the importing agent MTC: Marginal transaction cost of good i = B, C Under (3) and no transaction costs, optimal exchange involves the commodity price q B q C = p c = τ C τ B (3) Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
24 The real money price Barter is very inconvenient Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
25 The real money price Barter is very inconvenient Define real money m with marginal energy cost τ m Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
26 The real money price Barter is very inconvenient Define real money m with marginal energy cost τ m The commodity price between any good k and real money is k s real price p k = τ k τ m Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
27 The nominal money price Real money is also inconvenient Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
28 The nominal money price Real money is also inconvenient Define a representation of real money as n. The commodity price between both yields n s purchasing power τ s = τ mq m Q n Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
29 The nominal money price Real money is also inconvenient Define a representation of real money as n. The commodity price between both yields n s purchasing power τ s = τ mq m Q n The commodity price between any good k and nominal money is k s nominal price P k = τ k τ s Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
30 Market prices and average embodied energies The relation between marginal energy costs and average embodied energies is with τ k = γ k + (θ k ϑ k ) γ k : Marginal embodied energy of good k Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
31 Market prices and average embodied energies The relation between marginal energy costs and average embodied energies is with τ k = γ k + (θ k ϑ k ) γ k : Marginal embodied energy of good k Considering the relation between marginal and average values, nominal prices are P k = γa k (1 + µ k) + (θ k ϑ k ) τ s Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
32 Highlights of the model Means as energy transfers Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
33 Highlights of the model Means as energy transfers Marginal energy costs as goods opportunity costs Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
34 Highlights of the model Means as energy transfers Marginal energy costs as goods opportunity costs Marginal energy costs as complex variables with economic intuition Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
35 Highlights of the model Means as energy transfers Marginal energy costs as goods opportunity costs Marginal energy costs as complex variables with economic intuition Prices as social representations of marginal energy costs Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
36 Highlights of the model Means as energy transfers Marginal energy costs as goods opportunity costs Marginal energy costs as complex variables with economic intuition Prices as social representations of marginal energy costs Marginal energy costs are related to average embodied energies Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
37 Further implications New layer to microeconomic analysis - Price formation, Nonmarket valuation Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
38 Further implications New layer to microeconomic analysis - Price formation, Nonmarket valuation New micro-foundation for macroeconomics - Growth, interest rates, inflation, inequality Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
39 Thank you Benjamin Leiva - bnlc@uga.edu (UGA) Economics & energy September 24th, / 23
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