Thermodynamic Efficiency Gains and their Role as a Key ‘Engine of Economic Growth’

Abstract

Increasing energy efficiency is commonly viewed as providing a key stimulus to economic growth, through investment in efficient technologies, reducing energy use and costs, enabling productivity gains, and generating jobs. However, this view is received wisdom, as empirical validation has remained elusive. A central problem is that current energy-economy models are not thermodynamically consistent, since they do not include the transformation of energy in physical terms from primary to end-use stages. In response, we develop the UK MAcroeconometric Resource COnsumption (MARCO-UK) model, the first econometric economy-wide model to explicitly include thermodynamic efficiency and end energy use (energy services). We find gains in thermodynamic efficiency are a key ‘engine of economic growth’, contributing 25% of the increases to gross domestic product (GDP) in the UK over the period of 1971–2013. This confirms an underrecognised role for energy in enabling economic growth. We attribute most of the thermodynamic efficiency gains to endogenised technical change. We also provide new insights into how the ‘efficiency-led growth engine’ mechanism works in the whole economy. Our results imply a slowdown in thermodynamic efficiency gains will constrain economic growth, whilst future energy-GDP decoupling will be harder to achieve than we suppose. This confirms the imperative for economic models to become thermodynamically consistent.