Energy and the Global Economy

This article describes the contribution economists can make in uncovering energy choices capable of reducing carbon emissions on a global scale. All production and consumption activities involve the use of energy, and economists possess theoretical and analytic frameworks relating production and consumption in individual economies with international trade among them. Current challenges include deepening collaboration with physical scientists and engineers by according primacy to the formulation of scenarios and to the representation of physical stocks and flows of resources as factor inputs. Energy scenarios are discussed in terms of technological options, distinguishing those options that are already known but not yet widely applied from ones that still require research breakthroughs. Scenarios about household lifestyles and consumption in the areas of diet, housing and mobility are also discussed, distinguishing those that could already be initiated by households from those that would require changes in the built environment. Models and databases of the global economy have existed since the 1970s, and one was first used to analyze energy scenarios in the early 1990s based on the recommendations of the Brundtland Report of 1987. Relevant areas of progress since that time are described both in modeling the global economy and in compiling a global economic and environmental database. The paper concludes with a few examples of recent applications of a particular global economic model to analyzing energy scenarios to demonstrate both the progress that has been made and the nature of some of the challenges still to be faced.

Input-Output Economics and Material Flows

This paper argues that resources constitute the fundamental area of overlap between the interests of input-output economists and industrial ecologists. Three misconceptions about input-output economics obscure this fact: the frequent failure to utilize combined quantity and price input-output models, treatment of value-added as a monetary concept only, and the belief that all input-output models assume a linear relationship between output and final deliveries. The paper dispels these misconceptions by describing a quantity input-output model with resources measured in physical units and the corresponding price model with both resource prices and product prices. The model is illustrated with a numerical example of a hypothetical economy and analysis of a scenario where that economy is subsequently obliged to extract a lower grade of ore. Then three other input-output models are presented: a model closed for household consumption, a dynamic model, and a model of the world economy. Unlike the basic model, the last two are non-linear in final deliveries and in factor prices while also retaining the desirable features of the basic model.

Sustainable Consumption of Food

One of the key areas for lifestyle change in the interest of sustainable consumption is the household diet. This paper identifies concrete scenarios for dietary alternatives to high calorie diets rich in fats and sugars, based on the specialized nutrition literature, that are likely to have salutary impact on both the environment and the personal quality of life. Rough estimates of the substantial implications for agriculture of a moderate diet-change scenario are discussed. The paper then describes an approach to more systematic quantitative analysis of alternative dietary scenarios through the integration of life-cycle analysis and an input-output model of the world economy that captures likely effects of shifting comparative advantage in agriculture. Vested interests that might resist these kinds of dietary changes are identified, and approaches are suggested for enlisting their support or countering their opposition.

World Trade as the Adjustment Mechanism of Agriculture to Climate Change

This paper evaluates the role of trade as mechanism of economic adjustment to the impacts of climate change on agriculture. The study uses a model of the world economy able to reflect changes in comparative advantage; the model is used to test the hypotheses that trade can assure that, first, satisfying global agricultural demand will not be jeopardized, and, second, general access to food will not decrease. The hypotheses are tested for three alternative scenarios of climate change; under each scenario, regions adjust to the climatic assumptions by changing the land areas devoted to agriculture and the mix of agricultural goods produced, two of the major mechanisms of agricultural adaptation. We find that trade makes it possible to satisfy the world demand for agricultural goods under the changed physical conditions. However, access to food decreases in some regions of the world. Other patterns also emerge that indicate areas of concern in relying on trade as a mechanism for the adjustment of agriculture to likely future changes in climate.

Regional Development in China: Interregional Transportation Infrastructure and Regional Comparative Advantage

Significant economic disparities among China's Eastern, Central, and Western regions pose unequivocal challenges to social equality and political stability in the country. A major impediment to economic development, especially in the poor, remote Western region, is the shortage of transportation infrastructure. The Chinese government has committed to substantial investment for improving the accessibility of this vast, land-locked region as a mechanism for promoting its development. The paper examines the impacts of the intended transportation infrastructure buildup on the Western region's comparative advantage and its interregional trade. The World Trade Model is extended to represent this investment and applied to determine interregional trade in China based on region-specific technologies, factor endowments and prices, and consumption patterns as well as the capacities and costs of carrying goods among regions using the interregional transportation infrastructure in place in the base year of 1997 and that planned for 2010 and 2020. The model is implemented for 3 regions, 27 sectors, and 7 factors. The results indicate that the planned infrastructure buildup will be cost-effective, will increase benefits especially for the Western region, and that it can conserve energy overall at given levels of demand but substitute oil for coal. Based on these and other model results, some recommendations are offered about strategies for regional development in China.

Physical and Monetary Input-Output Analysis: What Makes the Difference?

A recent paper in which embodied land appropriation of exports was calculated using a physical input-output model (Ecological Economics 44 (2003) 137-151) initiated a discussion in this journal concerning the conceptual differences between input-output models using a coefficient matrix based on physical input-output tables (PIOTs) in a single unit of mass and input-output models using a coefficient matrix based on monetary input-output tables (MIOTs) extended by a coefficient vector of physical factor inputs per unit of output. In this contribution we argue that the conceptual core of the discrepancies found when comparing outcomes obtained using physical vs. monetary input-output models lies in the assumption of prices and not in the treatment of waste as has been claimed (Ecological Economics 48 (2004) 9-17). We first show that a basic static input-output model with the coefficient matrix derived from a monetary input-output table is equivalent to one where the coefficient matrix is derived from an input-output table in physical units provided that the assumption of unique sectoral prices is satisfied. We then illustrate that the physical input-output table that was used in the original publication does not satisfy the assumption of homogenous sectoral prices, even after the inconsistent treatment of waste in the PIOT is corrected. We show that substantially different results from the physical and the monetary models in fact remain. Finally, we identify and discuss possible reasons for the observed differences in sectoral prices and draw conclusions for the future development of applied physical input-output analysis.

Human Ecology: Industrial Ecology

Industrial Ecology aims to inform decision making about the environmental impacts of industrial production processes by tracking and analyzing resource use and flows of industrial products, consumer products and wastes. Quantifying the patterns of use of materials and energy in different societies is one area of research in Industrial Ecology. An extensive literature is devoted in particular to Material Flow Analysis (MFA), the collection of data describing the flows of specific materials from sources to sinks within some portion of the global industrial system. Industrial Ecologists are also concerned with the system-wide environmental impacts associated with products. Design for the Environment involves the design or redesign of specific products so as to reduce their impacts, while Life Cycle Analysis (LCA) quantifies resource use and emissions per unit of product from material extraction to the eventual disposal of the product. The LCA community has created a significant body of best-practice methods and shared data and increasingly incorporates their analyses within input-output models of entire economies to capture that portion of the impact that would otherwise be overlooked. Input-output models, often incorporating both MFA and LCA data, analyze the effects on the environment of alternative consumption and production decisions. Industrial Ecology makes use of this array of top-down and bottom-up approaches, all of which are grounded in its origins in the ecology of the industrial system.

Mathematical Models in Input-Output Economics

This paper describes the mathematical basis for input-output economics, the major types of models, and the underlying economic theory. The features of these models that make them especially well suited for understanding the connections between the economy and the environment are emphasized throughout. These include the dual physical and price representations and the representation of resource inputs as factors of production, whether they are priced or not. The basic static physical and price models are described, along with their major properties and associated databases. The most important approaches to analysis involve multipliers, decomposition, and scenario analysis. Going beyond the basic static framework requires the progressive closure of the model by making exogenous variables endogenous while maintaining simplicity, transparency, and the distinctive feature of an input-output model: the simultaneous determination of solutions at the sectoral level and the economy-wide level. Closures for household activities and for investment are described by way of example. The major extensions of the basic model accommodate the representation of pollutant emissions and policies for constraining them, dynamic models, and multi-regional models, the latter including a new version of a world model that solves for bilateral trade flows and region-specific prices based on comparative advantage with factor constraints. The concluding section describes the challenges currently being addressed within the field. An annotated bibliography provides references for further reading and includes both classic articles and a representation of recent research.

Embodied Resource Flows and Product Flows: Combining the Absorbing Markov Chain with the Input-Output Model

We develop the absorbing Markov chain (AMC) for describing in detail the network of paths through an industrial system taken by an embodied resource from extraction through intermediate products and finally consumer products.  We refer to this as a resource-specific network. This work builds on a recent literature in industrial ecology that uses an AMC to quantify the number of times a resource passes through a recycling sector before ending up in a landfill.  Our objective is to incorporate into that analysis an input-output (IO) table so that the resource paths explicitly take account of the interdependence of sectors through their reliance on intermediate products.  This feature makes it possible to track multiple resources simultaneously and consistently and to represent both resources and products in mixed units. Hypothetical scenarios about technological changes and changes in consumer demand are analyzed using an IO model, and model solutions generate the AMC database. A numerical example is provided.  AMC analysis describes the resource-specific networks using matrices that are derived not from the Leontief inverse but from a generalized variant of the Ghosh inverse matrix.  The Leontief inverse and especially the Ghosh inverse (although often not identified as such) have been used extensively to analyze ecological systems, and this paper extends these approaches for use in studying material cycles in industrial systems.  Constructing the AMC formalizes the resource-specific network analysis and generalizes the content and interpretation of the Ghosh matrix.  Path-based analyses derived from AMC theory are discussed in relation to the set of techniques called Structural Path Analysis (SPA). The paper concludes by identifying the three most critical enhancements to the IO model needed for analyzing material cycles: the simultaneous incorporation of waste-processing sectors, stock and flow relationships, and international trade.  The idea is to implement an AMC after each model extension. The modeling framework is intended for analyses such as: tracking a resource extracted in one region to landfills in other regions, evaluating ways to intensify secondary recovery at key junctures in-between.  There are other ways, of course, to approach such an analysis, but the combination of an extended IO model and an AMC, representing both resources and products in mixed units, provides a comprehensive, systematic and standardized approach that includes many features that are valued in industrial ecology and builds directly on a number of active research programs.

Sectors May Use Multiple Technologies Simultaneously: The Rectangular Choice-of-Technology Model with Binding Factor Constraints (Revised)

We develop the rectangular choice-of-technology model with factor constraints, or RCOT, a linear programming input-output model for analysis of the economy of a single region. It allows for one or more sectors to operate more than one technology simultaneously, with the relatively lowest-cost one supplemented by others if it encounters a binding factor constraint. The RCOT model solves for sector outputs, goods prices that are set by the highest-cost technologies in use, and scarcity rents that correspond to binding factor constraints experienced by the lower-cost technologies. The model is motivated by the fact that mineral deposits of different qualities may be exploited simultaneously, as may primary and recycled sources for the same materials or irrigated and rainfed techniques for producing the same crop. RCOT generalizes Carter’s square choice-of-technology model, in particular adding the factor constraints that allow several alternatives to operate simultaneously. The Appendix gives a numerical example.