In a recent post discussing what we know about energy consumption and economic growth in post-recession America, I wrote something that is not true:
"History has shown that increases in energy efficiency lead to more energy consumption, not less." I will repeat: I made a mistake. I will take this opportunity to explain both where I erred and to outline some basic facts essential to understanding the relationship between energy and economic growth.
Lets start with energy efficiency. Everything we do requires energy. We conserve energy when we choose to not do something that requires energy (for example, deciding not to drive a car or turning off a flash light). We are more energy efficient when we manage do to those things using less energy than it would otherwise take (for example, retro-fitting the car of your engine to be more fuel efficient, or replacing the flashlight's incandescent bulb with an LED).
If we wish to measure the energy efficiency of an entire economy, we use a measure known as energy intensity. Energy intensity is a measure of the amount of energy it takes to produce a dollar's worth of economic output, or conversely the amount of economic output that can be generated by one standardized unit of energy. Energy intensity varies widely from country to country; it is affected by a whole host of factors, ranging from climate to population density. However, most changes in energy intensity can be attributed to one of two things: technological change and structural change. If the steel industry discovers a new way to create a ton of steel with less energy than was required before, a technological change has occurred. If the steel industry outsources its factories and the workers that would have been on a factory floor are now employed in offices, a structural change has occurred.
Many people believe that energy efficiency will be the solution to the world's energy problems. Increase energy efficiency, the argument goes, and you will reduce the amount of energy the world uses—that is, global energy consumption. This idea is intuitive. It is also false. It may be helpful to think about energy use and efficiency in a context more familiar than global economics. Think of it this way: if you bought a car with better fuel efficiency than your current one, would you use it more, or would you use it less?
Sectors that use a lot of energy continue to do so even when they become more energy efficient for the same reasons most people drive more as their fuel costs shrink. Energy efficiency lowers the cost of production. This makes it possible to increase total production at a lower cost. As total production climbs, so does energy consumption. For this reason, decreases in energy intensity brought about because of technological change rarely reduce total energy consumption. To the contrary, decreasing energy intensity is often correlated with increasing energy consumption.
|Energy intensity and demand for energy in the U.S. economy, 1973-2005.|
Source: Institute for Energy Research. "Is The U.S. Becoming More Energy Efficient?," webpage (2008).
This logic (along with empirical evidence like the kind found in the graph above) form the foundation of the faulty statement that prompted this post: "History has shown that increases in energy efficiency lead to more energy consumption, not less."
The problem with this formula is that it focuses entirely on technological change, ignoring the impact that structural changes have on energy intensity. When these are considered the relationship between energy intensity and energy consumption changes. This can be seen more clearly when we widen our historical scope:
|Trends in energy intensity for Japan, UK, USA, and Canada, 1900-2000, China, 1970-2000.|
Source: Vaclav Smil, Energy in Nature and Society: Energetics of Complex Systems. (Cambridge, MA: MIT Press, 2008). 338
Thus my statement, "History has shown that increases in energy efficiency lead to more energy consumption, not less", should be amended as follows:
"History has shown that changes in energy efficiency had no historical correlation with changes in energy consumption."
That does not mean, however, that energy consumption does not correlate with anything. Consider the following info-graphics:
|Japan's energy use and GDP, 1880-2000|
Source:Vaclav Smil, Energy in Nature and Society: Energetics of Complex Systems. (Cambridge, MA: MIT Press, 2008), 336.
|America's energy use and GDP, 1845-2001|
Source: Institute for Energy Research, "U.S. Consumption by Source v. Real GDP," webpage, (2008).
Notice that in both the American and Japanese examples, the only times energy consumption fell were during periods of recession, depression, or stagnation—times when GDP growth fell or stalled as well.
Why is GDP growth so tightly correlated with energy consumption?
The answer: in many respects Gross Domestic Product is energy consumption. Every service and good in an economy is produced by using energy. "Wealth" is really just the word we use to name the goods created and services rendered through our energy use. Inasmuch as GDP purports to measure "The monetary value of all the finished goods and services produced within a country's borders"  it will inevitably reflect the amount of energy consumed to produce those goods and services.
The implications of the relationship between energy consumption and economic growth are wide reaching, but a thorough examination lies beyond the confines of this post. The following resources are a good starting point if you are interested in further study:
Tim Garret, "Is it Possible to Decouple Economic Wealth and From Carbon Dioxide Emissions?, Part I", Youtube video, 12:51, originally delivered as a lecture for the Pacific Institute for Climate Studies Seminar (31 May 2010).
Part two is available here; part three can be found here. Those interested in the technical side of Mr. Garrett's presentation will want to read Garret's, "Are there basic physical constraints on future anthropogenic emissions of carbon dioxide?" Climate Change 104 (2011).
Is It Really Possible to Decouple GDP Growth From Energy Growth?
Gail Tverberg, Our Finite World (15 November 2011).
Contains graphs (and discussion) of GDP growth and energy consumption for a dozen different countries, 1980-2010.
The Role of Energy in Economic Growth
David Stern, CCEP Working Paper 3.10 9October 2010).
A technical review of the literature on this topic written by and for economists, but it sums up what we know right now.
 T. Greer, "The Recovery That Never Was: Energy, Debt, and the U.S. GDP," The Scholar's Stage (10 March 2013).
 Investopedia. "Gross Domestic Product - GDP" (accessed 13 March 2013).