Thursday, September 19, 2013

The Underestimated Contribution of Energy to Economic Growth

AYRES Robert U., VAN den BERGH Jeroen C. J. M., LINDENBERGER Dietmar, WARR Benjamin
Read the working paper
INSEAD Working Paper 2013/97/TOM/EPS/ISIC

Standard economic theory regards capital and labour as the main factors of production that satisfy the “cost-share theorem”. This paper argues that when a third factor, namely energy, is added physical constraints on substitution among the factors arise. We show that energy is a much more important factor of production than its small cost share may indicate. This implies that continued economic growth along the historical trend cannot safely be assumed, notably in view of considerably higher energy prices in the future due to peak oil and climate policy.