akshayshanker / energy

Energy and the Direction of Technical Change

World and U.S. energy intensities have declined over the past century, falling approximately at an average rate of 1.2--1.5 percent a year. The decline has persisted through periods of stagnating or even falling energy prices, suggesting the decline is driven in a large part by autonomous factors, independent of price changes. In this paper, we use directed technical change theory to understand the autonomous decline in energy intensity and ask whether the decline will continue. We show in an economy with no scale effects, where existing knowledge does not make R&D more profitable, energy intensity continues to decline, albeit at a slower rate than output growth, from profit driven energy augmenting innovation. However, in an economy with scale effects, energy intensity eventually stops declining because labor augmenting innovation crowds out energy augmenting innovation. In either case, energy intensity never declines faster than output grows, and so energy use always increases, as long as the wellhead price of energy stays constant.