**3. Energy and development: Conceptual linkages**

There are significant differences in quality and quantity between energy flows from renewable sources, nonrenewable stocks of fossil fuels and other minerals, and slowly renewable stocks of organic matter (in the form of vegetable and animal biomass), water, etc. in their current and potential contributions to society. Therefore, some inputs to production are non-reproducible, while others can be manufactured at a cost within the economic production system. The primary energy inputs are not given an explicit role in the standard growth theories which focus on labor and capital. However, capital, labor, and in the longer term even natural resources, are reproducible factors of production, while energy (except fuels) is a nonreproducible factor of production (Stern, 1999).

Since the two oil price shocks of the 1970s, there has been extensive debate concerning the trend of energy use and economic activities. It is commonly asserted that there has been decoupling of economic output and resources, which implies that the limits to growth are no longer as restricting as in the past.

The existing literature on energy and development does make clear that energy development is an important component of development more broadly. In this section we have attempted to explore some of the ways in which energy might have influence on the development process. A very simple model of the economy can be used to discuss the possible ways in which increased energy availability might be especially important to economic development. Suppose that

$$Y = F(K\_Y, H\_Y, E) \tag{3}$$

Energy and Economy Links – A Review of Indicators and Methods 271

There are different ways in which the economic system might experience some form of increasing returns related to energy services. Therefore, increased energy availability somehow might make a disproportionate contribution to expanded economic activity. Increasing returns in energy services provision would take different forms at different stages of development. The industrial production and distribution of various forms of modern energy show increasing technological returns to scale. Moreover, the transformation of primary energy into deliverable energy (petroleum refining) also exhibits returns to scale. Energy quality is the relative economic usefulness per heat equivalent unit of different fuels. One way for measuring the energy quality is the marginal product of the fuel which means marginal increase in the quantity of a good or service produced by the use of one additional

Over the course of economic development the output mix might change. In the earlier phases of development there is a shift away from agriculture towards heavy industry, while in the later stages of development there is a shift from the more resource intensive extractive and heavy industrial sectors towards services and lighter manufacturing. It is often argued that because of different energy intensities in industries there will be an increase in energy used per unit of output in the early stages of economic development and a reduction in energy used per unit output in the later stages of economic development. Pollution and environmental disruption would be expected to follow a similar path (Panayotou, 1993). This argument can be pursued further to argue that the shift to service industries results in a decoupling of economic growth and energy use. Furthermore, shifts away from the use of coal and particularly towards the use of oil can explain the majority of declining energy intensity. The idea that a shift towards a service-based economy can achieve decoupling is one that is often put forward (Panayotou, 1993). But this notion ignores the large amounts of energy involved in producing services including some service industries such as transport (Stern and Cleveland, 2004). This implies that a shift to a service-based economy cannot

Energy indicators relating energy to economic issues can be useful tools for policy makers. They provide a way to structure and clarify statistical data to give better insight into the factors that affect energy, environment, economics and social well-being. Indicators can also

All sectors of an economy – agriculture, manufacturing and mining, and services – require energy. These energy services in turn foster economic and social development at the local level by raising productivity and facilitating local income generation. Energy indicators provide a measure of efficiency and sustainability in economical, social, and environmental programs. Indicators of energy use are usually expressed as normalized quantities of total

The following Energy indicators within the economic dimension are the most commonly

heat unit of fuel (Toman & Jemelkova, 2003).

achieve a complete decoupling of energy and economic growth.

**4. Energy indicators** 

be used to monitor progress of past policies.

energy use to facilitate comparison.

Energy Production and Supply;

Energy consumption;

used:

$$E = E(K\_E, H\_E) \tag{4}$$

Where Y represents output of final goods and services, and K represents the application of physical capital, H represents human capital services to the production of final good and services, and E represents energy services. Energy services in turn are produced through the application of other physical and human capital services.

A standard assumption from economic growth theory is that the production functions F, E are homogeneous of degree one that if all inputs are increased by some percent, outputs grows at the same percentage.

Energy development – increased availability of energy in quantity and quality terms – is part of enhanced economic development. Energy use per unit of output seem to decline over time in the more advanced stages of industrialization, reflecting the adoption of increasingly more efficient technologies for energy production and utilization as well as changes in the composition of economic activity (Nakicenovic, 1996).

Energy intensity in today's developing countries probably peaks sooner and at a lower level along the development path than was the case during the industrialization of today's developed world. But even with trends toward greater energy efficiency, total energy use and energy use per capita continue to grow in the developed and developing countries. Although, development involves a number of other issues (such as labor markets, financial institutions and provision of infrastructure for water, sanitation, and communications) besides those associated with energy, it is hard to imagine overall economic development succeeding without energy development.

The fact that expanded energy use (in quantity and quality) is associated with economic development still depends on the importance of energy as a factor in economic development, however. Much of the literature on energy and development, focuses mainly on how energy demand is driven by economic development (see, e.g., Barnes and Floor 1996) and on how energy services can be improved for developing countries (Dunkerley et al 1981; Barnes and Floor, 1996). Less is found in the literature on energy and development in the context of the margin of energy advance versus other inputs growth as an agent of economic development. However, there are substantial differences in energy forms and in the nature of economic activities across different stages of development. The linkages among energy, other inputs, and economic activity clearly change significantly as an economy moves through different stages of development. It is referred to "energy ladder" to describe this phenomenon (Barnes and Floor, 1996). At the lowest levels of income, energy sources tend predominantly to be biological sources (wood, dung, sunshine). More processed fuels (charcoal), animal power, and some commercial energy become more prominent in the intermediate stages. Commercial fossil fuels and other energy forms – primary fuels, and ultimately electricity – become predominant in more advanced stages of industrialization and development.

Energy provision requires a variety of different kinds of inputs. Energy utilization also depends on the opportunity costs of other inputs. Finally, the literature makes clear that observed patterns of energy production and utilization reflect a great deal of subtle optimizing behavior, given the constraints faced by the economic actors.

Where Y represents output of final goods and services, and K represents the application of physical capital, H represents human capital services to the production of final good and services, and E represents energy services. Energy services in turn are produced through the

A standard assumption from economic growth theory is that the production functions F, E are homogeneous of degree one that if all inputs are increased by some percent, outputs

Energy development – increased availability of energy in quantity and quality terms – is part of enhanced economic development. Energy use per unit of output seem to decline over time in the more advanced stages of industrialization, reflecting the adoption of increasingly more efficient technologies for energy production and utilization as well as changes in the

Energy intensity in today's developing countries probably peaks sooner and at a lower level along the development path than was the case during the industrialization of today's developed world. But even with trends toward greater energy efficiency, total energy use and energy use per capita continue to grow in the developed and developing countries. Although, development involves a number of other issues (such as labor markets, financial institutions and provision of infrastructure for water, sanitation, and communications) besides those associated with energy, it is hard to imagine overall economic development

The fact that expanded energy use (in quantity and quality) is associated with economic development still depends on the importance of energy as a factor in economic development, however. Much of the literature on energy and development, focuses mainly on how energy demand is driven by economic development (see, e.g., Barnes and Floor 1996) and on how energy services can be improved for developing countries (Dunkerley et al 1981; Barnes and Floor, 1996). Less is found in the literature on energy and development in the context of the margin of energy advance versus other inputs growth as an agent of economic development. However, there are substantial differences in energy forms and in the nature of economic activities across different stages of development. The linkages among energy, other inputs, and economic activity clearly change significantly as an economy moves through different stages of development. It is referred to "energy ladder" to describe this phenomenon (Barnes and Floor, 1996). At the lowest levels of income, energy sources tend predominantly to be biological sources (wood, dung, sunshine). More processed fuels (charcoal), animal power, and some commercial energy become more prominent in the intermediate stages. Commercial fossil fuels and other energy forms – primary fuels, and ultimately electricity – become predominant in more advanced stages of

Energy provision requires a variety of different kinds of inputs. Energy utilization also depends on the opportunity costs of other inputs. Finally, the literature makes clear that observed patterns of energy production and utilization reflect a great deal of subtle

optimizing behavior, given the constraints faced by the economic actors.

application of other physical and human capital services.

composition of economic activity (Nakicenovic, 1996).

succeeding without energy development.

industrialization and development.

grows at the same percentage.

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There are different ways in which the economic system might experience some form of increasing returns related to energy services. Therefore, increased energy availability somehow might make a disproportionate contribution to expanded economic activity. Increasing returns in energy services provision would take different forms at different stages of development. The industrial production and distribution of various forms of modern energy show increasing technological returns to scale. Moreover, the transformation of primary energy into deliverable energy (petroleum refining) also exhibits returns to scale. Energy quality is the relative economic usefulness per heat equivalent unit of different fuels. One way for measuring the energy quality is the marginal product of the fuel which means marginal increase in the quantity of a good or service produced by the use of one additional heat unit of fuel (Toman & Jemelkova, 2003).

Over the course of economic development the output mix might change. In the earlier phases of development there is a shift away from agriculture towards heavy industry, while in the later stages of development there is a shift from the more resource intensive extractive and heavy industrial sectors towards services and lighter manufacturing. It is often argued that because of different energy intensities in industries there will be an increase in energy used per unit of output in the early stages of economic development and a reduction in energy used per unit output in the later stages of economic development. Pollution and environmental disruption would be expected to follow a similar path (Panayotou, 1993). This argument can be pursued further to argue that the shift to service industries results in a decoupling of economic growth and energy use. Furthermore, shifts away from the use of coal and particularly towards the use of oil can explain the majority of declining energy intensity. The idea that a shift towards a service-based economy can achieve decoupling is one that is often put forward (Panayotou, 1993). But this notion ignores the large amounts of energy involved in producing services including some service industries such as transport (Stern and Cleveland, 2004). This implies that a shift to a service-based economy cannot achieve a complete decoupling of energy and economic growth.
