Can the Energy Transition Be Smooth? A General Equilibrium Approach to the EROEI

Abstract

The concept of energy return (EROEI ratio) is widely used in energy science to describe the interactions between energy and the economic system but it is largely ignored in macroeconomics. In order to contribute to bridging a gap between these fields of research, the authors incorporate these metrics into an endogenous growth model with two sectors (energy and final goods). An approach in terms of net energy allows them (1) to explicitly link the EROEI to macroeconomic variables, (2) to show how it is related to the growth rate of GDP and (3) to obtain a closed-form solution for its long-run value at a general equilibrium level. A transition to lower EROEI resources intensifies the rival use of capital in the energy and non-energy sectors and leads to major economic changes, both in the inter-sectoral capital allocation and in the allocation of final output between consumption and investment. The authors show that a protracted economic contraction may occur before the completion of the transition to renewable energy. They analyze how (1) the magnitude of this contraction and (2) the possibility of an ulterior recovery depend on the initial stock of non-renewables, the potentials of technical progress.