1. Russian Presidential Academy of National Economy and Public Administration John A. “Skip” Laitner Gaidar Forum 2015 Russia and the World: New Dimensions Sustainable Development: Decarbonization Pathways January 15, 2015 A Thought Experiment – Energy as Work: Understanding the Economic Imperative of Greater Efficiency * * In the spirit of the discovery of the Higgs boson which required the support and hard work of 10,000 theoretical and experimental physicists from 100 different countries – as many of those countries were at war with each other!

2. RANEPA 1 Integrating a Deeper Perspective The productivity benefits from the current generation of industrial technologies are generally diminishing. Evidence indicates that, among the biggest reasons for those diminishing returns, is the inefficient use of resources – especially the inefficient use of energy. A social and economic transformation is clearly needed to sustain the economy and move it forward – driven by purposeful effort that includes both directed actions and targeted investments which drive improvements in resource productivity. Energy efficiency – not necessarily new supply – may provide the critical and productive link between today’s economic activity and tomorrow’s economic future.

3. RANEPA The Six-Step Thought Experiment Explore the critical difference between energy as a “commodity” versus energy as “work.” Examine the magnitudes of energy waste. Review the possible link between energy efficiency and per capita economic activity. Examine the costs of energy services as they impact economic activity. Offer final thoughts with suggested next steps ahead. 2

4. RANEPA 3 We Begin with Two Views on Energy Energy as commodities that are sold on the market (e.g., barrels of oil or kilowatt-hours of electricity) – tracked by the various governmental agencies. Energy as the capacity to do useful work, necessary to transform matter into necessary goods and services for a local economy and distribute or make them available as needed To ensure the appropriate development of innovation that ensures sustainable economic activity, the emphasis needs to be on energy as work.

5. RANEPA 4 Exploring Energy as Work Energy = Exergy + Anergy = Constant Source: Kümmel (2011) Work = Exergy * Efficiency Source: Ayres and Warr (2009), and Laitner (2014a,b)

6. RANEPA 5 Useless Anergy Energy = Exergy + Anergy = Constant High Quality Exergy Drawn neither to scale nor shape

7. RANEPA 6 Energy = Exergy + Anergy = Constant Useless Anergy High Quality Exergy As high quality energy is used up, there is more waste but total energy remains constant

8. RANEPA 7 Total Exergy Applied as Work Total “Energy Commodities” Reported Useful Work Completed Comparing reported energy, Where the difference between the useful work that is completed, and the total exergy that is consumed, equals waste... applied exergy, and useful work

9. RANEPA 8 Comparing Russian Federation and the United States: Energy, GDP and Initial Levels of Energy (in)Efficiency Note: This comparison draws only from the conventionally reported energy. If a full exergy assessment shows perhaps 20 percent of exergy that is not reported, then the “exergy efficiency” might be reduced to about 8 percent and 14 percent for the Russian Federation and the United States, respectively.

10. RANEPA 9 Where we want to be... What we want to avoid!

11. RANEPA 10

12. RANEPA Energy costs generally refer to the unit price of energy flows as they may be paid by a household, business, or government consumer of energy The full costs of energy services refer to the array of capital, labor, and energy resources as they enable the transformation of matter into useful goods and services A proper accounting of energy services includes both the costs of market transactions and the array of social, economic, and environmental externalities Yes, it is important to consider the cost of energy; but the inefficient use of any resource may impose even larger total costs that limit future economic opportunity. A Key Distinction between Energy Costs and the Full Costs of Energy Services

13. RANEPA 12 Economy-Wide Benefits of a Lower Cost of Energy Services (perhaps the most important slide of this talk!) Initial Total Energy Purchases plus Social, Economic, Health, and Environmental Costs Reference Case Cost of Energy Services Costs in Year X Investment Expenditures Year X Reduced Total Cost of Energy Services Year X Remaining Costs of Energy Services Year X Energy Expenditures (currency) Policy and Program Expenses Year X The combination of energy efficiency and new energy resources must be able to reduce the real cost of energy services each year, and in whatever year!

14. RANEPA “Individuals have a natural tendency to choose from an impoverished option bag. Cognitive research in problem solving shows that individuals usually generate only about 30 percent of the total number of potential options on simple problems, and that, on average, individuals miss about 70 percent to 80 percent of the potential high-quality alternatives (emphasis in the original).” Dr. Jeffrey S. Luke Catalytic Leadership: Strategies for an Interconnected World, 1998 A Further Thought on the Tough Choices 13

15. RANEPA 14 A Final Thought on a New Reality?? The complete economic recovery and robust development of the World’s long-term prosperity will not be possible without large increases in purposeful investment and greater levels of resource and energy efficiency – all enabled by significant reductions in the full cost of energy services, and motivated by informed attitudes and more productive behaviors. It can be done. The opportunities are there. But they require imagination, effort, and new business models together with new ways of managing resources.

16. RANEPA The difficulty lies not with the new ideas, but in escaping the old ones... John Maynard Keynes 15

17. RANEPA 16 Selected References Ayres, Robert U. and Benjamin Warr. 2009. The Economic Growth Engine: How Energy and Work Drive Material Prosperity. Northampton, MA: Edward Elgar Publishing, Inc. International Energy Agency. 2014. Energy Efficiency Market Report. Paris, France: OECD/IEA. Kümmel, Reiner. 2011. The Second Law of Economics: Energy, Entropy, and the Origins of Wealth. New York, NY: Springer. Laitner, John A. “Skip.” 2014a. “The Link between Energy Efficiency, Useful Work, and a Robust Economy.” In: Byrne, John, and Wang, Young-Doo, eds. Green Energy Economies. New Brunswick, NJ: Transaction Publishers. Laitner, John A. “Skip.” 2014b. “Linking Energy Efficiency to Economic Productivity: Recommendations for Improving the Robustness of the U.S. Economy.” Wiley’s Energy Environ 2014. doi: 10.1002/wene.135.

18. RANEPA Contact Information John A. “Skip” Laitner Senior Research Fellow Russian Presidential Academy for National Economy and Public Administration Principal Economist and Consultant Economic and Human Dimensions Research Associates Senior Fellow, American Council for an Energy-Efficient Economy (ACEEE) and the CNA Public Policy Research Institute for Energy, Water, and Climate Tucson, Arizona USA 85750 c: (571) 332-9434 Email: EconSkip@gmail.com 17