Energy currency
Chapter 2 - Society
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Welcome to the Energy currency page
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Energy from primary energy sources is almost always transformed into different forms to make it easier to use, transport, or store. These forms can be called "energy currencies." Several authors have introduced the idea of energy currency to describe these proper intermediate forms of energy because they can be thought of as a way to exchange value from one party to another.
The economic system is intrinsically linked to the ecological system on which it depends. Still, our conventional economic theory does not sufficiently capture the significance of this relationship, limiting the effectiveness of policy responses. The monetary system has become increasingly divorced from the economy's productive capacity, resulting in inflation, asset bubbles, and banking instability.
Production depends on physical materials, labour, and capital. Labour, capital, and natural resources are complementary rather than substitutable. If you give a baker enough money to double his number of ovens and chefs but tell him he can't have more flour and energy to heat his oven, he will struggle to make more bread. The question arises: Can and will the economy supply sufficient low-entropy energy instead of high-entropy energy (fossil fuels)?
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Core ideas
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Understanding the role of energy in the economy
Many processes in nature, technology, and human activity involve transforming energy from one state to another. For example, light from the sun is converted into thermal energy for the warming of soil, rocks, and plants and chemical energy captured by the plants for photosynthesis. The laws of thermodynamics are the principles governing the accounting by which we keep track of energy as it moves through such transformations. There are two established laws of thermodynamics, an exception to which has never been observed.
- The first law, also known as the law of conservation, states that energy can neither be created nor destroyed within a closed system like Earth. All the energy that flows into any transformation process – including all economic processes – must end up as a useful product, a stock change or a waste.
- The second law of thermodynamics – the law of entropy – distinguishes different types of energy-matter in terms of their availability and usefulness to us as human beings. The law of entropy states that energy availability to do useful work (‘exergy’) is reduced by every transformation process while the non-useful component increases.
As we now know, such wastes and pollution have definite costs to human beings and the planet. Global warming, the toxification of the oceans and air, and the damage that results to species can all be considered ‘economic bads’. The exact amount of energy mass is still there, but it has changed to a form that we cannot translate into work and, in many cases, reduces human welfare. Fossil fuels can be thought of as the product of thousands of years of solar energy condensed into very low entropy matter (i.e., the type of matter that enables us to transform it into useful energy much faster than sunlight).
The useful work obtained from fuel resources has grown much faster than the consumption of fuels themselves, owing to substantial improvements in thermodynamic conversion efficiencies and corresponding Energising Money 17 reduction in waste. By including useful work in their aggregate production function, rather than primary energy, they obtain a perfect fit to US GDP trends over the past century, thereby eliminating the need for the mysterious technology ‘multiplier’.
There is considerable evidence that the world is reaching a saturation point regarding energy-conversion efficiency improvements and the supply of such low-entropy materials. This is particularly true for the conversion of fossil fuels into more useful, processed energy (gas, electricity, woodchips, etc.), technically described as ‘work’.
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(Fiat) Money
Money, as we use it now, is a social construct, a belief system held together by shared norms formalised through legal, economic and political institutions. Its creation does not follow physical laws any more than language follows physical laws. But if we accept that the economy must obey physical laws, then does money also have to obey them?
The nature and history of moneyː
- money gives us confidence in our ability to access goods and services in the future
- money enables us to conduct efficient transactions and trade with each other
- with a widely agreed-upon unit of measurement, we can settle debts or establish effective price systems
Modern fiat bank-debt money has several serious flaws:
- it creates the illusion of wealth
- encourages the build-up of unsustainable debt
- requires ever-increasing growth and/or inflation
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Reform
At the global level, there is a desperate need for a stable reference attached to the planet‘s natural capacities – a unit of account linked to a well-known aggregate of physically stored energy, for example, a renewable or non-renewable kilowatt-hour. This would help price nature into markets‘ thereby improving the ecological efficiency of the economy. Similarly, concretely relating money to natural resources would make clear that such resources cannot be simply substituted for other inputs (labour or capital). This misconception lies at the heart of conventional economics‘ understanding of production.
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Deep dive
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Ecological overshoot
For most of humanity's existence, we have remained comfortably within the planet's carrying capacity. However, a mounting body of scientific evidence suggests that this is no longer the case. While the earth has the capacity to recycle some wastes back into the environment, from around 1970, humanity began turning resources into waste faster than waste can be turned back into resources, as the Club of Rome stated.
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Renewable resources
While renewable sources of energy such as solar, hydro, wind, and tidal are abundant, the environmental impacts, time, resources, and expense required to capture energy mean that a longer-term goal for society should be to live on sufficient energy rather than simply meeting demand.
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