Decoupling economic growth from energy use: The role of energy intensity in an endogenous growth model

Abstract

We develop a theory of endogenous economic growth with explicit consideration of energy in the production process. Following basic thermodynamic considerations, energy is modeled as a (perfect) complement to machines. Long-run economic growth is driven by expanding product varieties. While energy flows on Earth are currently abundant, extrapolation of past consumption trends suggests that energy supply might be a binding constraint in a few centuries to millennia. We show that constant economic growth with bounded energy use is possible if the energy intensity of newly developed products declines at a constant, positive, and arbitrarily small rate. Hence, aggregate decoupling is possible even when no decoupling at the product level is possible. Aggregate decoupling is, however, not possible if there exists a strictly positive lower bound for the energy intensity of newly invented products. We further show that increasing energy prices decrease growth rates by reducing the incentive to innovate. Our results suggest that the energy intensity of structural change is decisive for future growth.