The Value of Energy and the Price of going Green

Written on July 25, 2008 by Rolf Strom-Olsen in Arts & Cultures & Societies

Rolf Strom-Olsen

IE’s MBA students may already be familiar with my interest in the concept of value as a historical phenomenon and an agent of change. This academic interest has helped mitigate the pain of the stratospheric increase in energy prices. Granted, the mitigation has been exceedingly slight. Still, the current turmoil in energy prices offers a  good living laboratory to consider the question of how the value of things can change in our society, and particularly (in this instance) the disjunction between value and price.

Clearly, energy markets have gone more or less mad. So much for efficient market theory. But in the way of things, when a percolating crisis hits the mainstream, a raft of previously unfamiliar terms suddenly comes to the fore. The strangely political debate about the impact of global warming had already helped introduce a public discourse about energy consumption, both at an individual and, rather less-coherently, at a society-wide level. The spike in the actual price of the stuff has certainly made that debate a lot more urgent. The concept of reducing our "carbon footprint," previously advanced in pious terms about saving our world, is now a fairly urgent issue in terms of saving our wallets. Give us high-minded, abstruse academic and scientific debates and we all nod off to sleep. Hit us hard where it hurts, of course, and you have our undivided attention.

So whether the price escalation of oil is real, or simply an instance
of a specific marketplace bubble, it matters little in terms of the
debate over our pattern of consumption that the new price regime has
sparked. (Actually, that is a very interesting consideration for
monetarists out there, since price trends of commodities like oil are
an unusually good way to measure the inflationary effect of money
supply, but we’ll leave that discussion to another time.) Faced with
the real increase of the cost of energy as a percentage of national
income, we have been forced to focus our attention on the value of
energy in our society and to our way of life.

That value can be considered in any number of ways. One popular measure at the moment, influenced by the environmentalist prism introduced by the climate change debate, is national per capita carbon emissions. By that measure, I happen to live in one of the world’s most polluting countries. Indeed, measured on per capita basis, the top three carbon emitters are Australia, the US and Canada. And much of that comes from our astonishingly poor choice of transportation (e.g. the SUV),  intensified by the long distances we tend to travel, the rise of so-called exurbia and of course seasonal climate extremes.

But from the perspective of considering the value of energy to our society, that is not a particularly useful standard. I think a better standard considers our energy-efficiency as a society at both a macro and micro level. Granted, that is an exceedingly complex task, since almost everything we do involves some kind of energy consumption somewhere along the line. We can measure, perhaps, the efficiency of the car we drive or how we heat our house, but what about the foods we eat or the goods we buy, the packaging we throw away or even the elevator we take? To get a sense of this overall figure, we need to consider aggregate energy consumption, as well as the pattern of that consumption, in the context of the efficiency with which it is produced. We also need to consider the importance of social attitudes towards energy consumption, which are clearly undergoing a dramatic shift across the deveoped world. I happen to have at hand a modest example that exemplifies the variables of this matrix.

Over the last several years, the social value of green behavior has increased significantly. (This is particularly visible in the fad-happy UK. Britons now have an astonishing number of ways that they can offset their carbon use, typically by paying money to some group that promises to plant a tree and gladly pockets their cash. I digress, however.) With the hyper-accelerated rise in the price of energy, we are witnessing the convergence of perceived social responsibility with immediate economic motivation. One result: electric cars. Already on the streets of London, the well-meaning (and typically well-heeled) can be seen silently scooting around in little battery-powered cars. A recent announcement by GM suggests that electric vehicles will become more commonplace in North America as well. In addition to touting the fact that such cars will be cheaper to use, GM, Nissan and other manufacturers typically bill these new models under the rubric ‘green’ (or environmentally friendly).

Cheaper to drive, greener to use: a perfect solution in the context of the changing value (and I mean value, not price) of energy in our societies. I can virtually guarantee you that when people like actress Kristin Scott Thomas (of English Patient fame), buzzes around London in her REVA G-Wiz, she fervently believes that by switching from gas to electric she is making a statement for social responsibility and environmentalism.

Energy consumption is energy consumption, however, even for good-looking English actresses. And if driving an electric car does not produce direct emissions from a tailpipe, those emissions are being generated somewhere else. In the United States, 49% of all electricity is produced from burning coal. Similar numbers (or worse) attain to many European countries, while the situation in energy-hungry China is already bleak and getting worse. Despite various advances such as clean-coal technologies and emission capturing or sequestration, the fact is that coal, while abundant and cheap, is a dirty and inefficient way to produce energy. The efficiency of a typical coal plant is about 35%. Granted that is better than the internal combustion engines of most cars (20-25% efficient), but once the polluting difference between coal and gasoline is factored in, passing energy use up the pipeline by switching to an electric or electric-hybrid vehicle produces no real advantage at all. It makes vehicle operation cheaper, yes. But not greener. Sorry Kristin.

It is likely, however,that over the next decade we will see at least a gradual and possibly a quite decisive shift toward hybrid and/or electric cars. We will see our patterns of fuel consumption change as we move toward electricity-based resources in lieu of direct fossil fuel consumption. So this is a debate that, in its particulars and as an energy-addicted society, we should be having. We need to consider the overall impact of such a shift, and we need an informed, intelligent and thoughtful debate about the efficiency both of production and consumption. The convergence of environmental responsibility and an awareness of the impact of carbon emissions on the earth’s ecosystem climate change with a dramatic price increase in gasoline is an ideal time to reconsider the value of energy to our society.

I am a historian, not an economist or mathematician, so happily I don’t have to worry about stuff like:


I am, however, interested in the concept of how we value things and that changes within specific contexts. The energy revolution of the nineteenth century introduced such sweeping changes to our social system that no prognostication, little matter how fanciful, could have predicted the scale of technological, social and economic change unleashed. The next phase in that revolution promises to be just as extraordinary. 


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