Ecological Economics 31 1999 381 – 394
ANALYSIS
Is energy cost an accurate indicator of natural resource quality?
David I. Stern
Centre for Resource and En6ironmental Studies, The Australian National Uni6ersity, Canberra ACT
0200
, Australia Received 16 July 1997; received in revised form 8 February 1999; accepted 21 May 1999
Abstract
The use of energy cost as an indicator of natural resource quality is examined. Energy cost is the direct and indirect energy used to produce a unit of a resource commodity. Different approaches to the role of energy in the economy
are discussed and it is demonstrated theoretically that energy cost can give false indications of changes in resource quality. This is because energy cost is only an accurate indicator of resource quality if either energy is the single
primary factor of production and the economy can be represented by an input – output model, or if there is substitutability between the factors of production, then marginal products must be proportional to the factors’
embodied energy. These conditions are tested empirically using data from the US agricultural sector. The results show that there is substitutability and marginal products are not proportional to embodied energy. However, the strong
neoclassical assumption of price-taking profit-maximization can be rejected at a 5 level of significance, though not at the 3.5 level. The generality of the empirical results may be restricted due to data limitations but the theoretical
framework can be applied to other data sets, other resources, and even other indicators. © 1999 Elsevier Science B.V. All rights reserved.
Keywords
:
Resource quality; Energy cost; Energy analysis; Scarcity; Indicators www.elsevier.comlocateecolecon
1. Introduction
This paper critically examines the basis for, and appropriateness of, energy cost as an indicator of
natural resource quality. Energy cost is the amount of direct and indirect energy required to
extract and process a unit of a resource to a given standard. Energy cost has been used by some
energy analysts as an indicator of natural resource quality e.g. Cook, 1976; Chapman and Roberts,
1983; Hall et al., 1986; Cleveland, 1991. Resource quality is the productivity of the resource stock
when all controlled inputs such as capital, labor, and energy are held constant. Changes in produc-
tivity are then either the result of improved tech- nology or changes in the natural environment.
Resource quality is an indicator of natural re-
Tel.: + 61-2-6249-0664; fax: + 61-2-6249-0757. E-mail address
:
dsterncres.anu.edu.au D.I. Stern 0921-800999 - see front matter © 1999 Elsevier Science B.V. All rights reserved.
PII: S 0 9 2 1 - 8 0 0 9 9 9 0 0 0 6 0 - 9
source scarcity in that it indicates the use value capable of being generated by the resource stock
Cleveland and Stern, 1999. Theoretical and empirical arguments are pre-
sented, indicating that energy cost can be a mis- leading indicator, showing increasing scarcity
while resource quality is actually increasing, and vice versa. The theory shows that if energy is the
primary factor of production and the economy can be represented by an input – output model,
then energy cost is an accurate indicator of re- source quality. When there is substitutability be-
tween the factors of production, energy cost is only accurate when marginal products are propor-
tional to factors’ embodied energy. Using data from the US agricultural sector, the evidence is in
favor of substitutability with marginal products not proportional to embodied energy. Evidence
for full neoclassical price-taking, profit-maximiz- ing behavior is less strong. The generality of
the empirical results may be restricted due to data limitations. The available embodied energy
time series data are not as systematically calcu- lated or as comprehensive as some cross-section
estimates of embodied energy e.g. Costanza, 1980.
2. The role of energy in the economy
