and by 1995 the gap was nearly three-quarters of a trillion dollars and climbing US Bureau of the
Census, 1997. A proportionate share of the earn- ings of those assets leave the US each year as
payments to foreign shareholders, and thus an ever increasing share of GDP leaks away. Since
GDP supports income, the more GDP leaked out of the US, the lower our incomes will be. US
payments of income to the rest of the world exceeded US income receipts from abroad in 1995
and are climbing US Bureau of the Census, 1997.
The energy price disparity results in low energy efficiency that leads to a higher than necessary
total energy use, much supplied by imports. The deficit in our balance of trade increases and facili-
tates foreign purchase of US assets. Returns to those assets then leaks out of the US to other
countries. In effect we are trading income produc- ing assets for oil. The tragedy is that imported oil
would be unnecessary if we became as energy efficient as our European trading partners by
conservation and by raising or equalizing prices for energy. Our wasteful energy practices appear
to be resulting in a loss of potential income in the US, along with global climate change and other
negative impacts.
3
.
6
. Price disparity and energy subsidies A price disparity above the US average results
in a subsidy above the US average for the indus- trial sector because that state sector is, in all
likelihood, getting energy cheaper than the US industrial average, and the states’ residential sec-
tor is paying a price higher than expected. For example, see Fig. 1 where Louisiana residents pay
higher prices than the US average for energy and industry pays less. The subsidy can be calculated
relative to the US average energy price disparity using:
Energy subsidy = residential expenditures ×
1 − US price disparity
state disparity 3
The US sector average energy price is set as the zero point for ease in calculation so the subsidy
calculated by Eq. 3 is positive only if a state’s energy price disparity is higher than the US aver-
age price disparity. Dividing the energy subsidy calculated with Eq. 3 by the state population
then gives the energy subsidy per capita paid by a state’s residential sector, which is shown in Table
1. Positive numbers mean that a subsidy above the US average is being paid, negative numbers
states’ residents are paying a subsidy below the US average, although all states’ residents pay
some subsidy for a derivation of the formula, see Templet, 1995b. It is possible, of course, that a
portion of the subsidy may be justified due to delivery costs or other extenuating factors, but
these state-wide costs would have to be substan- tially above the US average for the subsidy figure
calculated here to be invalid.
Providing the subsidy to the industrial sector has negative public welfare consequences. Poverty
and unemployment rise significantly while income per capita declines with an increase in the energy
subsidy Templet, 1995b. In addition, energy flow diversity declines significantly with a rise in sub-
sidy across states, thus higher subsidies lead to a higher energy intensity, lower economic diversity
and lower energy efficiency.
4. Discussion
Economic theory indicates that diverging en- ergy prices across states’ economic sectors have
negative effects on allocation efficiency and en- ergy efficiency. Our empirical analysis confirms
this. A similar result is obtained for diversity, subsidies, leakage and the partitioning of energy
between useful products and waste. These result in lower incomes, higher poverty and generally
lower public welfare. Fig. 8 is a schematic repre- sentation of the relationships and a relatively
simple model of the findings of this analysis. The connections shown in Fig. 8 are statistically sig-
nificant and the direction of causation is pro- posed. A likely scenario explaining price disparity
is that collaboration between energy producers and big industrial users results in pressure on
Fig. 8. Schematic of energy price and system interactions.
energy producers and regulators to lower prices for the industrial sector. But regardless of how price
disparity occurs, cheap energy for one sector and higher prices for other sectors represents a subsidy
for those with lower energy prices financed by the ‘tax’ implicit in the higher price paid by the other
sectors Templet, 1995b. High energy price dispar- ity also means that a state is less sustainable because
energy price distortions lead to less efficiency and diversity and more throughput, pollution and leak-
age — that all conditions are antithetical to sus- tainability.
To put it positively, as systems evolve they become more complex with more components and
more connections between them. Diversity is one means of measuring those changes. As the system
becomes more interconnected it becomes more efficient in using resources because energy and
material are passed between components where each uses the resource before discarding, it thus
reducing entropy and waste. One level’s waste is another level’s energy supply. Allocation and par-
titioning improve as energy flows equalize across components; efficiency follows and energy intensity
declines. This leads to reduced throughput per unit of output, lower specific entropy and movement
toward sustainability. Efficiency is a means to an end; ultimately, total energy throughput must be
within the ecosystem capacity to supply energy and absorb waste. Sustainability is not shown in Fig. 8
because it is implicit in so many of the parameters.
Diversity in economic systems is related to the efficiency of resource use and the level of economic
capacity or output. Higher diversities result in lower energy intensity, i.e. lower energy consumed
per dollar of output, and less waste, so output rises per unit of energy input and pollution declines. As
diversity rises and energy intensity declines, income per capita and economic health improve. These
results indicate that economic diversity is an essen- tial requirement for sustainability. Diversity in
economic systems is also related to resource alloca- tion. Economic systems that are low in diversity are
suffering from misallocation of resources. Ineffi- cient allocation of resources also leads to poor
partitioning of energy between products and waste so pollution rises and productivity declines. All
have a negative impact on public welfare.
Sustainability requires a throughput consistent with the scale of ecosystem services Daly, 1992.
Price disparity results in resource use inefficiency, higher throughput, low diversity, and inequality in
allocation. Economic systems that use resources more efficiently have lower throughputs for a given
level of output and are, therefore, more likely to be sustainable. The net result is that high price dispar-
ities are contrary to sustainability. States having economic sectors with low energy prices relative to
other sectors exhibit high capture of energy, low diversity and efficiency, high leakage, and are not
sustainable over the long term. In other words, they resemble eutrophic or immature ecological systems
Mageau et al., 1995.
A firm that is successful in lowering its energy price relative to other sectors is paying lower prices
for resources, i.e. they have secured a subsidy for themselves, increased their utility and caused other
sectors’ prices to rise. A sector with lower prices has greater utility for the energy dollars spent and are
appropriating more natural capital for their own use at others’ expense. The type of subsidy dia-
cussed here is generally paid to those sectors of the economy, that are large users of resources and large
dischargers of waste i.e. throughput-intensive sec- tors. In essence large appropriators of sources or
sinks benefit from externalization because external- ities create subsidies for those doing the externaliza-
tion Templet, 1995b. For example, a firm that pollutes the environment is externalizing some of
its pollution control costs and thus gains a subsidy in the form of retained dollars, which the firm
would have otherwise spent to control or eliminate the pollution. The subsidies accrue to firms’ profit
margin but the profits of publicly owned corpora- tions go to shareholders and management who are
generally located in places other than poor states. The relationship of manufacturing value added per
job, a profits surrogate, to the percentage of the GSP leaked from a state is significant and positive
in a cross-sectional analysis; the higher the subsi- dies, and thus the profits, the more is leaked to
other states. In Louisiana, which has the highest subsidies and the highest value added per manufac-
turing job, only 71 of the annual GSP accrues to income within the state US Bureau of the Census,
1997. The remainder, about 7000 per person annually, is exported to other states and countries
since some of the firms in Louisiana are foreign owned. If this wealth were to remain in Louisiana,
its per capita income would equal or exceed the US average.
The export of wealth from intensive resource use, high pollution states raises serious equity and
community health issues. Those states, whose economies rely heavily on extractive natural capi-
tal, e.g. mining and manufacturing, tend to have lower incomes as wealth is leaked away. In addi-
tion, health care expenditures are higher, indicating that public health is negatively affected by pollu-
tion. Subsidies leaked from poorer states go to the richer states, creating large income disparities be-
tween states. While leakage may be efficient from an economics point of view, it can lead to situations
where states or regions of a country become analogous to colonies providing source and sink
services with all of the environmental, socioeco- nomic, health and community ills associated with
such exploitation. In addition, such regions are less sustainable because of higher throughput per unit
of output. A more comprehensive view of economic development takes the approach that development
includes improving natural and social capital as well as man-made capital Sierra Business Council,
1999, and none of the three capitals is sacrificed for the others. In this view, because total wealth is
the sum of the capitals, a loss of any of the three diminishes the whole. In addition, public decisions
are to be made in such a way that at least two of the capitals are improved and the third is not
diminished — a new type of optimality. Unless our communities and our environment provide us with
a good quality of life, which includes more than man-made capital, economic development is failing
to improve public welfare.
5. Conclusion
