The GDP/Energy Ratio

Carbon Emissions Do Not Exist In a Vacuum

By Richard L. Wottrich, Blog Editor

President Obama’s Carbon Cap-and-Trade Bill passed by the House in June contains a fatal  conceptual flaw. Carbon emissions do not exist in a vacuum. They represent a people’s efforts to survive, thrive and prosper. Hence energy consumption is only relevant when compared to a country’s GDP. In other words, the more efficient a country is in using energy to produce GDP, the less it should be penalized.

The Top-10 GDPs in the world in 2008 (including the EU as a complete unit) accounted for roughly $50 trillion in GDP, an astounding 90% of the world’s production. None of the OPEC and related oil-producing nations are on the list. Commodity sales do not create large GDPs – productive peoples do.

For example the US uses roughly 25% of the world’s energy, but contributes 29% of total GDP – a very efficient GDP/Energy Ratio of 1:.86. China by contrast just passed the US as the biggest pollution emitter in the world, but contributes just 8.8% of total world GDP, a GDP/Energy ratio of 1:5.6, 6 1/2 times worse than the U.S., so clearly China has a far worse GDP/Energy ratio than the US, as one might expect in a newly industrialized country.

China and India argue that their energy consumption is only relevant on a per capita basis. This is an obvious political argument, as their populations are the two largest in the world. To prove the point, neither country would advertise their food production on a per capita basis, as that would be politically embarrassing. The relevant ratio is GDP/Energy.

Introducing a Carbon Cap-and-Trade Tax on US businesses will clearly make the United States less competitive with less efficient countries like China and India. That will cause our 1:.86 GDP/Energy ratio to decrease, the opposite of what we would like to happen, because energy costs are always reduced by scale – less GDP – less scale. The Tax is wrong-headed and counterproductive. The true cost of energy, as always, will drive efficiencies and innovation.

Fine graining even further, one should discount energy consumption by the percentage of goods exported minus the energy cost of shipping them. This is because those goods are sent to countries that do not use energy to produce them; effectively representing an energy credit. The United States is a major exporting country. In 2007 the US exported approximately 11.7% of its GDP. Its true GDP/Energy ratio (adjusted for the energy cost of shipping) would be a net adjustment of about 10%, or a GDP/Energy ratio of 1:.75, a very efficient usage of energy indeed. This credit would clearly improve the GDP/Energy ratios of Germany, China and India for example, as they are major exporters.

We are all on this globe together. Measuring energy consumption in a vacuum is misleading. We must produce to survive, hence our efficiencies of production are the key - the GDP/Energy ratios of each country being the most convenient measure.