Per Krusell and John Hassler. Photos: Niklas Björling/Stockholm University

What is the future of our dependence on natural resources in finite supply? How will consumption growth be affected by scarcity? 

In a paper recently accepted in top-5 economics journal Journal of Political Economics, IIES Professors John Hassler and Per Krusell, together with IIES alumnus Conny Olovsson (now at Sveriges Riksbank) develop quantitative theory to answer these questions and apply it to the case of fossil fuel-based energy as an input into production. The researchers have focused on energy because this is a key issue in climate change. 

The market’s first response to scarcity is a rise in the price of the scarce resource, with curbed use as a result. The paper focuses on an implication of a higher price: endogenous resource-saving technical change, in the form of new techniques and products allowing us to save on the scarce inputs. The theory is used to interpret the postwar U.S. data on fossil energy dependence but also to make projections into the future.

The findings are striking: (i) fossil-energy saving was dormant until the oil shocks hit but then took off and grew rapidly; (ii) capital/labor saving grew more slowly after the oil shocks; and (iii) more generally, fossil-energy prices and saving on fossil energy comove clearly even if one excludes the large oil shocks in the 1970s. 

The article shows that it has been possible to sharply increase the growth rate in energy efficiency at relatively modest costs in terms of lower growth. In a scenario with declining energy use, long-term growth would be 1.7% per year if the historical connections remain.

Contacts at the IIES:

John Hassler and Per Krusell

The article on the JPE web