An Implementable Index of Sustainability and Assessment of Energy Policy

Energy is a critical input in production and the main sources of energy in modern economies are exhaustible. Therefore sustaining aggregate consumption across generations requires reduction of the quantity of energy used per unit of output. Energy policies incentivize the deployment of new technologies that will not only increase energy efficiency but also impact the ease with which capital and materials can substitute for energy and hence the ability of societies to sustain consumption. Therefore an assessment of the impact of energy policies on sustainable consumption requires accounting for the link between technological progress and substitutability. We first allow for biased technical change and find that capital augmenting technical change (e.g. diffusion of biofuels and other bioenergy technologies) enhances sustainability. In addition, provided a sustainable consumption exists, Hicks-neutral technical change and capital accumulation increase maximum sustainable consumption. Energy augmenting technical change (e.g. modern nuclear technologies) reduces maximum sustainable consumption. Second we allow for both biased technical change and variable elasticity of substitution. Results show that an elasticity of substitution between capital and energy greater than one is a necessary condition for existence of a positive sustainable consumption. Moreover, provided a sustainable consumption exists, technical change increases maximum sustainable consumption regardless of its bias. Energy augmenting technical change enhances sustainability through its positive effect on capital energy substitutability.