Cap solves the environment—decoupling is possible, but innovation is key—assumes rebound effects and leakage and is about the US

I. INTRODUCTION Humanity finds itself at perhaps one of the most challenging junctures in its history. While grappling with an ever-increasing population, all with an equal right to development, it also has to consider the consequences of this unbridled development. Simultaneously, economists across the world have witnessed the gradual decoupling of economic growth from its energy use (Naqvi & Zwickl, 2017; Mulder and de Groot, 2012). In simpler words, the growth of environmental pressure, which is the pressure exerted by human activities on the state of the environment, has slowed down in comparison to its economic driving force (GDP). However, many environmentalists claim that this decoupling trend is largely a result of developed countries outsourcing their manufacturing activities rather than countries isolating their economic growth from the energy use (Hardt et al., 2018; Cunha et al., 2018). This allows us to re-examine the relationship between energy use, the economic productivity of a country and its environmental pressure. Unfortunately, earlier attempts made by researchers have largely been inconclusive (Kalimeris et al., 2014; Omri, 2014; Schurr, 1982). However, recently emerged studies advocate that the potential for examining this relationship lies in the second law of thermodynamics (Ayres & Warr, 2009; Brockway et al., 2018; Sorrell 2015). Exergy, which in simple terms can be defined as the amount of energy flow that can be used to perform physical work, originates from this very law. This article shall attempt to trace the links between the exergy efficiency and economic decoupling in the United States of America. II. LITERATURE REVIEW Exergy as a concept, purely in the context of thermodynamics, emerged in 1956, when Zoren Rant introduced this term. It originates from the second law of thermodynamics, which from one perspective states that some amount of usefulness of an energy source, i.e exergy is lost at every stage of the conversion process (Sciubba & Wall, 2007). Ayres and Warr (2009), used the concept of exergy to explain economic growth in the US and Japan. In doing so, their work produced a new theoretical innovation: exergy efficiency, an economic variable that can be used to monitor the conversion efficiency of manufacturing systems in place. They define exergy as the potential useful work that can be performed by an energy source. Exergy efficiency captures the difference between the actual work performed and the amount of work that could theoretically be performed. Brockway, Sorrel, Foxon and Miller (2018) present a chain for examining exergy flows in the context of production activities. At the top of this chain is the primary exergy (exergy derived directly from the energy source such as thermal power, fossil fuels or nuclear fission). When this source gets processed and converted into a carrier of commercial use energy, it gets transformed into secondary exergy, for example, electricity. This source is then transferred to the households and is referred to as final exergy. Final exergy is different from secondary exergy because there are some losses (resistive) along the transmission lines. The final exergy of the energy that reaches the households is the useful exergy (the portion of energy flow that actually carries out the useful work and can be stored over time) that economists deal with. This can be measured in Joules. In this regard Miller, Foxon and Sorell (2016) have significantly developed methodologies for exergy accounting. They have constructed a series of useful exergy accounts for the UK for the period of 1960-2012. They developed a classification of energy carriers group, useful exergy categories and their respective end uses. The converted exergy equivalents of primary/final energy estimates are then attributed to each of these end uses to get the final useful exergy output for an economy. When it comes to decoupling and exergy analysis, Haberl et al (2020) have synthesized evidence from 835 selected peer-reviewed articles. Based on these combined evidences of empirical research, they have concluded that relative decoupling is a common occurrence for Greenhouse gases (GHG) and CO2 emissions, but not for useful exergy. Their findings suggest that GDP can be decoupled from primary energy use, to the extent to which conversion from primary exergy to useful exergy can be improved. In simpler words, GDP can be decoupled from energy use by increasing exergy efficiency. III.THEORETICAL OVERVIEW The paper aims to trace the relationship between exergy efficiency and economic decoupling and the following section deals with the two concepts in detail. III.A. Environmental Decoupling Decoupling implies that the growth rate of an environmental burden (CO2 and/or GHG emissions) is less than that of its economic driving force ("Indicators To Measure Decoupling Of Environmental Pressure From Economic Growth", n.d.). Decoupling can be relative or absolute. Relative decoupling is witnessed when economic productivity rises at a rate higher than the emissions of harmful gases. Absolute decoupling occurs when economic productivity continues to rise while the harmful gases emissions decrease. Decoupling trends can be accounted for by simply observing the ratio between CO2 emissions and GDP or GHG emissions and GDP. III. B. Exergy Efficiency Exergy efficiency, on the other hand is a relatively new economic variable that measures the distance from the theoretical maximum potential output. The key idea behind examining the exergy efficiency accounts of an economy is that it captures the effectiveness and robustness of the manufacturing systems in place for the production process. A moment’s thought would throw light on the fact that actual useful work obtained from an energy source largely differs from the maximum useful work that could be extracted from said energy source. This is because some amount of usefulness of an energy source is lost at every conversion process in the form of heat according to the second law of thermodynamics. The ratio between useful exergy consumption and primary exergy consumption gives us the figures for exergy efficiency (Ayres & Warr, 2009). III. C. The Rebound Effects The rebound effect is witnessed when energy consumption increases as its efficiency increases. Implicitly, the actual energy savings are quite lower than the expected savings. This is because consumers are induced to consume more of the energy source, considering that the resource has become relatively cheaper as a result of increased efficiency. This could be seen as a hurdle in achieving the objective of decoupling economic growth from energy usage (Shao, 2018). However, in the exergy analysis, we’re also measuring the effectiveness of reducing the amount of usefulness of an energy source being lost in the form of heat or harmful carbon emissions. Thus, exergy efficiency is already reducing the carbon emissions because the amount of quality of energy being lost is reducing. Building upon this, as a result of this increased exergy efficiency, a rebound effect would be set into motion. As energy consumption would increase, the country’s economic productivity would also increase, since energy animates capital and labour, two determinants of productivity. This leads us to conclude that an increase in exergy efficiency would reduce the carbon emissions while economic productivity would increase as a result of the rebound effect. Thus, exergy efficiency could eventually be the key to achieving absolute decoupling in economies (Ayres & Warr, 2009). IV.DATA ANALYSIS In the following section, this article shall attempt to trace the linkages between exergy efficiency and decoupling in the United States of America for the period of 1990 - 2010. The choice of the US is partly due to availability of comprehensive data on its useful and primary exergy quads (unit of energy equal to 1015 BTUs) as well as exergy efficiency accounts. Another reason is the USA's role in environmental pressure exuded on the planet as a result of economic growth. As of 2016, the US ranked second in the list of highest CO2 emitting economies, closely following China at 15.502 metric tons per capita ("U.S. Energy Information Administration (EIA)", n.d.). Further, its total greenhouse gases emissions stood at 6,677 million metric tons of carbon dioxide equivalents. ("Inventory of U.S. Greenhouse Gas Emissions and Sinks | US EPA", n.d.). These statistics could produce even grimmer realities for the planet, considering that the US is one of the largest economies. It becomes increasingly pertinent to look at ways in which these emissions can be reduced as the country’s economic productivity continues to rise. Between 2005 and 2017, USA’s carbon emissions declined by 12% ("U.S. Energy Information Administration (EIA)", n.d.), while its GDP increased by nearly two folds. This leads us to surmise that the US has been experiencing some levels of relative decoupling of its economic growth from its energy usage. Further, if we look at Figure 1, CO2 emissions per capita have steadily declined in the USA for the period of 1990-2010.

This article aims to seek how much of the changes in USA’s decoupling figures can be explained with its exergy efficiency accounts. If we look at figure 2, we observe that USA’ s exergy efficiency has steadily increased for the period of 1990-2010, until it suffered a sharp decline in 2010.

However, if we take a look at the USA's energy mix for the period under consideration, we observe that the energy mix hasn’t undergone any significant changes and the share of various energy sources have remained relatively constant. However, in the period between 2010 and 2019, drastic decrease in high carbon emitting fuels such as coal and oil is visible. Between 2010 and 2019 coal’s share in the energy mix declined from 23% to 17%. Moreover, the share of renewables increased from 16% to 18% and the share of low carbon emitting fuels increased on an average of 3.1% annually from 22% to 30%. Subsequently, the total energy supply during this period declined from 22,14,655 Ktoe to 22,00,000 Ktoe. However, USA’s real GDP for this period increased on an average of 2.3% annually. This implies that USA has experienced some level of decoupling following the 2000 decade.

Consequently, we look at the exergy efficiency trends in the country. If one closely considers the concert of exergy efficiency and the second law of thermodynamics, they can observe that exergy efficiency can be achieved by making the production process more robust (Laitner, 2013). This implies that exergy efficiency is driven by technological change or more importantly, innovation.

IV. A. Exergy Efficiency and Decoupling

If we logically follow this train of thought, one can draw the connection between exergy efficiency and economic decoupling. To empirically establish this relationship, we look at

Pearson’s R for the dataset provided in the appendix, which lists the CO2 emissions as a percentage of GDP and the exergy efficiency of the USA for the period of 1990 - 2010. Pearson’s R indicates the degree of correlation and ranges from -1 to 1. For the dataset at hand it stands at -0.7629, which indicates that there is a strong negative correlation between CO2 emissions per capita of GDP and exergy efficiency trends for the USA. V. POLICY RECOMMENDATIONS The policy implications of the above analysis are quite stark. Firstly, paramount importance must be given to collection of data on primary and useful exergy quads on an aggregate level. To achieve the sustainable development goals by 2030, emphasis must be laid on collecting data on variables that can serve as effective indicators for measuring the emissions and decoupling rate. Conclusively, exergy efficiency accounts can act as a positive indicator of technological progress. Secondly, taking into account the rebound effects of increased exergy efficiency and the cycle of economic growth that would result from this increase, imposing a carbon tax on the use of energy sources could put this growth cycle into reverse. Increased cost of an energy source would naturally increase the exergy price as well. This would lead to reduction in the demand for energy and reduction in economic growth inadvertently negating the rebound effect, while minimally affecting the emission rates (Ayres & Warr, 2009). Thus, emphasis must be laid on increasing conversion efficiency while providing incentives for employing clean energy fuels. VI. CONCLUSION Technological progress and innovation can help us reduce carbon emissions, as has been observed in the USA's case through the course of this analysis. Thus, achieving exergy efficiency, which reflects this progress, could provide economies with an opportunity to evade the trade off between economic growth and environmental sustainability.