Energy as a factor of production and entropy as a pollution indicator in macroeconomic modelling

Abstract Fluctuating energy prices and the environment's limited capacity for absorbing pollution constitute significant uncertainties for future industrial evolution. Solving a set of differential equations and using the Simplex algorithm in linear programming we look into the questions how changing energy inputs and prices have affected industrial growth in the past, and how the energy system can be optimized so that pollution becomes minimum in the future. We obtain production functions which depend linearly on energy and exponentially on the ratios of labor/capital and energy/capital. They describe well the growth of output in West Germany and the U.S.A. during the last two decades and the responses to theenergy price explosions. Energy conservation was an important response element. The most optimistic possible savings of primary energy by heat exchangers, heat pumps and cogeneration at (the present) fixed energy demand profiles are computed to be 54% in the Netherlands, 36% in West Germany, and 59% in Japan. A pollution indicator “entropy production” is proposed and incorporated in a model of enviromental constraints on industrial growth.

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