Energy return on (energy) invested (EROI) is a ratio that measures the energy input and output of an energy production process. The energy inputs included in the calculation can vary based on 1) what kind of inputs (e.g. direct, indirect, externalities) are included, and 2) how much of the energy supply chain is included in the analysis. EROI has been used to assess both conventional and alternative fuels, integrated with environmental and sustainability analyses, and has been used to discuss the contribution of energy to economic growth.
While EROI is interesting from a methodological perspective given its potential variability, it is of most use when making data-driven financial and investment decisions. In their review article, Murphy and Hall remark that policy decisions should be based on both EROI and financial analyses i.e. that investments should be made only when the financial return and EROI are sufficiently high. The primary example provided that shows how important EROI can be in guiding investment decisions is with regards to the corn ethanol industry. The U.S. subsidized the corn ethanol industry even though that it had a very low EROI and low (even negative?) financial return – and potentially net negative environmental impacts. This is obviously an inefficient use of resources.[1] Subsidies should instead be used to encourage those energy production activities that have a lower than market return, a positive EROI, and net positive environmental impacts.
In addition to illuminating issues with the U.S.’s subsidization of corn ethanol given its low EROI, EROI research has also uncovered significant issues with the U.S.’s energy accounting system. Historically, the economic production function was believed to be a function of capital, labor, and “technology.” It has since been learned that the economic production function is a function of capital, labor, and “applying more energy to the process;” and energy is more important than either capital or labor. In other words, it has been possible to correlate U.S. economic growth to its increase in its EROI. However, more research into EROI has revealed that U.S. EROI has not been increasing over time, and consequently, that growth in U.S. GDP has been overestimated via some “cooking of books” by the U.S. Department of Commerce.
Through EROI research, it has been found that the U.S. energy base is declining in both quantity and quality. If this is the case, then it seems inevitable that the GDP rate of growth is also in decline. What does this mean for the role of technological optimism? And what is the point of the U.S. continue to “cook the books” if this trend is irreversible and inevitable? It seems (incredibly) problematic that the U.S. is obfuscating data that might inspire systemic change e.g. if economic growth is no longer achievable perhaps we can reorient to other more indicators (like quality of life or socioeconomic equity) that are both viable and more meaningful given the state of our energy future.
References:
Murphy, D.J., and C.A.S. Hall, Year in Review – EROI or energy return on (energy) invested, Annals of the New York Academy of Science, 1185, 102-118, 2010.
[1] This policy change seems clearly attributable to the work of the corn ethanol lobby. So some people are obviously making money – and so I wonder how helpful it’ll be to do these kinds of analyses when the political situation in the U.S. is so convoluted anyway i.e. are policy decisions ever data-driven?