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Facts in Energy and Environmental Economics

Facts in Environmental and Energy Economics, Models and Practices, Past and Present: Introduction

Guido Erreygers, Marion Gaspard and Antoine Missemer
p. 411-418

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1In all fields of economics the relations between theories, models, and facts are objects of concern. This holds especially in environmental and energy economics, where facts are complex and multidimensional: they include not only observable economic variables determined by individual and social behavior, but also biophysical and ecological processes, geological constraints and climate-economy interactions. These are fields where peculiar methodological questions in economics may arise—related to intertemporal representations, uncertainty, projections or incomplete validation protocols—as well as questions associated to the cooperation with other disciplines (climatology, biology, physics, political sciences, among others).

2Environmental and energy economics have a long history. Resources and pollution have been subjects of economic research at least since the 19th century (Kula, 1998; Schabas, 2005; Albritton Jonsson, 2013; Wolloch, 2016). The Industrial Revolution boosted the reflections on energy sources, particularly fossil fuels (Missemer, 2017; Turnbull, 2017). Local pollution, firstly observed by lawyers, local rulers, and citizens (Massard-Guilbaud, 2010; Fressoz et al., 2014), became a subject of economic investigation with Pigou’s classic contributions and with the design of new instruments in the 1960s and 1970s. The post-WWII period was also the moment when the economic measurement of environmental amenities emerged, notably at the newly founded think-tank Resources for the Future (Banzhaf, 2019).

3With respect to the relation between models and facts, the case of exhaustible resources is particularly relevant. Until the 1920s, economists involved in research on exhaustible resources mostly tended to propose theoretical frameworks that took into account some facts (physical or economic limits to ore extraction, technological inertia). In the turmoil of the 1920s, the theoretical, abstract position defended by Hotelling (1931) was in contrast to more empirically grounded studies conducted in the American institutionalist context (Pogue, 1921; Stocking, 1925; Tryon, 1927). Hotelling gave birth to a theoretical tradition that showed strong heuristic power, in particular in the 1970s (e.g. Solow, 1974; Dasgupta and Heal, 1979), but struggled to stick to reality, in terms of both assumptions and results. In the post-WWII period, the institutionalist approaches were renewed by engineering studies and system analysis, more in line with geological and biophysical “facts” (Hubbert, 1956; Meadows et al., 1972), but sometimes accused of not taking into account economic mechanisms (Solow, 1972). We should avoid, however, reducing the position of each camp into a caricature: Hotelling actually was sensitive to political and geological issues (Franco, Gaspard, and Mueller, 2019; Ferreira da Cunha and Missemer, 2020), and the most recent applied literature discusses consumers’ demands, not only physical supplies (see Jakobsson et al., 2014 for a review). Nevertheless, we can see how much the problem of empirical realities has structured the economic analysis of exhaustible resources.

4Issues about the articulation between theories, models, and facts were raised also in other branches of environmental and energy economics. Regarding pollution, in the 1960s-1970s, missing data obliged economists to replace the classic Pigouvian perspective, and even some Coasean intuitions, by cost-effective second bests in the design of regulation measures (Baumol and Oates, 1971; see Berta, in press). This suggests that even when it is an abstraction, a model needs facts (here data) to be operational. Energy economics also experienced conceptual changes involving empirical concerns. From the late 1940s onwards, marginal cost pricing and other theoretical innovations found very practical applications on the electricity market (Yon, 2016). This may highlight that some phenomena (e.g. electricity as a homogenous good, with no stock effect, etc.) are more amenable to theoretical abstractions than others (e.g. oil, which is heterogeneous in its concrete forms).

5Today, environmental and energy economists remain confronted with the question ‘what to do with facts’. Past treatments of this question have an influence on current practices. But facts in the 21st century also bring their own methodological challenges. Climate change is systemic; to measure its impact requires the incorporation of both economic and biophysical data. This is the role of integrated assessment models (IAMs), which emerged in various communities, some of them not alien to the energy systems tradition (Huet, 2015; Cointe, Cassen, and Nadaï, 2019). IAMs face new questions in relation to their articulation with facts (interdisciplinary dialogue, incorporation of material flows in economic frameworks, connection between empirical findings on climate damage and damage functions in the models, etc.).

6When we launched the call for papers for this special issue, we solicited original contributions from economists, historians, and philosophers, on the ways in which environmental and energy economists conceive(d), construct(ed), and refer(ed) to “facts”. As might be expected from the preceding paragraphs, we defined facts broadly. In terms of observation, they could be empirical tendencies known as ‘stylized facts’; they could be derived from gross data or be the outcome of sophisticated statistical or econometric treatments; or they could be obtained through experimental protocols or simulations. As far as social behavior was concerned, qualitative dimensions were also at stake. This special issue aimed at bringing together various works on past and present experiences. It encouraged dialogue between creators or users of models and scholars more familiar with historical and methodological inquiry. We are grateful to Œconomia for hosting such a project.

7The set of papers published in this issue meets, for a large part, our initial objectives. In the articles selected for publication “facts” are defined as follows: given geological features, which oblige economists to revise the formal categories they are accustomed to (Roberto Ferreira da Cunha); ontological properties of resources, whose implications for equilibrium attributes (in particular for long-term trajectories of prices and distributional variables) should be disclosed (Christian Bidard and Guido Erreygers); given social and political practices, challenging the implementation of sustainable development strategies conceived by economists in their models (Emmanuel Combet); numerical simulations, allowing the tractability of models but implying a selection of the characteristics of forests to be represented in models (Miguel Rivière and Sylvain Caurla); flows of matter and energy shaped by value-based judgements as inputs to alternative schemes of calculation in kind and economic planning (Marco P. Vianna Franco); shared collective representations in experts’ (economists’) communities, being both a condition of knowledge—and cognition—and a way of influencing public decision-making (Kirsten Sophie Hasberg). Clearly, the spectrum of retained meanings here is particularly broad, revealing the wide range of approaches developed by energy and environmental economics to deal with the complexities of socio-economic and biophysical interactions.

8It deserves to be mentioned that our invitation to reflect on the status of facts in these fields led to contributions in which not only the relationship between facts and theory is submitted to a critical analysis, but also the relevance and uses of theory itself. This is where the history of economic thought comes in.

9In the first three papers, the history of economic thought helps to identify competing thought schemes, and to compare and to analyze different theoretical and methodological tools which can be used to study issues such as resource exhaustion and climate change.

10Christian Bidard and Guido Erreygers explore to what extent the integration of exhaustible resources into a classical model would change its properties, in particular with regard to the long-term dynamics of prices and distributional variables. More precisely, the issue concerns the introduction of a distinction that did not appear relevant at the end of the 18th or the beginning of the 19th century, viz. that between land and exhaustible resources. The subject is not new. The published contribution aims both at synthetizing the debate sparked by the publication of a special issue on the economics of exhaustible resources nearly twenty years ago in Metroeconomica, and at further exploring the properties of classical models with exhaustible resources. The debate is not closed and will probably continue for a while, as is testified by Heinz D. Kurz and Neri Salvadori’s comment on the article by Bidard and Erreygers. Both contributions raise questions about what kind of theory is needed to understand the long-term socio-economic transformations coming from the progressive exhaustion of resources. They show us how classical theory is challenged by the insights about exhaustible resources formulated by Hotelling (1931) within the framework of neoclassical theory.

11Marco P. Vianna Franco invites us to discover how, at the beginning of the 20th century, two major members of the so-called “Other Austrian Economics”, Josef Popper-Lynkeus and Otto Neurath, tried to construct a “natural resources flow accounting”: a system of accounting integrating flows of matter and energy as well as social behavior and values. Their socio-ecological approach to economics (“a holistic approach” interconnecting “physical and psychical phenomena”) aimed at defining a medium way between the Austrian subjective theory of value and the German historical school in order to produce concrete instruments for planning. The aim was to define a portfolio of possible development trajectories warranting improved living standards founded on a rational relationship between nature and society.

12It is in more recent contributions, and in particular those of Edmond Malinvaud and Sukhamoy Chakravarty in the 1990s, that Emmanuel Combet finds material for dealing with sustainability and planning. His enquiry starts from the fact that economists’ usual solutions to climate change, such as taxation and carbon pricing, fail to win political approval and to incite significant modifications of behavior. Economic theory, however, has at its disposal operational concepts able to articulate preferences (or individual objectives) and realities: beliefs and expectations. Combet advocates “a deliberative approach to planning” as an instrument for coordinating beliefs and expectations towards a desirable path of transformation, involving all stakeholders, from experts to citizens.

13Thinking about the place of empirical validation in resource economics, the authors of the next two papers of the special issue sketch a new history of their research field. Roberto Ferreira da Cunha reviews the theoretical and empirical literature on nonrenewable resources, recalling that one of its central tenets (the famous Hotelling Rule) lacks empirical validation, except for the specific case of mineral nonrenewable resources. He suggests that the distinctions between renewable, nonrenewable, or indestructible resources, inherited from Hotelling’s views, and fundamentally driven by mathematical tractability, may have put resource economics on the wrong track. According to him, the system of classification of natural resources based on a resource’s degree of exhaustibility should be replaced by a system considering geological constraints more precisely. His paper critically reviews the historical evolution of the interplay between geological facts and economic theories for nonrenewable resource supplies.

14Miguel Rivière and Sylvain Caurla focus on forest economics. They take the example of forest sector models (FSM) and show how simulation historically emerged as a research method and as a way to support decision-making. Considering models as representations of real-world systems, they highlight the blurry boundaries of the forest sector, which prompt modellers to make choices regarding both the facts represented (forest growth, timber markets) and methods used to do so (econometrics, mathematical modelling, rule-based approaches). Following Morgan’s (2012) account of how economists use models, Rivière and Caurla discuss the role played by narratives and scenario analysis in FSM research.

15In the last paper of the special issue, the history of a specific decision making process provides the material for an inquiry into the choice and use of economic techniques in public policy. Kirsten Sophie Hasberg analyses the theoretical, institutional and political processes leading to the construction of Viking Link, a British-Danish interconnector now under construction. She studies the conditions under which cost-benefit analysis was chosen to structure information and to evaluate the project, whereas alternative techniques were ignored. The case study is here offered to illustrate how the power of choosing scientific devices may end up reinforcing the political power of still dominant energy infrastructures and hindering democratic deliberations about energy regulation and climate change.

16All these contributions provide very different insights into the topic of facts in environmental and energy economics. And they do not exhaust the subject. But they clearly show that the ontological and methodological issues related to the consideration of empirical realities in economics are large in number, and deserve the attention of both historians of economic thought and contemporary theoreticians and practitioners.

17We would like to conclude this introduction with a few words of context and acknowledgments. The call for papers for this special issue was launched on the basis of discussions that took place at the international workshop ‘Facts in Environmental and Energy Economics’, CIRED Paris, October 2018. This workshop gathered more than fifty scholars from almost ten countries, including historians, economists, and specialists in the history and methodology of economics. The workshop was itself part of the research project ‘Bifurcations in Natural Resource Economics (1920s-1930s)’ (#BNREproject) funded by the European Society for the History of Economic Thought (grant 2017-19). This project explored the structuring of natural resource economics in the 1920s and 1930s, with special attention to exhaustible resources, especially through the work of Harold Hotelling. The special issue can be considered as an indirect outcome of that project, the main deliverables of which have renewed the historiography of natural resource economics from the early 20th century, addressing also the question of empirical concerns in the literature of the time (Franco, Gaspard, and Mueller, 2019; Gaspard and Missemer, 2019; Ferreira da Cunha and Missemer, 2020; Missemer and Nadaud, 2020; Missemer, Gaspard, and Ferreira da Cunha, 2020). A special thanks, therefore, goes to ESHET for its support in that project.

18We hope this special issue will encourage historians and philosophers of economics to further enquire into energy and environmental issues, and contemporary practitioners to read and conduct historical and philosophical research.

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References

Bibliographical reference

Guido Erreygers, Marion Gaspard and Antoine Missemer, Facts in Environmental and Energy Economics, Models and Practices, Past and Present: IntroductionŒconomia, 10-3 | 2020, 411-418.

Electronic reference

Guido Erreygers, Marion Gaspard and Antoine Missemer, Facts in Environmental and Energy Economics, Models and Practices, Past and Present: IntroductionŒconomia [Online], 10-3 | 2020, Online since 01 September 2020, connection on 24 October 2021. URL: http://journals.openedition.org/oeconomia/9171; DOI: https://doi.org/10.4000/oeconomia.9171

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About the authors

Guido Erreygers

University of Antwerp. guido.erreygers@uantwerpen.be

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Marion Gaspard

University of Lyon 2, Triangle. marion.gaspard@univ-lyon2.fr

Antoine Missemer

CNRS, CIRED. missemer@centre-cired.fr (corresponding author)

By this author

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Les contenus d’Œconomia sont mis à disposition selon les termes de la Licence Creative Commons Attribution - Pas d'Utilisation Commerciale - Pas de Modification 4.0 International.

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