D-3356 ECONOMIC VULNERABILITY AND THE ENERGY TRANSITION

The United States is currently undergoing a transition from rapidly depleting nonrenewable energy sources to "backstop " energy sources. Unlike previous transitions, the current transition will be marked by rising real energy prices and may profoundly affect the economy. Despite the acknowledged urgency of the problem, there is little agreement on the nature of the connections between energy and the macroeconomy. A system dynamics model is developed to analyze the macroeconomic effects of the energy transition. GNP, consumption, investment, wages and prices, and.other major energy and economic aggregates are determined endogenously. Though the model generates macroeconomic dynamics, it is based on an explicitly causal, behavioral theory of decisionmaking at the microeconomic level of individuals and firms. The model shows how delays in substitution and the development of new energy sources arise and lead to substantial economic vulnerability during the next several decades. The model is used to analyze the effects of government subsidies for energy technologies. The effects of subsidies for long-lead time, capital intensive centralized technologies are contrasted against subsidies of short lead-time, labor intensive, decentralized technologies; the latter are found to be far more effective in reducing the vulnerability of the economy during the transition. D-3356 ECONOMIC VULNERABILITY AND THE ENERGY TRANSITION [1