Ecological Economics 31 (1999) 381 – 394 ANALYSIS Is energy cost an accurate indicator of natural resource quality? David I. Stern * Centre for Resource and Enironmental Studies, The Australian National Uniersity, Canberra ACT 0200, Australia Received 16 July 1997; received in revised form 8 February 1999; accepted 21 May 1999 Abstract The use of energy cost as an indicator of natural resource quality is examined. Energy cost is the direct and indirect energy used to produce a unit of a resource commodity. Different approaches to the role of energy in the economy are discussed and it is demonstrated theoretically that energy cost can give false indications of changes in resource quality. This is because energy cost is only an accurate indicator of resource quality if either energy is the single primary factor of production and the economy can be represented by an input–output model, or if there is substitutability between the factors of production, then marginal products must be proportional to the factors’ embodied energy. These conditions are tested empirically using data from the US agricultural sector. The results show that there is substitutability and marginal products are not proportional to embodied energy. However, the strong neoclassical assumption of price-taking profit-maximization can be rejected at a 5% level of significance, though not at the 3.5% level. The generality of the empirical results may be restricted due to data limitations but the theoretical framework can be applied to other data sets, other resources, and even other indicators. © 1999 Elsevier Science B.V. All rights reserved. Keywords: Resource quality; Energy cost; Energy analysis; Scarcity; Indicators www.elsevier.com/locate/ecolecon 1. Introduction This paper critically examines the basis for, and appropriateness of, energy cost as an indicator of natural resource quality. Energy cost is the amount of direct and indirect energy required to extract and process a unit of a resource to a given standard. Energy cost has been used by some energy analysts as an indicator of natural resource quality (e.g. Cook, 1976; Chapman and Roberts, 1983; Hall et al., 1986; Cleveland, 1991). Resource quality is the productivity of the resource stock when all controlled inputs such as capital, labor, and energy are held constant. Changes in produc- tivity are then either the result of improved tech- nology or changes in the natural environment. Resource quality is an indicator of natural re- * Tel.: +61-2-6249-0664; fax: +61-2-6249-0757. E-mail address: dstern@cres.anu.edu.au (D.I. Stern) 0921-8009/99/$ - see front matter © 1999 Elsevier Science B.V. All rights reserved. PII:S0921-8009(99)00060-9