Arnold Kling  

Economics for Environmentalists

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The Airline Union Game... Comment of the Week 2003-02-27...

At the fascinating Longbets web site, Robert A. Freling of the Solar Electric Light Fund makes this bet:


By the year 2020 solar electricity will be as cheap or cheaper than that produced by fossil fuels

I wish that environmentalists knew basic economics. In a free market, the price of electricity is the same regardless of which energy source is used to produce it. If electricity is selling for 2 cents a kilowatt, then the use of fossil fuels adjusts to where it costs 2 cents a kilowatt on the margin to produce energy using fossil fuels. The same thing happens with solar.

Freling believes that we will have to shift away from fossil fuels and toward solar power over the next twenty years. In textbook economic terms, he is saying that the cost curve for using fossil fuels will shift upward while the cost curve for using solar power will shift downward. If that happens, what we will observe is a change in the quantities used for the two sources of energy. But for market-competitive electricity, the marginal cost will be the same, regardless of energy source.

For Discussion. Assuming that Freling is correct about the future shift in cost curves, what energy policy, if any, is called for?


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COMMENTS (4 to date)
Jack writes:

Isn't that a bit harsh?
There is not a single market price for electricity and sunk capital costs in the fossil fuel market may give the question meaning.
Maybe he ought to have said that "by 2020 a new 1GW power station will be cheaper if it is solar" although even that could be finessed.
Also if the consequences you suggest actually occur could he not claim that solar energy was cheaper?
Assuming you are boht correct about cost curves, obviously no energy policy is necessary.
Interesting issue though.

Bernard Yomtov writes:

This is very excessive nitpicking. Surely he is referring to the cost curves, or average production costs, not the marginal cost or, equivalently, the price.

And as long as we are in nitpick mode, electricity is hardly sold in a classic competitive market.

Ironically, if it were, we might see more rapid movement toward solar or other environmentally friendly sources. I would be willing to pay a small premium, say 5-10%, for electricity from a low-pollution source. If enough other people were willing to do the same incentives would encourage the development of new sources.

Alternatively, if the market functioned as it should, assigning the full social cost of producing and burning coal, say, to electricity users, the effect might be the same.

So perhaps it is not only some environmentalists who do not understand economics.

Brad Hutchings writes:

Obviously, an enlightened energy policy of the future will need to subsidize fossil fuel production to save jobs and promote conservation of the sun. At our rate of energy consumption, the sun will run out in a few billion years.

More seriously, and in line with previous comments, the full social cost of solar energy capture and battery storage will need to be factored in by regulators.

-Brad

Bernard Yomtov writes:

"More seriously, and in line with previous comments, the full social cost of solar energy capture and battery storage will need to be factored in by regulators."

I agree that they need to factored in. If the market doesn't do it, as it doesn't with fossil fuels, then regulation might be desirable.

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