Conventional economic wisdom says that it’s costly and inefficient to spend a lot of money fixing a problem before the necessary technology has matured. By that logic, the environmental pluses from quickly stopping climate change have to be weighed against the economic minus of higher costs.
But a study published last year in the scientific journal Joule lays out a more encouraging case. The peer-reviewed article, “Empirically Grounded Technology Forecasts and the Energy Transition,” says that “in a faster transition, we are likely to reach lower costs sooner.”
The authors write:
Rapid replacement of fossil fuel technologies by low-cost key green technologies — in power and transport in particular — causes the expected annual energy system cost in 2050 for the Fast Transition scenario to be $514 billion cheaper than that for the No Transition scenario, although the distribution of possible costs for the Fast Transition is wider.
The “fast transition” is defined as eliminating fossil fuels by around 2050. The key to the savings is that one learns by doing, as anyone who tries to hang wallpaper or make a crepe for the first time will confirm. The authors invoke Wright’s Law, which is not a hard-and-fast law but more of an observation that was made in a 1936 paper by the engineer Theodore P. Wright, who said that costs fall as production experience grows.
The authors are Rupert Way, Matthew C. Ives, Penny Mealy and J. Doyne Farmer, all of whom are affiliated with the Institute for New Economic Thinking at the Oxford Martin School. The first three authors are also at the University of Oxford’s Smith School of Enterprise and the Environment; Farmer is also at the Santa Fe Institute in New Mexico.
They focus on four green technologies: solar power, wind power, battery storage and P2X electrolysis. That last one is short for “power to X,” where X represents a synthetic fuel. The idea of P2X is to use renewably generated electricity (the “power”) to electrolyze water, releasing hydrogen, and then either burn the hydrogen or combine the hydrogen with something else to make a fuel (the “X.”) Combining it with nitrogen yields ammonia. Combining it with carbon dioxide makes a hydrocarbon fuel. This is carbon neutral because the amount of carbon dioxide that’s produced by combustion of a synthetic fuel roughly equals the amount of carbon dioxide that was captured to make the fuel.
In rough numbers, the costs of solar photovoltaics, wind turbines and batteries (which store the electricity generated by solar and wind) have been dropping at a rate of nearly 10 percent a year for several decades, the authors write. P2X electrolysis is newer but is also getting cheaper rapidly, they add. In contrast, they write, there’s less room for reduction in the cost of fossil fuels because the technology is already well advanced, and the resources are becoming harder to find.
“High-tech technologies tend to get cheaper because of ever-increasing knowledge accumulation. Comparatively lower-tech technologies can’t get much cheaper because we’ve accumulated all the knowledge we can already,” Way wrote in a follow-up email.
While Wright’s Law posits that cumulative production causes prices to drop, because people learn by doing, an alternate hypothesis is that the causality runs in the other direction: Prices drop, so production increases. In the case of tank production in World War II, the causality clearly ran from higher production to lower costs, according to a 2020 paper by Farmer and two other authors. The Joule paper paraphrases the 2020 one: “Roosevelt did not say, ‘Tanks are getting cheaper, let’s build more,’ but rather ordered the production of as many tanks as were needed to win the war.”
In most cases, the Joule paper concludes, the causality runs both directions: “There is a virtuous cycle, in which increasing production causes lower costs and lower costs cause increasing demand, which increases production.”
Way said that the paper has been well received in policymaking and industry circles but faced some resistance on its journey to publication from technical experts on various kinds of energy. “The more expert you are at something, the more able you are to see the hurdles,” he said. “They always err on the slower side. It adds up subtly in a way you don’t comprehend to an overall pessimism.”
It’s certainly true — and documented in the Joule paper — that technical experts have repeatedly underestimated the pace of cost reductions and deployment of solar and wind technology. That could be a sign that Wright’s Law is real and underappreciated. If so, then pushing to increase the output of green technologies faster could have big payoffs for budgets as well as the planet.
Outlook: Michael Gapen
The Federal Reserve’s rate-setting committee, which concludes a two-day meeting on Wednesday, is likely to raise its target for the federal funds rate by a quarter of a percentage point, putting the top end of the range at 5 percent, Michael Gapen, head of U.S. economics at Bank of America, said in a note to clients on Friday. He wrote that members of the forecasting team are sticking to their forecast that the Fed will continue hiking until the top end of the target range reaches 5.5 percent, but that because of recent financial stress, “we now see greater risk that Fed tightening could end sooner, whereas we saw risks skewed to the upside previously.” If there’s more financial stress in the days before the vote, he wrote, “The Fed has options. In the past, the Fed has sometimes paused rate hikes in the face of stress, only to resume them later.”
Quote of the Day
“Individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful or masochistic.”
— Gary Becker, Nobel lecture (1992)
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