Riding to the rescue.

Photographer: Simon Dawson/Bloomberg

Capitalism Can Survive Cutting Carbon

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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It has been a source of enormous pleasure for me during the past five years to see the solar power skeptics proven wrong. Back in 2010, I almost never saw articles about solar's potential to replace fossil fuels as our primary energy source. Then, in early 2011, futurist Ramez Naam posted one of the most important articles in recent history. The post, titled "Smaller, cheaper, faster: Does Moore's law apply to solar cells?", demonstrated how solar power prices had been declining exponentially at a steady clip for decades. 

Naam quickly brought media attention to the solar revolution, and the floodgates opened. Suddenly, everyone -- including me -- was writing starry-eyed pieces about how solar would not only save us from Peak Coal and usher in an era of energy abundance, but might even save us from global warming in the bargain. 

But many skeptics remained. In November 2011, economics blogger Tyler Cowen wrote

Is there any reason, based in industry-wide market prices, to be optimistic about the near-term or even medium-term future of solar power?  I don’t see it.

Skeptics said that the fall in solar prices was a temporary phenomenon due to Chinese oversupply of polysilicon, an essential ingredient in solar panels. They said that the intermittency problem -- the sun isn't always shining -- would prevent solar from ever replacing coal and gas. They said that the industry was only surviving because of subsidies. 

So far, the skeptics have been proven wrong. Prices have continued to plummet. Companies such as SolarCity have grown impressively. The solar industry has proven to be hugely disruptive to coal- and gas-burning utilities. 

This has been enormously pleasurable to watch. Not because I like scoring gotcha points over the skeptics, but because I always enjoy seeing optimism pan out. For those who think that the days of heroic technological breakthroughs are behind us, solar's rise is a reminder that our species can still do great things. 

Of course, even if solar becomes big business and makes electricity cheaper, there is still one huge question left -- will it be enough to put a dent in climate change? 

There are good reasons to be skeptical here. Chief among these is the huge number of coal and gas plants that have already been built. Even if solar becomes cheap enough to replace new coal and gas plants -- as it is now doing in many regions, even with reduced or no subsidies -- it will be a long time before it becomes so cheap that it is economical to simply scrap existing fossil-fuel plants. Yet every day those old plants stay in operation is a day that they belch tons of carbon into the atmosphere. 

The second reason for pessimism is the income effect. If solar power becomes cheaper, we become effectively richer, and so our demand for energy rises. Since solar will not replace fossil fuels entirely, this income effect means that in some places, cheaper solar will mean more fossil fuel use and more carbon emissions -- or at least a far smaller reduction than we might hope. Solar's intermittency will add to this problem, since coal and gas plants will often be needed as backups for when the sun isn't shining. 

But new numbers are showing that solar may be enough to save us after all. A research report by J.P. Morgan Asset Management, led by Michael Cembalest and assisted by energy researcher Vaclav Smil, says that "deep decarbonization" is within reach at current solar prices.
QuickTake The Cost of Carbon 

Solar is intermittent, and requires fossil-fuel plants as backups. In a combined solar/fossil system, the fossil-fuel plants go unused for most of the day, including at peak usage times. The cost of maintaining fossil-fuel plants simply as backups is considerable, but it won't necessarily break the bank, especially since most of those stand-by plants are already built. 

The J.P. Morgan team uses a German decarbonization plan as a reference. They calculate that at current prices solar could reduce carbon emissions from electricity generation by about 63 percent. This enormous reduction would be costly -- it would increase U.S. electricity prices by about 90 percent from current levels. 

A 90 percent increase sounds like a lot. But it would only bring our electricity costs to about Japanese levels. Japan, of course, is able to sustain a rich consumer society with those high electricity costs, and so would the U.S. 

With further drops in solar costs and energy-storage costs, the price tag will naturally be even cheaper. The J.P. Morgan team estimates that the electricity price bump from a two-thirds reduction in emissions might be only 20 percent -- a small annoyance. 

In other words, deep decarbonization of our economy wouldn't force us to return to a pre-industrial civilization. It wouldn't require the end of capitalism, or even a substantial modification. Solar power is for real, and it can do what we need it to do -- as long as policy makers are willing and able to make the small sacrifice needed.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net