Wednesday, June 13, 2007

Musings on the "cost" of switching to climate friendly energy

I keep seeing people refer to major economic costs of reducing CO2...and it got me wondering about these costs. How major are they? are they being purposefully overblown?

Will a doubling or a tripling of the cost of energy over the next 30 years end our way of life?

Clearly not, it would simply restore the proportion of our GDP spent on energy to where it was 30 years ago.

At worst 2-3x is what it will cost to switch to renewable sources of energy. Since renewable sources (minus hydro) make up less than 1% of our energy use, we can expect the average price of energy from renewable sources to fall as the various technologies reap greater economies of scale.

Solar PV is widely accepted to be one of the most expensive zero-carbon energy sources and that only costs twice the delivered cost of electricity from other sources. Wind is clearly competitive with fossil fuel sources (+/- 20%) depending on location. Both of these sources will benefit from an investment in energy storage (many methods are available to store energy) which could add anywhere from 0-50% to the price of energy.

Consider that the cost of oil has already quadrupled within the past decade and in the US oil comprises 40% of our total energy use. On average this means our energy costs have more than doubled during the past decade alone. Certainly not fun, but hardly the end of our way of life.

Furthermore even a modest 2.5% energy price inflation rate will double average costs in 30 years. Energy prices have been rising much faster than this in recent years. If you consider the likely future increases in energy prices, renewable sources represent an inflation hedge which could negate any “perceived” upfront premium. For example if energy prices rise much faster than we expect, today's investment in renewable sources may turn out to be no more expensive than continuing to use CO2 spewing fossil fuels.

Of course once society understands/admits/recognizes that energy will cost more in the future, we will use it more efficiently. Greater energy efficiency means that we will learn to use less of it to do what we want, which means that we won't end up spending so much more for energy in the future as (perhaps) we currently fear.


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