The Good Guy Doesn't Always Win...

...On Price

A Convenient Untruth

As I mentioned last time, we need to deploy green solutions at massive scale: billions of tons of carbon-neutral concrete per year, terawatts of solar panels, over one billion electric vehicles…

How can we marshall resources of this scale? A popular answer these days is “market forces”. As climate-friendly technologies climb the learning curve and become cheaper than conventional solutions, the invisible hand of the market – in all its majestic power – will make everything right. Or so the story goes.

It’s a pretty good story! Certainly the market can upend established industries; ask Nokia or Kodak. And so you see it all over the climate conversation. Headlines like Solar is now ‘cheapest electricity in history’. Arguments like “Only market forces can drive the change we need”, “people won’t spend more to buy green”, and “increasing scale will bring down the cost of green solutions”. However, this story relies on a hidden assumption: that green solutions will soon become cheaper than the status quo in every sector.

It’s understandable that no one questions this. It’s such a convenient assumption. It suggests that we can forget about messy policy arguments and just innovate ourselves back to a healthy planet. But just because the idea is convenient, doesn’t mean it’s true.

Is Greener Always Cheaper?

I dunno! But I don’t think we can count on it.

I mean, you can certainly make a case. The ferocious cost decline of solar, wind, batteries, and other critical technologies, has outpaced every projection. Maybe there’s something inherently efficient about processes driven by sunlight. Certainly there is massive R&D spending, startups are popping up out of the woodwork, you can’t take three steps without tripping over someone climbing a learning curve. Companies working on green solutions benefit from motivated workers, mission-driven investors, and government incentives.

On the other hand, the simple seductiveness of the idea should make us wary. Existing solutions have the benefit of massive historical investment. Our entire global infrastructure is designed to support them, and regulations often favor them. Workforces are trained on them. Friction and inertia make it difficult to adopt a new technology even if it’s theoretically more cost-effective.

For me, there are three clinchers. First, we only have to lose once. If we find cheap-and-green solutions for electrical power, steel manufacturing, and residential heating… but not for, perhaps, cement… then the idea breaks down.

Second, we’ll face long-tail problems on both the supply and demand sides. On the supply side, some fossil fuel sources, such as Saudi oil, are extremely cheap and may remain cost-competitive when other sources have been driven out of the market. On the demand side, some markets – say, long-haul air travel, or Alaskan homes in winter – will be particularly challenging for clean energy.

Finally, to reach net zero and mitigate past emissions, we’ll inevitably need to remove some CO2 from the atmosphere. The “dirty” alternative to that is to do nothing, which is free. It’s hard to be cheaper than free. (Yes, some companies are planning to use captured CO2 to create useful products, but doing that cost-competitively and finding markets large enough to absorb gigatons of carbon annually is a huge challenge.)

The Market Has Its Own Agenda

Market forces are powerful, but they don’t always work in our favor. This can be confusing, because often market forces are helpful. Markets are very good at optimization: minimizing resource usage, maximizing worker productivity, producing the right goods and services in the right place at the right time using the right inputs.

However, as is well known and yet somehow often forgotten, markets have huge blind spots, known as “externalities”. Wikipedia defines an externality as “a cost or benefit for a third party who did not agree to it”. Greenhouse gas emissions are a textbook example; they impose costs on the entire world, but emitters do not have to pay for those costs.

An elegant solution is to “price in” the externality, which in this case would ideally mean a carbon tax. However, so far that has been politically infeasible, at least in the US. We can keep trying to price in the externality, but we shouldn’t count on it.

The result is that the market does not “know” the importance of minimizing emissions, and market-driven decisions do not take this critical fact into account. When a coal plant closes down, replaced by a cheaper solar plant, that doesn’t demonstrate any special ability of the market to do “the right thing”; it just so happens that the coal plant was more expensive to operate even without taking into account the externality of CO2 emissions.

So Should We Just Forget About Cost?

Absolutely not! Cost is critical. Lowering the cost of green solutions doesn’t cause the market to care about emissions, but it can trick the market into achieving the same result. When clean solutions can win on price, that will be a huge tailwind for adoption. And winning by a lot is better than winning by a little.

Even when we can’t win on price, we should work just as hard to bring costs down: losing by a little is better than losing by a lot. When we need to rely on policy or other non-economic means to push higher-cost solutions, the smaller the cost penalty the easier the push.

And while it’s always important to optimize cost, we should also always pay attention to non-cost factors: incentives, friction, policy, public opinion. Whether we’re working with market forces, or against them, every incentive helps. We need to use every tool available to accelerate the green transition. We can’t count on the “one weird trick” of learning curves and declining costs to carry the entire burden.