Solar and Oil: 2 Great Tastes That Taste Great Together

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Karl Smith -- Assistant Professor of Public Economics at UNC-CH & Blogger at Modeled Behavior

Climate Change has evolved into a political wedge issue in the United States. Part of the unfortunate fallout of this is that fossil fuels and renewables are viewed as competing tribal camps. One is either in the "drill-baby-drill" camp or in the solar power and plug-in hybrid camp.

An honest accounting, however, shows that these two energy paradigms are strongly complementary. Fossil fuels in general and oil and gas in particular provide ready sources of energy to support strong global growth.

A wealthy planet provides a large marketplace in which to recoup R&D costs from solar and battery research. And, completing the circle, more rapid solar development cuts down on long term emissions and the most troubling effects of climate change.

Some analysis suggests that photovoltaic generation of electricity could reach grid parity in 75 percent of the world's markets by 2020. As an economist, my tendency is to think physical scientists are underestimating the speed at which PV could overtake fossil fuels in the production of electricity.

As costs for the underlying technology fall, the incentive to lower the associated installation and infrastructure costs accelerates rapidly. A rapidly falling cost curve also provides enormous incentives for producers to rapidly establish dominance in the distribution channel.

If you know that there will be few if any barriers to entry in producing electric power then you want to build out a distribution system so advanced that no one can hope to match your lower costs of delivering power.

This arms race is likely to produce very rapid solar adoption. This effect will be magnified by the very low real interest rates that are likely to persist into the future. In a sense, the investment world is looking for a new bubble and solar power has all the right characteristics.

Seeing this vast potential in solar power, however, makes it all the more costly for us to delay or retard extraction of fossil fuels today. Cheap electricity puts downward pressure on the price of all fossil fuels, including to some extent oil. Battery technology may never replace gasoline, but repurposing natural gas from electricity and heat generation will increase its use as a long haul transportation fuel.

When prices fall far enough it will no longer be profitable to extract fossil fuels. The remaining carbon will simply be left in the ground.

In short, the more we invest in solar and the more rapidly the technology develops, the more we can afford to exploit our fossil fuel resources today.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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