Renewable energy economics

Fossil-fuel-led growth has been a major contributory factor to rapid rise in carbon emissions. Emissions of CO2 from fossil-fuel combustion and industrial processes contributed about 78% of the total GHG emissions increase from 1970 to 2010. Cutting down on use of fossil fuels and shifting to clean energy sources is therefore a major strategy for combating global warming. This chapter discusses the economic principles that should govern renewable energy choices. Renewable energy sources including biomass energy, water power, wind, solar, and geothermal energy have somewhat different characteristics than fossil fuels: they are capital-intensive with their costs dependent on interest rates, their costs are highly dependent on their scales and production sites, and many renewable energy sources are available only intermittently. Minimizing the total cost of providing renewable energy suggests that marginal costs of individual renewable energy sources be equal. In many areas, use of more expensive sources such as solar photovoltaic energy will thus make it economical to develop hydropower and wind power on sites that might not appear feasible currently. Similarly, the marginal cost of renewable energy suggests that additional energy conservation will be economical, and a large portion of the transition to renewable energy will likely be accomplished through energy conservation rather than energy production. To minimize total costs, equality of marginal costs must also hold at all points of time and from all points in space, suggesting possibilities for energy storage and long-distance energy transmission facilities. While the market would eventually accomplish a renewable energy transition as a result of rising fossil-fuel prices, public policy will likely be needed to make the renewable energy transition soon enough to avoid the worst effects of climate change.