Capitalism Is Saving the World from Climate Change

Finally, some good news on climate

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There has been a quiet sea change in the climate change world. So quiet, in fact, that most people have missed it. But it is there, and it is having an enormous effect.

The change is this: Over the last ten years, the cost of solar energy has dropped by about 90%. In 2010, the solar company I worked for installed solar for about $11–12 per watt. Most projects were deeply subsidized. When I left the industry in 2021, large rooftop installations were averaging $1.50 per watt, and ground-mounted systems were approaching $1 per watt.

What does that mean? According to a study by IEA, the cost of electricity from coal production in the US is $110/MWH, whereas the cost of solar is $44/MWH — 69% less cost. Similar differentials are true around the world, including in China and India.

As David Wallace-Wells shared on NPR’s Fresh Air, this means that long-term planners in the public and private sector are shifting their plans for a new energy future, and projections of climate outcomes are quite different from what they were only a few years ago. Based on assumptions that coal would remain cheaper than renewables, many modelers were predicting more than 5 degrees Celsius of warming, and they were looking at catastrophic outcomes. Today, those expectations are shifting.

How Capitalism Is Driving the Solution

What’s important here is why the change in modeling and predictions has occurred. The cost of solar has dropped and that has made the shift to renewable electric energy the rational choice for virtually all businesses, governments, and organizations. Read that again. Solar and wind, in particular, are now the rational choice for people throughout the economy. It’s not about being a do-gooder. It’s not about altruism. The truth is, it is now about capitalism. Competitive price pressures are forcing the adoption of renewable energy. Capitalism, of all things, is now driving the solution.

While interest groups of various kinds are promoting their agendas for reduced consumption, spartan living, or even socialism as a response to climate change, the animal spirits of capitalism are pushing and changing economic behavior. No doubt, government policies have had an effect igniting this industry and the downward spiral of costs, but equally, no compulsory government policy could move the renewable industry forward faster than capitalism when the industry meets the need. It is astonishing to write it, but capitalism is now on our side.

According to Wallace-Wells, it is now cheaper to build new solar than it is to build new dirty power systems in 90% of the world. In fact, he said, in much of the world it is cheaper to build new solar than it is to operate an existing dirty power plant.

Here’s the thing about solar. When you make a big investment in a fossil fuel-powered power plant, you have to recoup that extraordinary investment, but every day you run the plant, you have incremental costs. In economics, this cost is called the marginal cost of reproduction. In a power plant, it is defined by how much fuel and labor cost is needed to generate the next kilowatt-hour of electricity. In fossil fuel plants, that question’s answer has two components, and you can see them on your bill. First, there is the standard rate you pay for electricity, say $0.06/kwh. That number is usually calculated from a combination of labor, maintenance, transmission, amortization of capital costs, and return on investment. The second number is something called the fuel cost adjustment, and that number reflects changes in fuel costs. In many places, that can be another $0.10/kwh plus or minus a lot. The average total cost of electricity in the US is $0.166/kwh, so you can see the impact of fuel costs. For my purposes, it is not how high the fuel cost adjustment is; rather, it is that the fuel cost exists at all.

Renewables Cost Advantages

Solar’s cost advantages are twofold. First, it is less expensive to build, so the first number on the bill can be lower. Second, there is no fuel, so that second number, which is a huge component of the total cost, is zero. There are no fuel costs because solar doesn’t use fuel. In other words, the marginal cost of reproduction is radically reduced and approaches zero.

Until now, part of the rhetoric on climate change has been a dire warning: “The era of cheap energy is over,” people have said. As far back as 1990, a Washington Post article opined on this. People have said that we had a 200-year blowout sale on hydrocarbons, and now we have to pay the price. No doubt, there is a price to pay, but it does not need to come in the form of higher energy prices going forward. The new reduced cost of producing renewable energy means that the era of cheap energy is not over.

Is Capitalism’s Shift Good or Bad?

Is this good? It depends on your point of view. For those looking to promote degrowth and an end to consumerism, cheap renewable energy is likely the death knell to their movements. When energy is cheap, like it was with fossil fuels, it is difficult to stimulate the kind of austerity degrowth and anti-consumption movements would need. The movements anticipated, however, that climate change would require massive changes in how capitalist society operates. Many commenters favor that kind of austere world and they may well have been correct that such a world would be required had solar energy not dropped so much in cost. Now, however, a low-cost, energy-driven economy can continue.

From a different point of view, this is great news. It means life can go on without major disruptions in lifestyle or standards of living, and we can achieve the emission reduction requirements at the same time. Rather than disrupting everything about how we live, all we need to do is switch the source of the energy we use. We need to build and buy electric vehicles, electric appliances, and electric heating products. We need to electrify our lives, but also our industrial processes and methods. As we do so, costs will go down, not up. We can rely on that to ensure that the ecosystem required for a new energy infrastructure will arise because the logic of capitalism supports it.

Let me be clear: Climate change is not solved. We have a long way to go. There is a sea change in how that will unfold, however, when capitalism suddenly turns and supports what needs to be done rather than fights it. I would think this change is something we can all be grateful for.

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