Would renewables still be a good idea if fossil fuels didn’t have negative environmental consequences?

Given the push toward renewable energy that is happening these days, it’s natural for folks to start to demonize fossil fuels like coal, gas, etc.  I think this is a shame.  Cheap energy is a really great thing — and fossil fuels are really good at providing this. I’ve posted before about how important energy usage is for the health and advancement of humankind.  So, we have to be careful that a push toward renewable energy sources does not come at the expense of the health and welfare of the population — where cheap fossil fuels can save lives, we should use them without guilt!  It’s disappointing when folks like Bill Gates take flack for decisions like this

But, at the same time, there are also clear reasons to prefer renewable energy to fossil fuels in the long run.  Typically, people jump to environmental concerns as the hammer to motivate this.  Environmental issues are certainly one strong motivating factor, but for this post, I want to try to make the argument a different way.

In particular, even if we completely ignore all the points about pollution and environmental side-effects (which, of course, we shouldn’t do as a society), I think the value of energy usage for society makes a clear argument for investing in the development of renewables and, eventually, converting as much as possible to renewable energy.

Some assumptions

For this post, I’ll consider the following as the base assumptions.

1) We’ll completely ignore environmental effects of fossil fuels.  (Note, I do this only for a thought experiment — Human-influenced climate change is a fact, and one that we need to address sooner rather than later.)

2) More energy consumption is always better for society, but energy consumption has decreasing marginal returns.  This is a consistent trend across a wide variety of quality of life measures, c.f., my previous post on the value of energy consumption.

3) Fossil fuels are finite.  In this sense, fossil fuels shouldn’t really be thought of as generation; they should be thought of as an efficient form of extremely large scale storage.  We’ve been gifted (a long time ago) enough fuel to last us a very long time, and we’ve been working for centuries on how to extract it more and more efficiently.

4) Our efficiency at extracting energy from fossil fuels increases over time, as does our efficiency at extracting energy from renewable sources.  We’re pretty good at extracting energy now (much better than a century ago), but we’re still getting better at it, including being able to  extract energy from places where we couldn’t before. However, it’s important to remember that this improvement in efficiency requires an “investment” of energy consumption.

5) Initially, it is more efficient to extract energy from fossil fuels than from renewable sources.

That’s it.

These simple assumptions have very concrete implications.

The idea that fossil fuels are limited — there’s a certain amount in the earth that we’ll eventually be able to extract, and once we do, it’s gone — means that the fundamental tradeoff to consider is whether to use it now or later.

But, when one considers the fact that we get better at extracting it over time, the consequence is that the longer we wait to use it, the more energy we’ll get from it.  And, since the more energy consumed by society the better, it is clear that there should be a bias toward deferring usage of fossil fuels as much as possible.

What’s the alternative?  Renewable energy.  In contrast to fossil fuels, renewable energy is use-it-or-lose-it.  If we don’t grab it immediately, it disappears.  We’ll never be able to go back and extract the solar and wind that we missed in the past.  Thus, the trade-off between using it now versus using it later doesn’t exist.

Viewed this way, one can think of an interesting investment problem.  Starting from scratch as a society:

When should we make withdrawals from our capacity of fossil fuel?  

It’s easy to see what the structure of an optimal policy looks like.

Fossil fuel should be the dominant source early on, since it takes improved technology (an investment of energy) to develop sources to extract renewable energy as efficiently as fossil fuels.  However, once there are renewable energy sources that are near the effectiveness of fossil fuels, it is extremely wasteful not to make huge investments in renewable energy, since we lose it forever otherwise — which would mean wasting enormous amounts of energy that could be hugely beneficial for society.

Thus, irrespective of the policy of usage of fossil fuels, once renewable energy is efficient enough, we should be grabbing as much of it as possible, since it will disappear otherwise, and it will be a missed opportunity for our society!

In contrast, it is not clear what should be done with fossil fuels at this crossover point — it depends on the return on investment of energy usage (i.e., the benefit to society).  If the return on investment is high enough, then fossil fuels should be used (and invested in) just as before the influx of renewables.  However, once renewable generation grows high enough that the return on investment for fossil fuels is small (which will eventually happen given the decreasing marginal returns of energy consumption to society), it becomes best to save the remainder as an “investment” for the future (i.e., save it and wait for technology/efficiency to improve over time, or find other societal uses with better returns on investments).  This is not to say that no fossil fuels get used in this phase, but that renewable energy becomes dominant.

Given this simple story, the question becomes: where are we currently?

I think there is a strong argument to be made that we’re nearing the first crossover point (maybe a decade or so away).   Renewable sources like wind and solar are not yet as efficient as fossil fuels, but they are increasingly in the ballpark.  Further, with the improvements in energy storage that are happening, they are becoming increasingly viable for large scale replacement of significant fractions of fossil fuel.

The implication of this is that we are nearing the time where large-scale investment in renewable energy is the right choice — even when one doesn’t consider the environmental consequences of fossil fuels — because of the societal benefits that come from increased energy consumption.   Further, without considering the environmental consequences of fossil fuels, we are not yet to the point where it makes sense to curtail usage of fossil fuels — we should treat renewables as an opportunity to increase energy consumption further.  (Of course, in reality, environmental consequences should be considered too.)

That said, once we hit the crossover point, we are in a time period where the usage of fossil fuels should start to be justified by a calculation of their “return on investment,” which necessarily must consider the tradeoff between health & welfare benefits of increased energy usage and the costs (pollution, environmental damage, etc.).

An interesting final note is that an important part of this calculation of the return on investment of fossil fuels must be how much generation we can get from renewable sources.  If that number is small, then it is easy to argue the societal value of cheap energy produced by fossil fuels, and we should not curtail their usage (if we ignore environmental consequences).  But, as that number increases, the return on investment of fossil fuels shrinks (due to the decreasing marginal returns of energy consumption), and it becomes important to curtail their usage to save them as an “investment” for our future.

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7 thoughts on “Would renewables still be a good idea if fossil fuels didn’t have negative environmental consequences?

  1. Nice exercise.

    Another fun thing to add to your model: “efficiency at extracting energy from fossil fuels increases over time, as does our efficiency at extracting energy from renewable sources” — but these efficiency gains aren’t magically appearing on a timeline. They require investment.

    I expect that would push the crossover point earlier: R&D today on renewables increases the value of an infinite resource, whereas R&D on expendables increases the value of a finite resource (including making some of it have positive cost that previously had negative cost). But it’s too late for me to reason clearly about infinite sums with discount factors.

    • I agree Benoit, the value of investment should push the crossover point earlier, but it’ll all depend on the discount factor used. My guess is that it’s a second order effect compared to the other issues…

      • So your model roughly is: you have expendables and renewables, each has a cost curve that eventually hits infinity. Society has a benefit curve. Each timestep, you start afresh: you can walk up the benefit curve, buying units from the expendables and from the renewables, until the marginal cost exceeds the marginal benefit (but you can also stop earlier). When buying, you start from zero on the renewables cost curve, but you start from the last item purchased on the expendables curve. Each timestep, the cost curves fall, whereas the benefit curve increases, so over time you will want more energy and each unit will be cheaper — except that expendable units you already bought are gone.

        Then your argument is that the social optimum may involve not being greedy when buying expendables, even if the cost curves are distorted (e.g. they ignore externalities).

        Where else could we apply this model? Other than as nice exam questions, I mean.

      • Yep, that’s the model Benoit… I haven’t thought about other settings. You’re probably right that some other situations could be modeled similarly. Let me know if you come up with something. (BTW, seems like it would be an interesting, but nasty exam question!)

  2. Seems to me that considering socially formulated “return on investment” as a criterion for justifying fossil fuels usage is not plausible in the context of substantial infrastructures like oil & gas where there are a number of self-interested decision makers involved whose benefits will not necessarily be fulfilled through social optimal.

    • Yes, there are many things left undiscussed — the unpredictability and intermittency of renewables, the market structures to create proper incentives, etc. All of these are important issues, but the point of this post is simply to highlight that, as a society, the use of renewables can be justified strongly even without discussing environmental issues.

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