The allure of many environmentally beneficial technologies is that they also hold the eventual promise of being economically efficient. This is particularly true in the field of energy. However, efficient devices that require less fossil fuel generally involve higher capital costs, especially when they are newly introduced to the market. This is particularly the case if one doesn’t include any externalities – the costs borne by somebody else.
But leaving aside the consideration of externalities just for a minute, let’s just look at the as-priced economics. More efficient technologies often have higher upfront costs for at least two reasons: 1) because there is some additional technological element built into the thing we are buying, compared with the technology being replaced, and 2) because they are newer technologies and have to amortize development costs over a smaller number of units produced. In other words, they haven’t gotten to scale yet.
This holds true for many efficient technologies. In buildings, efficient lights, special windows, and new design technologies aren’t cheap, but t hey lower overall operating costs. It holds true with renewable power plants, such as solar and wind facilities. These technologies are still evolving, and costs still have a way to fall as conversion efficiencies improve and manufacturing scales up. However, recent trends in solar show us the way: once manufacturing does scale up and markets mature, costs can drop dramatically – as much as 30% over the past two years for solar. Grid parity is within sight in some markets already.
If the technologies are good, and the market is there, then market transformation is probable over time. With scale, new technologies become more competitive in price. Or at least close enough in cost that people actually buy the product based on lifecycle costs rather than just the initial sticker price. This transition has happened with compact fluorescent bulbs. It will happen with LED lighting very shortly. It will occur shortly with solar energy. And it has clearly happened with hybrid cars.
Government subsidies can help such technologies to reach an inflection point at which they can survive and thrive on their own. It’s a similar path to that taken by countries that launch and support infant industries. Initial subsides and tariffs create enough breathing room for the new entrant to eventually flourish. In many cases, the result is that whole new markets are created, while older technologies give way.
More efficient devices are good for everybody. They lower overall user costs to the user and to the environment, and they decrease demand on fuel, lowering costs for all everybody. And yet, for all of these new and more efficient technologies, and their beneficial impact on demand, there always seems to be a crowd that just doesn’t like them. Sometimes we see justified skepticism, and perhaps the emotion is aimed at some of the perceived piety of the eco crowd, but it’s a curious phenomenon.
George Will’s stance on Toyota’s Prius is a fascinating case in point. For the record, the Prius isn’t really a green vehicle (marketing notwithstanding), but it is a step in the right direction. My 2007 Prius still pollutes, but it uses only a third of the gasoline consumed by my 2001 Ford F150. While I appreciate the environmental benefits, I really like that I can go 450 miles on 30 dollars of gasoline.
It turns out Consumer Reports likes the Prius for the same reason. They not only rated the Prius as having the best value – in terms of total cost of ownership – among cars in its class, but among all 2013 models they tested. Based on their calculations, the Prius costs an estimated 49 cents/mile, less than 50% of the cost of the average car, with a reliability factor also much better than average.
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