In today’s NYT, Paul Krugman highlights the subsidy being given to the ‘fracking’ methods of fossil fuel extraction: basically, another example where costs are socialized although, let’s face it, the most common example. The story of an old technology using non-market means to keep itself afloat is, of course, the way things work. (Just travel back to 1845 for this amusing parody from the French Paul Krugman of that day).

What interested me more was the growing evidence that solar energy might be subject to a Moore’s Law rate of improvement. According to Ramez Naam in Scientific American, the cost of solar photovoltaic models has been falling at an exponential rate since 1980. Installation costs have been falling too. So much so, in fact, that in a decade, solar would outperform the average kilowatt energy cost in the US. A decade after that and it will be approaching the cheap baseload fuels.

It is instructive to think about what this means given our experience with Moore’s Law in computing. First, environmental policy has two targets. The first is to change behaviour so that less fossil fuel is used. This can occur through a price effect (increasing the price of fossil fuel) but also through various standards to reduce consumption directly. Economists favour the former because of scepticism that we know how to efficiently do the latter. But given the predominance of fossil fuel usage, what we are talking about in either case is generally energy conservation: that is, we want less energy to be consumed.

The second target is innovation. We want to encourage innovations that make it less costly (from an environmental perspective) to use energy. One class of innovations comes from energy conservation per se: getting more out of our fossil fuels — that is what your Prius is doing. The second class involves allowing energy to be produced without fossil fuels. And that is where solar comes in.

As I point out in a paper forthcoming in the American Economic Journal: Economic Policy, the two targets of environmental policy can conflict. First, if we push towards energy conservation in behaviour, innovations that encourage energy conservation are less valuable — that is, if you produce a technology that allows you to save $$ per KW on your electricity bill, your returns are higher when consumers are consuming more electricity. If environmental policy gets that reduction first, the returns to innovation may go down. Second, the same can be true for general energy conservation and so may even effect alternative energy technologies like solar. The conclusion in the paper is that even if we are vigilant in environmental policy (such as establishing a carbon price) then we need to be additionally vigilant in technology policy to support it.

But Moore’s Law in solar may be doing the job for us. In computing, betting on Moore’s Law means changing your usage to appreciate that processing power and storage will be cheap. All of the major innovators in the space for the last four decades have been successful by betting on Moore’s Law. That’s why your Gmail had so much storage and that is why all and sundry are investing in cloud computing. They are all bets on Moore’s Law type effects across the industry. And in each case, they are anti-conservation of what previously was a scarce resource or a bottleneck.

Think about what that means for environmental policy. If we believe Moore’s Law in solar, then the safe bet in terms of behavioural reactions is not to react. Within a decade or two, energy will be socially as cheap as it is privately as cheap now. That means that changing habits for environmental austerity is not the way to go.

Now, don’t get me wrong. I am not arguing that this is a good or satisfying conclusion. I was uncomfortable reaching it in my research but the basic economics was very clear. Moreover, two more decades of blindly polluting activity is two decades too much. Finally, missing an opportunity to conserve energy may only be delaying a future problem and also locking in infrastructure that is poorly equipped to take advantage of solar. But we have to step back and think about what these trends really mean. In that stark reality, one wonders if efforts for current conservation might be misplaced and instead that it may be time to bet on Moore’s Law in solar.

[For more, see Shane Greenstein’s chapter in this NBER volume.]