As global temperatures rise, it becomes more and more important to curb the emission of greenhouse gases such as CO2. One of the greatest contributors to CO2 emissions is, of course, the energy industry. According to the U.S. Energy Information Administration (EIA), “In 2015, emissions of carbon dioxide (CO2) by the U.S. electric power sector were 1,925 million metric tons, or about 37% of the total U.S. energy-related CO2 emissions of 5,271 million metric tons.” The large proportion that US energy sector represents of CO2 emissions can be seen as a great opportunity to reduce environmental harm. The emergence of alternative energy sources and the gradual decline of traditional energy production are an optimistic indicator that CO2 production in the U.S. will continue to fall. Technological development and investment in alternative energy industries is a strong path to improving pollution rates in this critical sector of the U.S. economy.
Perhaps the most textbook example of an inelastic good is electricity. It is a fixed cost for every firm, and a constant expense for every household. Once energy infrastructure is established in a region, the owners of production and distribution has an effective monopoly on that area. This makes the energy industry a very unique landscape for investment. New energy sources are difficult and costly to establish, but whoever finances the next widespread energy technology will undoubtedly see colossal return. A renewable energy source will likely be that next big industry, but who is to say which it will be?
There is evidence that investors are currently seeing great opportunity in sustainable and renewable energy sources. The wealthiest man in the world, Bill Gates, has recently formed the Breakthrough Energy Ventures Fund with an all-star cast of investors. On the list are major technological, financial, and political players, including Jeff Bezos of Amazon, Meg Whitman of Hewlett-Packard, Mark Zuckerberg and Dr. Priscilla Chan of Facebook, Michael Bloomberg of Bloomberg, and George Soros. Though many previous investments in new energy technology have flopped, Gates believes that large-scale long-term investment will have different results. Quartz reports that the fund believes “Being a 20-year fund with patient capital that’s not needing short-term gains allows us to have a longer-term outlook as well as fund technologies that don’t fit into the traditional VC model as it exists today.”
The public sector in the U.S. is also supporting renewable energy alternatives. The Department of Energy had $3.4 Billion for direct investments in 2013, and 51% of it went to energy efficiency and renewable energy (see graph). This is a different story than the private investment being done by Breakthrough Energy Ventures, however. Those investors are concerned with technological advancement as a way to make energy alternatives efficient, while the 2013 DOE allocated only 8% of their budget for advanced research projects. While public money is being contributed in large proportion to sustainable energy, some is still being spent on subsidizing fossil fuels. The new administration also seems friendly to the coal industry, so this spending is not likely to decrease in the next four years.
International financial advisory firm Lazard put together a report of levelized energy costs for each energy source in 2014. It indicated that per megawatt-hour, onshore wind had the lowest levelized cost. It was below coal, nuclear, and gas, more traditional energy sources. This analysis does not account for the practicality of onshore wind of course, the large land use necessary disadvantages it. The point to this analysis is that the efficiency for alternative energy sources is nearing the point where traditional energy generation may begin to be replaced. Perhaps some of this data is convincing Breakthrough Energy Ventures of the potential in renewable energy technology.
Transitioning off of fossil fuels will certainly be a long and arduous process, but it can be worth it in more ways than one. While alternative energy provides the obvious benefits of reducing CO2 emissions, it may soon be more cost-efficient than fossil fuels. Non-renewable resources such as coal and natural gas are vulnerable to the law of supply: as they become scarce, their marginal cost of production increases. The combination of influx of investment into new technologies combined with this force of scarcity means that all signs are pointing to the prevalence of new energy sources. Coal power in the U.S. has even begun to emit less CO2. This downturn is of course influenced by a number of factors including environmental restrictions and the rise of natural gas, but that does not undermine the nature of scarcity.
By encouraging the development of energy technology, we are bringing closer the day when a new energy source usurps traditional technologies. It must be more efficient by a significant magnitude to overcome the costs of replacing and building infrastructure, but that day will come. When it does we will have more cost-efficient and environmentally friendly energy sources to power the growing economy in the U.S. and in the rest of the world.