June 23, 2004

Clean Energy Won't Clean the Third World (Any Time Soon)

Greg Burch is in Beijing and notes the ungodly pollution in that city. He links finding a replacement for oil, a new source of energy, with cleaning up the city. Here he's in error. Beijing will become clean as it becomes rich, not as new sources of energy come on line. The reason is that the rich are the leading edge and the poor form the trailing edge in the adoption of just about every technology. Very new technology has yet to recoup its R&D costs so it is invariably expensive. It often also requires ancillary expenses (in this case a new energy distribution system) that make its adoption even more likely to be concentrated among the rich.

Even if hydrogen with fuel cells were to cross over and become cheaper than oil used with internal combustion engines (ICEs) ICEs would still abound. As long as it's cheaper to continue to operate old equipment rather than purchase new equipment, the old polluting stuff is going to stay in service. Even new purchasers in poor countries that can afford the new technology will be leery of being an early adopter because they know very well that they are living in a trailing edge country and that their maintenance expenditures are going to be sky high for much longer than they would be in the first world.

Thus, you're going to see adoption first in the 1st world and then a filter down effect. Since energy competition is going to be a major factor in the transition period, we're going to see progress on price in one area creating a ceiling on prices in the other. As hydrogen drops, oil for ICE producers will find that there is only a certain amount they can charge without losing major customers to hydrogen fuel cells, customers who will never return. This shrinking market will constrain their ability to raise prices and we should see gasoline prices trend downward along with hydrogen as new energy comes on line (pace energy pessimists, I know you don't believe it's going to happen, but for this scenario, it's an assumption that it will).

Cheaper gasoline will reduce the incentives for those on the trailing edge to move to hydrogen. In short, Beijing and 3rd world capitals are going to be the last to be clean because they're going to be the last to adopt the new technology.

Posted by TMLutas at June 23, 2004 12:05 PM