Given increased use of Namecoin, which would lead to a shortage of namecoins as you describe, the fee would be reduced. I have previously seen plans to reduce the network fee to 0.001 or lower, but can not find it now.
These changes would require a hard fork of Namecoin, but it is important to note a fee is only destroyed upon a new registration. Updates of DNS records and domain renewal go to miners.
I am not aware of any hard block size limit, but should one exist (or be implemented with a hard fork) it would be unlikely to get anywhere near the 2.1 billion names as you describe.