A renewable portfolio standard may result in job losses, not job gains

From The Obama-Biden Plan (hat tip: Grist):

The Obama-Biden plan will create new federal policies, and expand existing ones, that have been proven to create new American jobs. Obama and Biden will create a federal Renewable Portfolio Standard (RPS) that will require 25 percent of American electricity be derived from renewable sources by 2025, which has the potential to create hundreds of thousands of new jobs. They will also extend the Production Tax Credit, a credit used successfully by American farmers and investors to increase renewable energy production and create new local jobs.

I'm not necessarily opposed to a RPS on environmental policy grounds, although I'd prefer a carbon tax or cap-and-trade to nudge us towards cleaner energy, but on macroeconomic grounds.

A requirement that electric utilities, and therefore households and business firms, use higher cost electricity will increase the costs of production. Increased production costs reduces the supply of goods and services, prices rise and output falls. As output falls, employment in the industries hit by the higher production costs fall. Increases in jobs in the renewable energy sector will be offset (somewhat or totally, who can say without a general equilibrium model ... which I don't have ...) by job losses in other sectors (and job losses in nonrenewable energy sectors).

Comments

[Scott]

I have to admit that I am getting pretty tired of hearing that things like RPS will cost money, jobs, whatever because we will be paying more for energy.

Does that analysis take into account externalities? It appears not. If not its BS.

[John Whitehead]

Scott,

The analysis does not take into account externalities which are, by defintion, non-market. The RPS may be a good idea when externalities are considered, but the externalities are benefits of the policy that should be balanced against the costs (e.g., higher prices, etc).

The economics of the issue is to compare benefits and costs. Pointing out the costs does not require one to ignore the benefits.

[Pradeep]

John,
"I'm not necessarily opposed to a RPS on environmental policy grounds, although I'd prefer a carbon tax or cap-and-trade to nudge us towards cleaner energy, but on macroeconomic grounds."
There are some who think that a RPS might be easier to get through the Congress than a tax or a cap-and-trade bill..

Any thoughts as to whether RPS regulations limit "low-hanging fruit" opportunities for later cap-and-trade legislation?

[Scott Forrest]

John,

Why try to make an argument with blatantly flawed logic? It's pointless. No one can determine from the information you give whether your right, wrong or just full of hot air. Given that the externalities are enormous and given that the green infrastructure task is both novel and huge, it's almost certain that you are wrong.

John, just to prove I am not being dense: I think I understand your argument - A) green energy generation jobs just displace brown energy generation jobs except that B) RPS legislation forces us to use more expensive energy so our usage is reduced therefore; C) the net jobs due to RPS will actually be less. I think that is very probably true ... as far as it goes ... but it is so incomplete an analysis as to be COMPLETELY USELESS!

By that I mean very specifically, 1) job loss due to heath and environmental impacts of brown energy generation in combination with, 2) novel jobs creating a green infrastructure and, 3) replacement jobs associated with green energy generation will, and 4) jobs driven by consumer desire to reduce energy consumption in the face of higher energy costs, will 5) very easily more than replace jobs lost in brown energy AND any jobs lost due to reduced energy consumption.

I agree that pointing out the costs does not require ignoring the benefits, and yet you did, which is particularly a problem for your argument since one of the larger benefits are jobs, and your claim is that the cost is a loss of jobs, which you prove by ignoring at least three categories of job creation that RPS drives, then ... what the heck is your point?

The next thing I expect you to argue is that moving away from brown energy is going to cost us jobs in the healthcare sector, which as a matter of fact, I hope and expect it will.

[John Whitehead]

Scott,

My "blatantly flawed" logic is taught in undergraduate economics classes every semester all over the world.

And, of course it is an incomplete analysis ... however the goal of the post is not to determine the overall net benefits of a RPS. The goal of the post is to point out the flawed contention that a RPS will create jobs.

I'm not sure I follow your third paragraph. The job gains in 1) are long term and highly uncertain (since as far as I know the macroeconomic impact of environmental quality has not been measured) and should not be counted as part of stimulus. Please further explain #4.

The infrastructure construction argument is worth empirical investigation (#2). A similar policy may have been the increase in wastewater treatment plant construction during the 1970s as the result of the Clean Water Act. I don't recall there being any employment gain from WWTP construction. IN fact, jobs were lost as a result of the Clean Air Act and Clean Water Act.

I don't think you finished your thought on #3.

What sort of jobs will be created as a result of consumers cutting back on energy (#4)?

#5: "very easily" replace ...?

You say: I agree that pointing out the costs does not require ignoring the benefits, and yet you did ... I'm not sure I'm following what the problem is, if you agree ...

I think that one can point out the costs of a policy and false claims about jobs in the context of a macroeconomic fiscal stimulus plan. If you want to discuss the RPS in the context of environmental policy, that is a different matter.

I'd much rather discuss a RPS in the proper context of environmental policy (where jobs don't matter). But, current events lead me elsewhere.

[odograph]

If the title were a bet, I'd take it.

My thinking is this: Minus externalities, brown power is most cheapest. Any RPS will cost more. Given the easy economies of scale (one frikin' big boiler to power a lot of homes) I'm going to say that that brown power is less labor intensive, and that is part of its savings.

Therefore, RPS create jobs.

(We could do a cycle of 'those new jobs have to come from somewhere,' but with the U-6 hitting 13.5%, up from 12.6% in November and 8.7% in December '07, I'm not too worried.)

[odograph]

bah, "most cheapest" is the result of a fast re-edit. I usually let bad edits go by, but that one hurts.

[John Whitehead]

Odo,

If the title were a bet, I'd take it.

The title says "may" what sort of bet could you craft with that qualifier?

After this past fourth quarter, all bets are off. There are going to be some job gains wherever the stimulus plops money ... the stimulus includes a tax credit for each worker a firm hires!

[John Whitehead]

Odo,

What about the effects of higher priced energy on other sectors?

Anyway, jobs aren't the issue. We SHOULD have higher priced energy!

I'll work on a post that shows how a carbon tax or cap-and-trade will lead to green jobs in the renewable energy sector (even though "jobs don't matter" ;->). Maybe that would be more productive ...

[odograph]

The title says "may" what sort of bet could you craft with that qualifier?

Well, when there is a pattern I might respond to that. Is it just me or has "reasons not to do anything" been an env-econ theme, especially in the last month?

What about the effects of higher priced energy on other sectors?

That's an interesting question, and this might be a good point to remind readers that any answer is a prediction, about the future.

Maybe I should take a page from Taleb and say that the answer is uncertain. It is the risk/benefit of doing the right thing.

I'm at least sure it is the right thing, less because of GHG but more because of mercury and our self-poisoning of our food supply.

I mean sure, I believe in AGW and am willing to act. But now and then I need to remind myself that the state of the oceans is a more critical issue.

[odograph]

So I don't punt totally on the prediction:

Since US jobs have been reduced already to the "can't be outsourced or exported" category, I don't believe (moderately) higher energy costs will have a huge employment effect.

I think the number one factor in the US jobs market is globalization and the tilt toward a "global wage."

From something I read today:

The US has also invested very little in tradeable sectors. When we had all the cheap funding in the world, we built houses in the Inland Empire and bought a lot of cars. Why did America choose to consume or invest in residential real estate, rather than a machine shop in Michigan? Many ascribe that to avarice or stupidity, but it's unfortunately more likely a result of American workers and capital being totally uncompetitive at current and envisioned pricing. As evidence, American exports did finally start to respond a bit when the dollar index sunk a long way, but they've begun to fall again now during the recession, while the dollar's rising again. American goods and services need to be cheaper in other countries to be desirable.

That might not be totally true, but to the extent that it is true ...

[John Whitehead]

Odo,

Is it just me or has "reasons not to do anything" been an env-econ theme

It's just you.

Is it just me or do all of the rabid comments at evn-econ want to do something, anything, in response to economic events. Regardless of whether the easy, quick thing to do is the most economically efficient?

[odograph]

My point was wider than just on the question of stimulus.

Is it just me or do all of the rabid comments at evn-econ want to do something, anything, in response to economic events. Regardless of whether the easy, quick thing to do is the most economically efficient?

Feel free to return to the 50:50 split, amongst economists about whether the New Deal prolonged the depression.

You need to internalize that before thinking that it's just "rabid comments" on one side, and you on the other. Were that this was "settled science."

For what it's worth though, turning to the current crisis, the NY Times reports consensus on the "rabid" side:

Economists and politicians alike admit they are in uncharted territory. They are looking at an economic downturn far worse than any in the past half-century — and nobody knows how deep it will prove to be. “We have never been here before,” Mr. Reich said. “If anybody tells you they know exactly what to do, don’t believe them.”

Despite the consensus on the need for a mega-stimulus package, the sheer size of the projected budget gap is likely to revive age-old tensions between short-term goals like an economic recovery and long-term goals like reining in the soaring cost of the entitlement programs Social Security and Medicare.

I personally would be very happy if the consensus was "stimulus? who needs it?" ... but there it is.

I don't think I'm originating stimulus ideas, all by my lonesome. If anything, I'm probably drifting with what I think is the mainstream opinion.

Hey, here's an actual poll of economists:

WASHINGTON (Reuters) - The U.S. recession will probably be the longest since World War Two and could worsen without heavy government spending, according to a closely-watched survey of economists released on Saturday.

...

"Much likely will depend on the relative success or failure of ongoing and prospective stimulus measures applied by government," Blue Chip's monthly newsletter said, adding that absent a stimulus package, "prospects would be much darker."

The consensus opinion was that the stimulus plan would total $778 billion (510.7 billion pound), with estimates ranging from $635 billion to $900 billion. President-elect Barack Obama has encountered some resistance in Congress, but a large spending package is widely expected to be approved next month.

[John Whitehead]

Odo,

I've been reading the Obama-Biden stimulus plan and the jobs estimates and there is plenty in there to stand behind. But the green jobs stuff is shaky. Most of the green jobs are in one-shot construction jobs, from what I can tell. The green jobs claims seem to be overblown. ... which means, to me, I don't think we can count on a macroeconomic stimulus to improve the environmental quality in the U.S.

On the 50:50 split: Economists can't predict the future any better than anyone else and we don't understand human behavior any better than other social scientists and the sum total of understanding human behavior amongst all social scientists is gallingly poor. What do you want us to do? Avoid trying to inform the discussion at all?

Macroeconomics is where most of the disagreement amongst economists comes. I'm trying to stick with a microeconomic analysis of some of these proposals. The microeconomics is where economists mostly agree.

When I have gotten disagreement from economists, it is on the macro side (whether the net effect of green jobs will be positive or negative ... no one knows but I think the long run impact will be small), we seem to agree that concerning the efficiency of these environmental proposals, "jobs don't matter."