Lots more analysis will, I hope, be forthcoming, from both the environmental and the economic side. But there’s one crucial economic point I want to get out there right away: while the usual suspects will denounce all this as job-destroying regulation, tougher climate policy will, almost surely, be job-creating, not job-destroying, under current conditions.
Why? Well, ask yourself first how, exactly, pollution regulations are supposed to destroy jobs. They will indeed raise costs, that is, shift up the aggregate supply curve. But our economy isn’t supply-constrained right now, it’s demand-constrained; so why would this make a difference? Even if prices go up a bit, how will this reduce real demand? It’s like the argument about wage flexibility, which I’ve addressed many times in this blog: downward flexibility of wages does nothing helpful when you’re in a liquidity trap, and cost increases do no harm.
So, no job cuts. Why might new regulations actually be expansionary? Because they will provide power companies with an incentive to invest in ways that will reduce their emissions, even if they currently have excess capacity. Obama had a great phrase near the end of his speech: “Invest, divest” — that is, shift away from more to less polluting ways of doing business. And the “invest” part would be exactly what the economy needs. Yes, this is a variation of the “termites” theory, under which wrecking capacity can actually be expansionary — but that theory is right under these conditions.
In short, everything you’re going to hear about the downside of the new regulations will be wrong, at least for the short to medium run.
OK, I'm going to go ahead and be wrong (really, really wrong probably). I don't think that when business firms are forced to hire workers to meet environmental regulations it will result in no additional cost simply because those workers are currently unemployed. Won't those unemployed workers ask to be paid? Jobs will be lost as business firms adjust to these higher costs (the net impact on employment is likely trivial). And by the time this proposal hits the economy, the plan isn't supposed to be completed until a year from now and the legal action will likely push these regulations down the road another year or two, hopefully the economy will be in the expansionary phase of the business cycle.
Finally, as I've said before, assessing environmental policy with a macroeconomic model is not the best way to assess an environmental policy. The benefits of the policy are the reductions in negative market and nonmarket climate change impacts and the costs are the negative effects in markets (resulting from lower supply of carbon intensive goods). In other words, analysts should do some benefit-cost analysis and forget about the jobs.
Now I can only hope that I become a Krugman punching bag!