Opponents of climate legislation often claim that now is the wrong time to put a price on carbon, with the economy just emerging from a recession. But a must-read study released yesterday by the well-respected, nonpartisan Peterson Institute for International Economics shows that the reverse is actually true: passing climate legislation would provide the economy with a much-needed shot in the arm.
Trevor Houser and his co-authors use a widely respected economic model to analyze the impact on the U.S. economy of the American Power Act, the energy and climate legislation introduced last week by Senators Kerry and Lieberman. The study estimates that the legislation would spur investment in the electric power sector -- in turn adding over 200,000 jobs to the economy during the next decade relative to a "business as usual" scenario without policy. The reason is that when labor and capital are underemployed, as they are now, a policy that spurs new investment in the private sector will create jobs rather than simply taking them from other sectors. This lends quantitative support to the argument I've been making for over a year, which is that the fragile state of the U.S. economy strengthens the case for a cap on carbon rather than weakening it.
To understand why this is important, it helps to step back and think about what we know about the link between climate legislation and employment. The usual debates about the job impacts of climate legislation tend to follow parallel tracks that never intersect, with opponents focusing on jobs that might be lost, and proponents focusing on jobs that would be gained -- but little analysis of what the net impact would be. So what would that net impact be?
There are a couple of ways to think about this issue, depending on what time frame you are looking at. In the long run, the American economy is likely to gain from taking the lead in the clean energy revolution, just as our economy has always benefited from technological leadership. The world is heading onto a low-carbon path, and huge markets await for the firms that are able to develop and produce new technologies that generate renewable energy and promote energy efficiency. That provides a strong economic argument for a market-based cap on carbon, while will give American firms a powerful incentive to figure out new and better ways of cutting emissions.
What about the short run? In general, the U.S. economy -- like any market economy -- tends to hover at some natural level of "full employment" that is determined by fundamentals like productivity, technological change, and the size of the labor force. This suggests that the main effect of a price on carbon will not be to change the overall level of employment, but to shift labor (and other resources like capital) away from carbon-intensive sectors and into cleaner sectors. Some sectors win, some sectors lose, but the overall level of employment stays the same.
The key problem with this logic is that we are clearly not in a period of "full employment." Even though the economy seems to be slowly emerging from the recession, unemployment is still very high. And there is capital sitting on the sidelines as well, held back not only by the recent crisis but also by uncertainty over the strength of the recovery and over the regulatory environment.
When the economy is not in full employment, the picture changes fundamentally. Instead of reallocating resources from one sector to another, a price on carbon could have a positive impact by spurring demand for investment -- leading to net job creation, even in the short run.
This is precisely what the Peterson Institute's study forecasts would happen under the American Power Act. A cap on carbon would create powerful demand for new investment in clean energy, especially in the electricity sector. The Peterson Institute study projects that annual investment in the sector in the next ten years would rise by 50% as a result of the legislation -- an increase of nearly $11 billion a year. Precisely because our economy is operating below full employment, the result would be a net job increase of 203,000 jobs over the next decade, relative to the no-policy "business as usual" scenario -- even taking into account the effect of higher prices on fossil fuels. This is a small number in percentage terms, but it underscores an important point about the direction of the job impact in the short run -- and contradicts claims that climate policy will slow our economic recovery.
This isn't just theoretical. In a column in the New York Times last month, David Brooks reported that if climate legislation passed, the major electric power company FPL Group would likely invest roughly $3 billion more per year in wind and solar power. Similarly, NRG Energy would triple its new clean generation capacity. That's the kind of investment that can produce real jobs in the short run.
I'll have more to say about other conclusions of the Peterson Institute study in coming blog posts. In the meantime, Dave Roberts at Grist has a great take on it along with a summary of the key findings.
UPDATE
I revised this post on 5/27/2010 to correct some potentially confusing language on my part (and to make a few other edits for style and exposition in the process). The Peterson study estimates that the American Power Act would increase average annual employment by 203,000 jobs over the next decade (2011-2020). In other words, according to their analysis, there will be about 200,000 more jobs in each year. My original post said "203,000 jobs per year," which could be read to suggest that there would be an additional 203,000 jobs added to the economy each year, for a total of 2 million jobs over ten years; that is not what the study finds, and I have revised the post to clarify that point. Meanwhile, for consistency, I also revised the post to cite estimates of investment for the same period (2011-2020) rather than over the whole duration of the study (2011-2030).
We need to live in reality and stop creating games to solve problems.
All businesses must be required to find new ways to stop polluting the environment. All new businesses must start from day one with a plan to build their businesses in a "Green" way from the start. Car companies need to only make cars that are better for the environment and discontinue making the ones that are not and so on. It's common sense...stop doing the bad things and start doing the good things. It could and should be done in phases but it must happen now. No games or smoke and mirrors or slight of hand tricks. Black and White common sense. Where is it?
Where is Enron today? Andy Fastow is still in prison and he is the man who developed this ponzi plan.
Lets make oil WAY more expensive to expand the solar power industry.
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If you believe that there will be a net job increase of 203,000 jobs per year over the next decade due to this bill, you're either naive or a complete stooge. Senators will toss a number out there like they did on the stimulus package . . . then when the numbers don't go in their favor, they change the rules like having a pay raise count as a created job.
Wall Street can set the tax, and Wall Street can collect the tax. That's the last thing in the world I want. It's just asinine.
Sounds great to me.
Would you like to talk about how cap and trade will become the next economic bubble?
The new carbon credit market is a virtual repeat of the commodities-market casino that's been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won't even have to rig the game. It will be rigged in advance.
Here's how it works: If the bill passes, there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy "allocations" or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimates that about $646 billion worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.
But this posting by Nat Keohane should be celebrated by those among us who want to see our carbon-balancing goals met by policies that are capable of being affordable to a greater share of Americans than the ordinarily insane market-based options that Nat has championed over the past five years.
Notably, no mention here of Cap-and-Trade.
Let's all hope that is one dead pony.
Nat's dialogue is limited to market-based options for funding the selected policies.
Like a carbon tax?
Those who doubt the need for climate-related public initiatives in the field of energy policy will remain abhorred in the light of this latest Peterson-EDF initiative. But, for those of us who have been fighting EDF and its capital-markets-based tunnel vision, we are feeling mldly gleeful in seeing Nat surface here without his "Cap-and-Trade" flag-waving environmental inanity.
So, Nat, let's talk carbon-tax.
Or, is the Peterson Group's BlackRock delegation just waiting in the background for a Phase II shot at putting C&T forward as the best way to put Americans back to work?
Carbon Tax Now.
Only 5 comments and all of them are sane. This has got to be a Huffpo record.
Al Einstein believed that "God doesn't play with dice". Al Einstein must be niave because there is no God.
Nuclear energy is bad because we had an accident in the 1970's, proving that energy can't be equivalent to mass, as Al Einstein suggested and that science is bigger than God.
Al Gore and Al Frankin believe in corn. You can get clean energy from corn. Don't believe those people that tell you it takes more energy to plow a field for corn than the energy the field of corn produces. Al Gore received the Nobel Prize in this century, not last century, like Al Einstein did.
As a progressive, we need to get the right people on the job at Faux Noise and teach teabaggers like you that the free market failed too.
Maybe Goldman can hire Al Frankin to patent aspects of corn growing. Al Frankin knows Al Baldwin and Al Baldwin is a trend setter.â€