Environmental Valuation & Cost-Benefit News

Link: http://www.env-econ.net/2008/12/the-basic-econo.html#more

Recently we have reported on several studies estimating green job potential. These studies seem to be rolling off the presses faster than the demand for bailouts. Key reports include the following:

December 16, 2008: Sierra Club Releases Report Outlining ... Steps for New York Green Recovery http://www.envirovaluation.org/admin.php?ctrl=items&blog=2&p=6180

November 26, 2008: Economic Stimulus: The Case for “Green” Infrastructure, Energy Security and “Green” Jobs http://www.envirovaluation.org/admin.php?ctrl=items&blog=2&p=6150

November 21, 2008: The Green Industry: An Examination of Environmental Products Manufacturing http://www.envirovaluation.org/admin.php?ctrl=items&blog=2&p=6121

November 20, 2008: Deutsche Bank's Climate Change Research Indicates Investing in Climate Change Can Help Stimulate Economies http://www.envirovaluation.org/admin.php?ctrl=items&blog=2&p=6115

November 18, 2008: Wood-biomass Macroeconomic, Sectoral and Environmental Impacts

November 11, 2008: Green Investment Will Yield 2 Million Jobs in Two Years: New Report Outlines Rapid Green Economic Recovery Plan, Shows Green Investment Creates Four Times as Many Jobs as Same Investment in Oil http://www.envirovaluation.org/admin.php?ctrl=items&blog=2&p=6082

November 9, 2008: "Environmental protection, the economy, and jobs" added to Encyclopedia of the Earth http://www.envirovaluation.org/admin.php?ctrl=items&blog=2&p=6064

November 2, 2008: Worldwatch Report: Green Jobs http://www.envirovaluation.org/admin.php?ctrl=items&blog=2&p=6050

October 28, 2008: The Green Collar Economy: How One Solution Can Fix Our Two Biggest Problems http://www.envirovaluation.org/admin.php?ctrl=items&blog=2&p=6029

October 22, 2008: Energy Efficiency, Innovation, and Job Creation in California http://www.envirovaluation.org/admin.php?ctrl=items&blog=2&p=6012

October 7, 2008: New Study Finds That Clean-Energy Industry Can Power Northwest Economy, Job Creation, and Carbon Reduction http://www.envirovaluation.org/admin.php?ctrl=items&blog=2&p=5975

September 25, 2008: New Report Says Emerging Green Economy Could Create Tens of Millions of New "Green Jobs" http://www.envirovaluation.org/admin.php?ctrl=items&blog=2&p=5934

September 21, 2008: Low-carbon Energy Projects for Development in Sub-Saharan Africa: Unveiling the Potential, Addressing the Barriers http://www.envirovaluation.org/admin.php?ctrl=items&blog=2&p=5916

For a healthy dose of skepticism we refer you to the Environmental Economics blog by John Whitehead and Tim Haab at www.env-econ.net for example:

The basic economic analysis of a (green) subsidy in the context of 5 million green jobs

http://www.env-econ.net/2008/12/the-basic-econo.html#more
December 11, 2008

Economists are notorious in their opposition to subsidized industry unless the market, left to its own dang self, generates a market failure, such as positive externalities. That is why statements such as this ..."Mr. Obama has promised to ... support so-called green technologies that will create jobs while benefiting the environment." ... sends chills down the spine.

Why so?: The answer can be developed from a simple demand and supply analysis. ... The benefits and costs of the subsidy can be assessed by changes in consumer surplus and producer surplus. ... The price that business firms receive increases since the seller's price is equal to market price plus the subsidy.... Since the seller's price rises and quantity sold rises producers of green energy are made better off ... So, considering simply the market impacts the subsidy looks like a great idea. However, the government sector is involved as well. The cost of the subsidy to the government and tax payers is equal to the product of the subsidy payment and the number of units the subsidy is applied to. ... The overall affect on welfare is the difference between the benefits of the policy and the costs: Net benefits equal change in consumer surplus plus change in producer surplus minus subsidy payment. ... The overall net benefits of a subsidy are negative. In other words, the gains to the market participants are worth less than the cost to taxpayers. Subsidies are inefficient.

On the other hand, if green energy use helps avoid some environmental pollution, then the positive externalities associated with the supply shift (i.e., avoiding the negative externalities in the polluting market...) might make the subsidy payments worthwhile in terms of efficiency. This requires further analysis but the basic conclusion is that it is less expensive (i.e., more efficient) to tackle the negative externalities head on with a tax or cap-and-trade than to deal with them indirectly in the market for green substitutes.

Suppose the increase in market quantity leads to an increase in the number of employed persons (e.g., "5 million green jobs"). This is a grand outcome, right? However, on second thought, the increase in consumption in the green energy market comes at the expense of energy consumption in substitute energy markets.

More can be learned about the overall impact of green subsidies on the economy with a "general equilibrium" analysis....

Since both the prices of green and brown energy fall, the total amount of energy used may increase. If so, the total number of jobs in the energy sector may increase. But energy demand is inelastic (e.g., I'm not inclined to leave my lights on all day and night if electricity is cheap) so the total positive impact might be small. My guess is that the overall impact on the number of jobs is insignificant in the context of a 300 million person economy.

But, is this what we are after? An increase in energy use? Not me. I'd prefer a decrease in the amount of energy use (conservation and all that). In order to achieve a decrease in energy use we should tackle the negative externalities of brown energy directly with pollution taxes and/or cap-and-trade. Luckily, these policies are cheaper overall than green subsidies and result in the same environmental outcome.

In other words, the "green jobs" rationale for green subsidies is largely bogus.

Conclusion:
This MUST be the explanation for why one misunderstood economist at the environmental economics blog can't stand the green jobs argument but insists that green subsidies might be justified on the microeconomic, efficiency argument. However, he prefers avoiding the subsidies altogether with policies that penalize pollution.

Jobs Schmobs
http://www.env-econ.net/2008/12/jobs-schmobs.html
December 01, 2008
From Mankiw: One thing all economists agree on: If there are public investment projects that pay a high rate of return, those are worth paying for, even if it means more borrowing. But that is always true. Even if we were at full employment and there were no possible employment effects of fiscal stimulus, we should undertake public investments that pass a cost-benefit test.

Inkstain gets it!
November 30, 2008
http://www.env-econ.net/2008/11/inkstain-gets-i.html
From Inkstain: Dan Yurman calculates the jobs he thinks would be created by expanding the federal loan guarantees for nuclear power: The Federal loan guarantee program for construction of nuclear power plants, set by Congress at $18.5 billion, could if expanded to cover the entire fleet of 21 proposed new reactors, create nearly 80,000 construction jobs, and more than 17,000 permanent operations jobs over the next 10-15 years.

I rather think John Whitehead’s macroeconomic argument about green jobs applies here. There are jobs to be had creating the infrastructure necessary to supply our nation’s energy needs. If they are not created in providing that energy through nuclear power, they will be created in providing it with coal, or wind, or whatever. To the extent that more jobs are created by doing it with nuclear energy than with other approaches, that merely means nuclear energy is less efficient. My analysis suggests we could maximize energy-related job creation by hiring a bunch of extreme athletes to pedal those silly bike machines you see in late night infomercials. Hook ‘em up to the grid. All the food they have to eat would also add farm sector employment. Win!

This is what Whitehead/Habb add:
Over 10-15 years the government spending created jobs will simply replace those in another sector of the economy. The new construction jobs will hire workers away from other construction projects increasing the wages of construction workers. The higher wages will reduce the quantity demanded of construction workers from the private sector.

Another offset will occur from the source of the federal funding. The higher taxes will reduce consumer demand for goods and services and reduce jobs in the consumer spending sector of the economy. If the government borrows the money, the jobs will be a net gain if the deficit is externally funded by China and others. However, this sort of deficit financing is unsustainable over the long term. At some point the debt to GDP ratio will rise to a level where foreigners will feel super nervous about loaning the U.S. government money. At that point interest rates spike (this is known as crowding out) and all heck breaks loose.

Finally, the permanent jobs will simply offset the job losses in other non-nuclear power plants.

Green jobs rhetoric: curiouser and curiouser
http://www.env-econ.net/2008/04/curiouser-and-c.html
April 07, 2008
From Grist: Wind- and solar-boosting folk are crossing their fingers that new Senate legislation will succeed in extending renewable-energy tax credits set to expire at the end of 2008. The Clean Energy Tax Stimulus Act is framed as an economic boon: "If both houses of Congress don't pass a bill and the president doesn't sign it into law soon, we will start to see as much as $20 billion of anticipated investment in 2008 delayed or cancelled and more than 100,000 jobs lost," warns cosponsor Maria Cantwell (D-Wash.). The bill has bipartisan support, in large part because, unlike previous failed legislation, it would not seek to fund clean-energy incentives by removing tax credits for oil companies.

More than 100,000 jobs lost? Is that net jobs lost? As in the U.S. economy? Or gross jobs lost? Which may be offset by jobs gained in another sector?

Tired of me asking questions? Take the challenge below ...

My contention is that tax credits can increase employment in preferred sectors but this employment is taken from other sectors of the macroeconomy. Employment and unemployment is unaffected in the aggregate.

Whitehead posts the time trend of employment in the U.S. from the BLS's Current Employment Survey:
Are any of the dips caused by a lack of targeted environmental policy? I'll send a free "Drive Less! www.env-econ.net" bumper sticker to the first person who shows me empirical evidence that the U.S. loses jobs from expiration of renewable energy tax credits or some such policy using appropriate econometric methods and the 1946-2007 employment data (I'll send the spreadsheet if you don't want to hassle with the cut and paste):

The truth may very well lie somewhere in the middle, or not. In any case we will try to track future developments. If these reports do not "send chills down the spine" responsible doctors would recommend that you should take them with a "grain of salt".

Added December 18, 2008 by Ken Acks:
The degree of net green job creation is probably a function of the unemployment rate and other factors depicting the overall job market. The unemployment rate should be factored into these models, but I suspect that it rarely is incorporated. At the present time net job creation is in all probability higher than it would have been a year ago for a given stimulus due to the financial crisis.

Ken Acks, editor