Monthly Archives: May 2010

New evidence on the job impacts of climate policy: Why now is the right time to cap carbon

This was originally posted on the Huffington Post.

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 today 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.


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).

Posted in Climate Change Legislation, Economics, Science / Comments are closed

Murkowski’s resolution paves the way for a “Do Nothing” climate policy

Should Congress or the EPA act to address the threat of global warming?  Speaker Nancy Pelosi said that Congress must act – and she’s right.  The House passed legislation last year, and recently Senators Kerry and Lieberman introduced a very different approach called the American Power Act. But both bills would cut carbon pollution, curb our dependence on oil from unstable regions of the world and create millions of new clean energy jobs according to a new study from the Peterson Institute.

But within the next couple of weeks the Senate may well decide to do “none of the above.”  Senator Lisa Murkowski is proposing legislation to strip EPA of all authority to reduce carbon pollution, make us more reliant on foreign oil, and do nothing to help American manufacturing compete with China or other nations in clean energy technologies.

Sen. Murkowski’s bill would nullify EPA’s finding of scientific fact that greenhouse gases cause harmful global warming – a finding that forms the legal basis for any further steps EPA can take to address carbon pollution.  A vote for Murkowski’s resolution is a vote against the strong scientific consensus that climate change is a real threat we must avoid.  Just earlier this week, the National Academy of Sciences reaffirmed that consensus when it described the likelihood that much of global warming is not caused by human activities as “vanishingly small.”

Sen. Murkowski’s bill would make us more reliant on foreign oil.  It would dismantle the government’s program to reduce carbon pollution from cars and trucks – a program that U.S. automakers and the Obama Administration agreed last year to put in place – which will save Americans more than 1.8 billion barrels of oil over the lifetime of the affected vehicles, according to the Environmental Protection Agency.  At oil prices of $80 a barrel, that’s more than $80 billion worth of foreign oil Americans will not have to buy thanks to these standards.

Sen. Murkowski’s bill would do little or nothing for American manufacturers at a time when many are struggling to recover in these tough economic times.  For American manufacturers hoping to compete with Chinese companies entering the clean energy, Sen. Murkowski’s approach would provide no assistance or incentive to innovate.

And Sen. Murkowski’s bill is outright opposed by American auto manufacturers. That’s because the agreement the Obama Administration and automakers reached last year also included California and 13 other states that agreed to set aside their own regulations of automobile emissions.  With no national program, the agreement would fall and states would be free once again to move forward independently, leaving the automobile industry without the nationwide uniformity that it has described as vital to its business.

The Senate should reject this “do nothing” approach and get back to the important task of passing climate and energy legislation.

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The Latest on the Climate and Clean Energy Bill

Grist has a piece by Nathaniel Keohane, Director of Economic Policy and Analysis at the Environmental Defense Fund, on how the America Power Act will return the vast majority of the emission allowance value to consumers and the public, even though some of the allowances will be distributed for free. Nathaniel acknowledges that

“some progressives worry that free allocation is at odds with cutting emissions.  After all, if you give emitters something for free, doesn’t that eliminate the “price on carbon” that creates an economic incentive to cut carbon emissions?  The answer, actually, is ‘no.'”

He explains that

“the value of allowances doesn’t depend on how they are allocated.  Rather, allowances have value because they are in scarce supply — thanks to the cap on emissions.  The tighter is the cap, the greater is the scarcity, and the higher is the value of allowances, all else equal. “

Also on Grist, David Roberts gives a great summary of the new economic study by the Peterson Institute for International Economics which details the effects of the American Power Act.

Here is one key highlight:

“Employment Effects: The Act prompts $41.1 billion in annual electricity sector investment between 2011 and 2030, $22.5 billion more than under business-as-usual. This stimulates U.S. economic growth and job creation in the first decade, increasing average annual employment by about 200,000 jobs.”

Nathaniel Keohane also weighs in on the Peterson Institute report on the Huffington Post. He starts off by explaining how:

“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.”

Treehugger reports on the carbon tax enacted by Montgomery Country, Maryland.

“Not waiting for national legislation to set a price on carbon and kick start the journey to a low-carbon future, Montgomery County, Maryland has enacted one the country’s first carbon taxes. Passed by a vote of 8-to-1 the tax applies to stationary emitters of CO2 releasing more than one million tons annually into the atmosphere.”

On E2, Nancy Pelosi is urging Congress to act on climate legislation.

“Asked if she wants the Obama administration to address climate change through regulations if Congress fails to pass a bill this year, Pelosi responded, ‘It has to be done by statute.'”

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The case for strong climate policy is simple. A cap on carbon pollution is too.

Edward L. Glaeser makes the case for simplicity in addressing climate change. I couldn’t agree more with his premise. The basic economics are indeed simple. Climate change might be the largest market failure the world has ever seen. To correct it, put the right incentives in place: correct the fact that we currently treat the atmosphere as a free sewer for our global warming pollution. Problem solved.

The how and especially the politics are not quite as straight-forward. Glaeser bemoans that the proposed American Power Act has 987 pages and identifies three culprits: that the Act tries to do more than just put a price on carbon, that it uses a cap-and-trade system rather than a tax, and that the problem has an important international dimension. He is broadly right on one and three but not on two: the issue of a cap versus a tax.

A firm limit on global warming pollution does not make the law more complicated. It makes it better.

First, a cap sets a firm upper limit on pollution. Glaeser acknowledges as much by saying that “fixing the number of permits may actually be the right thing to do.” It is.

Second, it’s politics, stupid. There is a good reason why the U.S. tax code has 17,000 pages. Proposing a tax on paper is simple. Getting it through the political process is a different matter altogether. Most significantly, every tax credit, every exemption means an increase in pollution. That’s not the case with a cap. While politics does what politics does best—worry about the allocation of allowances—the upper pollution limit stands.

Third, and contrary to what is sometimes argued by tax advocates, a cap creates a more stable policy environment. Certainty is the sine qua non for energy policy.  While it is true that a cap and trade program can introduce short-term variability into the carbon price, that is unlikely to matter for investments in energy infrastructure.  What matters is certainty over the long run. Capital-intensive investment decisions take years if not decades to pay for themselves (think about a new electric power station).

A well designed cap—especially one with a price floor, which this Act would include—creates this kind of certainty, by guaranteeing that emissions must go down and, therefore, that emissions reductions will have value. A tax is easily revoked, altered, or put “on holiday.” A cap has durability. And even if it does have to be amended, market foresight will allow smooth transitions, much more so than a tax would.

Fourth is the international dimension, Glaeser’s last point. A cap makes international coordination easier. It also creates incentives for developing countries to cap their own emissions, in order to gain from selling allowances into a U.S. market and create win-win-win situations for themselves, U.S. companies and consumers, and the atmosphere.

All four of these reasons also appear in America’s Climate Choices, a terrific new study just released by the National Academy of Sciences. It provides the scientific closing argument for the debate unfolding in the Senate. The science is compelling, the urgency to act is clear, and the main solution is equally apparent: put a price on global warming pollution, ideally through a firm, declining cap on emissions.

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New Poll Shows Majority of Voters in ME, MA and FL Support American Power Act

A new poll conducted to gauge the popularity of the American Power Act shows strong public support for the bill in key states.

65% of Massachusetts voters, 57% of Maine voters and 50% of Florida voters said they support the measure. These percentages jump up to 80%, 74% and 71% respectively in support of a bill that will create new clean energy jobs.

According to a new study by the Peterson Institute for International Economics, the American Power Act is set to increase average annual employment by 200,000 jobs from 2011 to 2020. On Huffington Post, there is a great analysis of the Peterson study by Nathaniel Keohane, Director of Economic Policy and Analysis at the Environmental Defense Fund, which explains in greater detail how the American Power Act will stimulate the economy and create jobs.

The surveys were conducted May 14th through 16th 2010 by Public Policy Polling.

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Why the American Power Act is Not a Corporate Give-Away

In his insightful post, Rob Stavins makes two key points regarding the allocation of emission allowances under climate legislation like that introduced last week by Senators Kerry and Lieberman.

First, Stavins addresses head-on the concerns that some progressives have toward the allocation provisions in the bill, asking in the title of his post: “Is the Kerry-Lieberman Allowance Allocation a Corporate Give-Away?”  To answer this question, Stavins carries out a careful breakdown of the allowance allocation in the Kerry-Lieberman bill.  He shows that the vast majority of emission allowances (more than 80% over the duration of the bill) — goes to energy consumers and public purposes (including deficit reduction).  That hardly sounds like a windfall to big corporations!  Indeed, if you add it up, the largest fraction of allowance value (43% in total, according to my calculations) goes to households, through an energy refund to low-income consumers, a tax credit to working families, a universal trust fund for all Americans, and allowances that are allocated to local electricity and gas utilities for the benefit of their customers.

As Stavins’s calculations illustrate, what matters most in terms of allocation is not whether the allowances are auctioned or given away for free, but who receives the value.  (For example, of the allowance value that is directed to households, about four-fifths comes as auction revenue, while the remainder is from the allowances allocated for free to local utilities.)

Even so, some progressives worry that free allocation is at odds with cutting emissions.  After all, if you give emitters something for free, doesn’t that eliminate the “price on carbon” that creates an economic incentive to cut carbon emissions?  The answer, actually, is “no.”

Here’s where Stavins’s second point comes in.  As he explains, it is a basic result of economics that even when allowances are distributed for free, they will still have a value (since they can be sold on a market). In economic terms, each time a company uses an allowance, there is an “opportunity cost” involved — the foregone profit they could have gotten from selling the allowance instead.  As a result, companies will still have a strong economic incentive to find cost-effective ways to reduce their carbon emissions — so that the economic performance of the bill is basically unaffected.  (It’s also worth pointing out that the environmental performance of the bill is also unaffected, since that is determined by the cap — not by how allowances are allocated.)

To put the same point a bit differently, the value of allowances doesn’t depend on how they are allocated.  Rather, allowances have value because they are in scarce supply — thanks to the cap on emissions.  The tighter is the cap, the greater is the scarcity, and the higher is the value of allowances, all else equal.

Of course, there are a few nuances worth noting.  First, from a strictly economic point of view, the best use of allowance value would be to use it to lower distortionary taxes on labor and capital, giving the overall economy an added boost.  However, getting such a “double dividend” requires not just auctioning the allowances, but using the revenue in a specific way to cut other taxes — something that has yet to generate significant political momentum.  In other words, acknowledging the possibility of a double dividend doesn’t undermine the main point that what matters is how the value of allowances is allocated, not simply whether allowances are auctioned or freely allocated.

Second, some ways of allocating allowances can affect incentives.  This can cut both ways.  In theory, using allowance value to reduce electricity rates can undermine incentives to conserve energy; this suggests that it would be preferable to compensate households for higher energy costs by sending them a lump-sum rebate rather than cutting their marginal price.  In other contexts, allowance allocation is deliberately designed to affect incentives.  For example, energy-intensive, trade-exposed manufacturers are given allocations that are tied to their output and to the average emissions intensity of their sector.  As research by Carolyn Fischer at Resources for the Future and others has shown, such “output-based rebates” manage to preserve the incentive to reduce emissions, while helping to keep manufacturing in this country and prevent “emissions leakage” to countries without a carbon price.

The bottom line is that the distinction between free allocation and auction makes little difference for the environmental or economic performance of the bill.  That’s a key point well worth keeping in mind in the coming debates over climate legislation.

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