Give me green, and jobs, but not green jobs
Jan 18th 2011, 16:45 by R.A. | WASHINGTON
LAST week, I had an extended Twitter debate, which is not easy to do, with environmental writer David Roberts of the green site Grist (full disclosure: I have contributed to Grist in the past). The trigger for the debate was this piece, by Richard Schmalensee and Robert Stavins, on the relative merits of a cap-and-trade policy versus a renewable energy standard (RES). With the former, a cap is set on carbon emissions, the right to emit a certain amount of carbon under the cap is auctioned off or otherwise allocated, and those rights can then be traded on the open market. With the latter, power companies are simply required to generate a certain percentage of their energy output from renewable sources. There may also be a market component to the RES policy; firms can trade green energy credits, much as they’d trade carbon credits under a cap-and-trade plan.
The systems may sound similar, but as Mssrs Schmalensee and Stavins point out they have different impacts:
[R]enewable or clean electricity standards are a very expensive way to reduce carbon dioxide (CO2) emissions — much more expensive than cap-and-trade. These standards would only affect electricity, thereby omitting about 60 percent of U.S. CO2 emissions. And even then, the standards would provide limited incentives to substitute away from coal, the most carbon-intensive way to generate electricity. Even more problematic, renewable/clean electricity standards would provide absolutely no incentives to reduce CO2 emissions from heating buildings, running industrial processes, or transporting people and goods. And unlike cap-and-trade, which would also affect oil consumption, the electricity standards would make no contribution to energy security. Only a very tiny fraction of U.S. oil consumption is used to generate electricity.
RES is, in their words, “less effective, more costly, but politically preferred” to cap-and-trade. Mr Roberts made clear that he did not agree with the framing of the piece. In his view, cap-and-trade and RES aren’t substitutes; they’re complements. This didn’t make much sense to me, so I asked him to elaborate. Over the course of multiple tweets, Mr Roberts suggested that the two policies support different but related goals. Cap-and-trade is there to reduce emissions, while RES is there to “encourage industries [important] to [the] 21st century”, to help generate “a robust set of clean energy industries”.
This, as Mr Roberts freely admits, it straightforward industrial policy—choosing an industry to favour and adopting policies to favour it. I think this is a terrible idea on its own merits, carbon impacts aside. Ed Glaeser helps explain why, citing the example of a Massachusetts solar cell manufacturer that recently closed up shop to move to China, where the government incentives were sweeter:
Evergreen Solar’s move to China was supported by a $33 million loan from the Chinese government, and it has suggested that the Chinese production was cheaper because “solar manufacturers in China have received considerable government and financial support.”But surely China’s skilled, low-wage labor force is a far more important source of its low costs. Japan’s success in the 1980s was also attributed to its activist industrial policy, but subsequent research found that government subsidies backed losers more often than winners.Joshua Lerner’s superb book “Boulevard of Broken Dreams” (Princeton University Press, 2009) reviews public efforts to support start-ups and entrepreneurship worldwide and reminds us that “for each effective government intervention, there have been dozens, even hundreds, of failures, where public expenditures bore no fruit.”
Labour-intensive industries will always be at a disadvantage in America relative to China, because American labour is expensive. America tends to excel in physical and human capital-intensive kinds of production. Critics of this view might respond that those aspects of production are characterised by clustering. There are increasing returns to scale, and if Chinese efforts to attract production facilities pay off then R&D clusters may follow, leaving Americans with no good jobs at all.
To this, I’d respond with several points. First, it does no good to be the first mover on a lousy investment, and it’s impossible to know what the good investments are ex ante. Second, this doesn’t actually seem to happen; governments around the world have been recruiting technology companies for decades, and yet Silicon Valley is still an unrivalled centre of technological innovation. And third, it strikes me as extremely unwise to inject yet another zero sum aspect into the climate change game. Americans have contributed a hugely disproportionate share of the carbon emissions now warming the planet, and the costs will fall mostly on others. Now Americans want the government to aggressively pursue green industry, the better to deny economic opportunity to the very same developing economies that will fare the worst from climate change? Does that seem at all wise or just? And if the argument is that China will nonetheless benefit from America’s lead on green tech, then why doesn’t that argument cut the other way, as well?
Indeed, that’s one point that Mr Glaeser emphasises—the cheaper green technologies are, the better. The perceived expense of substituting away from dirty technologies is one huge obstacle to emission reduction plans in America and elsewhere. So to the extent that green industrial policy increases the expense of green substitutes, it makes the job of slowing warming harder. Now the cheapest way to produce green technologies is for all governments to offer the same optimal research subsidies and let the firms choose where to locate on their own. More expensive is a world in which one country provides a larger than optimal subsidy in order to develop that first-mover advantage. Costlier still is a world in which two governments compete to throw money at a firm, simply in order to influence its location rather than its decision to produce. And especially costly is a world in which governments do all that for a technology that ultimately ends up going nowhere.
This is potentially a big deal. Research trajectories are subject to path dependence—an established line of research attracts more resources than a fledgling area. A governmental decision to favour a specific technology that disappoints is therefore doubly harmful; it attracts resources to projects that shouldn’t get them, and it deprives other, more promising, projects of those resources. Every research dollar that goes to corn ethanol increases the expense of developing cost-effective alternative technologies (alternatives that might actually lead to reduced emissions). There’s a strong case for green research subsidies, but green industrial policy is as likely to frustrate emissions reduction efforts as it is to complement them.
That still leaves those millions of unemployed Americans. But their status is fundamentally a question for macroeconomic policymakers. It would be a mistake to try and address joblessness through climate policy. Environmental policymakers are trying to reduce emissions at least cost to the economy, while macroeconomic policymakers are trying to reduce unemployment at least cost to the economy and given current environmental policy. It’s hard to see how an explicit industrial policy, green or any other colour, emerges from the simultaneous solution of those equations.