Clean Energy – How Many Green Jobs?

July 23, 2009

by David L. Levy

Advocates of strong action on climate change have long argued that large-scale investments in clean energy will revitalize the economy and generate substantial employment, investment, and business opportunities. Last month my colleagues at PERI, University of Massachusetts, Amherst, Robert Pollin, James Heintz, and Heidi Garrett-Peltier, published a report (download pdf) titled The Economic Benefits of Investing in Clean Energy: How the Economic Stimulus Program and New Legislation Can Boost U.S. Economic Growth and Employment.

The headline findings of the report are that the clean-energy provisions incorporated within the American Recovery and Reinvestment Act, combined with the measures in the proposed American Clean Energy and Security Act currently before Congress, could together generate “roughly $150 billion per year in new clean-energy investments in the United States over the next decade”. They estimate that this level of investment, if sustained over time, will create and maintain a net increase about 1.7 million jobs – enough to reduce the unemployment rate by about one full percentage point. They observe that “These investments could, therefore, not only guide us out of our fossil-fuel dependent crisis, but serve as a powerful engine of economic recovery and long-term economic vigor in the U.S.”

It’s worth exploring their methodology and analysis in some detail, as the debates over climate change are almost entirely about the costs and benefits to various parties. The political economy of climate change will determine whether or not we can effectively address the risks of climate change. Carbon-intense industrial sectors such as oil, coal, autos, and chemicals have traditionally felt most exposed on the issue and led the charge against climate science and made the case that emission caps would create serious economic dislocation. Politicians increasingly act like businesspeople, concerned with the impact of policy on employment, investment, and tax revenues; political scientists term this phenomenon the “competition state”. Politicians from states most dependent on coal and oil, from Australia to Wyoming, are the least likely to support carbon control measures. Developing countries planning their industrial development based on cheap fossil fuels similarly oppose mandatory carbon controls. The key hurdle to vigorous, global action on climate change is not convincing people of the science; it’s convincing them that they won’t suffer economically, and might even benefit. Indeed, it’s surprising how companies shift their position on the science, once they realize that they can survive and even thrive in a low-carbon future.

To arrive at the 1.5 million employment figure, the report estimates that investing $150 billion a year on clean energy investments would yield 2.5 million new jobs, but it deducts 800,000 jobs lost if conventional fossil fuel spending were to decline by an equivalent amount. Essentially, clean energy is much more labor intense than fossil fuel energy, particularly on the installation and maintenance of wind turbines, solar panels, and efficiency measures. The report notes that it’s not likely that all $150 billion in new clean-energy investment spending would come at the expense of reductions in the fossil fuel industry, but the report leans to the conservative side. Still, reading the details of the methodology makes it clear that coming up with the investment and employment numbers involves a lot of heroic assumptions and extrapolations (for which economists are notoriously infamous). The report estimates, for example, the amount of private capital mobilized by federal funds, the amount of clean energy investment triggered by a future cap-and-trade system, and so on. The report gives the following breakdown of the projected $150 billion annual investment in clean energy:

Pollin1

The report then uses standard input-output analysis to estimate the employment impact of this incremental $150 billion annual spending. The new employment has three components: Direct, meaning the jobs involved in actually building and installing clean energy and efficiency products; Indirect, referring to jobs in industries that supply goods and services to clean energy, such as steel and electronics; and induced employment, meaning the multiplier effect by which the increased income from direct and indirect employment is spent in other sectors, raising employment more broadly. The table below shows the estimated employment impact in the various clean energy sectors, per million dollars of increased spending:

Pollin2

The authors estimate that, on average, $1 million of investment in clean energy generates about 16.7 jobs, compared with 5.3 in fossil fuels. They give three reasons for this: clean energy is more labor intensive, more of the value chain is domestically sourced, and more entry level (as well as highly skilled) jobs are needed in clean energy. They estimate the sectoral breakdown of jobs created below:

Pollin3

Overall, this is one of the most detailed and meticulous studies of the employment impacts of clean energy, and Bob Pollin and the UMass team deserve credit for that. Reports like this provide crucial ammunition for advocates of a robust clean energy policy. It’s important to understand, however, what this study does and does not demonstrate (and I’ll confess that I’ve worked on a report that looked at clean energy in Massachusetts using a similar, if simpler, approach). The report provides a good estimate of the employment created by new spending on clean energy under the current recessionary conditions of high unemployment. In that sense, it’s really an assessment of the proposed clean energy investment (via the ARRA stimulus funds and forthcoming energy bill) as a Keynesian demand stimulus. As such, it should really project the full 2.5 million jobs associated with the $150 billion of clean energy investment, and not worry too much about any decline in fossil fuels. While demand for coal is stagnating, oil and gas markets are likely to recover sharply in the next few years.

A very different, and much more complex, question to ask is: What is the employment and income impact of a long-term shift to clean energy? In the long run, as Keynes famously quipped, we are all dead, but before that fate arrives, we hope that this recession will end and we might even get back to conditions that pass for “full employment”.  Here, the report’s comparison of the labor intensity of fossil fuels and clean energy is highly relevant; X gigawatts (GW) of clean energy will displace the equivalent amount of fossil fuel-based energy (and the analysis should probably be done in GW rather than dollars of investment). If clean energy needs more labor per GW, then these workers are going to be drawn out of other economic sectors. Now, one of the first lessons of economics is that there is no such thing as a free lunch. Labor has an opportunity cost – people who get jobs in clean energy could have been doing something productive elsewhere (and it would be tough to fully staff the sector with unproductive investment bankers). So under more “normal” economic conditions, the “employment created” by clean energy is not a benefit, but part of the resource cost.

It may well be true that clean energy provides substantial employment to relatively unskilled workers, who have been decimated by the decline of traditional manufacturing in the US and find it hard to secure full-time, well-paid work even in good economic times. A switch to clean energy would then increase demand for this type of work, raising wages amongst these workers and helping to reduce some pockets of unemployment. Pollin and his colleagues very persuasively make this case regarding the impact of clean energy on poverty and living standards in this report, also released in June 2009. This focus on the distributional impact of investing in clean energy should be an important part of the debate on climate policy.

Estimating the overall impact of a switch to clean energy on employment, incomes, and growth is a far more complex affair, as Pollin’s study acknowledges. The partial and general equilibrium economic models generally used to examine this question are in many respects far more primitive than the climate models used to analyze the impact of rising atmospheric levels of greenhouse gases. It’s ironic that many of the climate skeptics who criticize climate modeling for its assumptions and uncertainties put so much faith in crude economic models.

A transition to a low-carbon economy will entail major structural shifts, driving the demise of some industries and the birth of others. A key question for the US, and for other countries and regions, is whether they are strategically positioned for this transition: do they have the labor skills, the technologies, the corporate capabilities, the university expertise, the planning capacity, and supportive public policies to grow and sustain the new business sectors? New England and California are probably quite well positioned, but as we academics like to say, further research is required.

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