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 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 more than double investment in the electric power sector, adding 203,000 jobs per year 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 such an important study, 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 introduced last week by Senators Kerry and Lieberman. 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 would more than double as a result of the legislation, increasing by nearly $23 billion a year. Precisely because our economy is operating below full employment, the result would be a net job increase of 203,000 jobs per year 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 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.