July 29, 2007
Carbon Pricing is No Engine for Sustained Growth
There's an interesting, if frustrating, piece by David Leonhardt in the New York Times Magazine this week on the need for a strategy for long-term growth, not just short term stimulus. In it he makes a critique of green jobs -- and offers up pollution pricing orthodoxy.
"Green jobs can certainly provide stimulus. Obama's proposal includes subsidies for companies that make wind turbines, solar power and other alternative energy sources, and these subsidies will create some jobs. But the subsidies will not be nearly enough to eliminate the gap between the cost of dirty, carbon-based energy and clean energy. Dirty-energy sources -- oil, gas and coal -- are cheap. That's why we have become so dependent on them.
The only way to create huge numbers of clean-energy jobs would be to raise the cost of dirty-energy sources, as Obama's proposed cap-and-trade carbon-reduction program would do, to make them more expensive than clean energy. This is where the green-jobs dream gets complicated."
It seems that this analysis is only half-right.
On the one hand, he acknowledges that fossil fuels are so much cheaper than clean energy, and that Obama's subsidies for clean energy won't bridge the technology price gap. Plus, he notes, nobody will want to raise carbon/energy prices by very much, either during the recession or in the decades that follow.
But he then proceeds to make a fairly wild assumption: "The only way to create huge numbers of clean-energy jobs would be to raise the cost of dirty energy sources."
One good sign that you're about to hear a bit of ancient dogma are these three words: "The only way..."
Here's why: It's a sentence that demands a counterfactual. "The only way to create huge numbers of kerosene fuel and lamp jobs is to put a price on whale oil." Or, "The only way to create huge numbers of computer jobs is to tax adding machines and typewriters." Or, "The only way to create huge numbers of Internet installation and e-commerce jobs is to put a price on faxes, mail, and telegraphs."
The most bizarre thing is that the rest of the article extols America's past investments in education as the key to innovation -- "to make objects and and accomplish tasks more efficiently." And yet, thanks largely to government investments in RD&D, we've managed to make solar panels and wind turbines (and countless other things) more efficient and more efficiently manufactured. Leonhardt never connects the dots between education and innovation on the one hand and clean energy on the other.
Leonhardt is no doubt right that many subsidies, including the ones in Obama's stimulus package, won't make clean energy cheap. If we guarantee a high fixed price for solar, as feed-in tariffs do, there is little incentive for manufacturers to innovate to achieve major price reductions. This has been one of the main criticisms of the German solar panel installation program.
But a strategy aimed at making clean energy cheap in real, unsubsidized returns, through strategic investments in infrastructure, education, and RD&D, could generate the kind of growth the economy needs not just for the next 2 years but the next 20. Leonhardt mentions only the benefit of jobs in the U.S., which he suggests might be a mixed bag as fossil fuel jobs are lost. But this is only one end of the trade equation. Selling cheap solar, wind, battery, decarbonization, and other technologies abroad could create jobs here while also expanding energy production/consumption in the developing world, which has the greatest potential as growth markets for U.S. goods. It's hard to see how pricing carbon at even $40/ton, which wasn't enough to stop coal-building in Europe, could do more.