China has already made its choice.  China is spending about $9 billion a month on clean energy.  It is also investing $44 billion by 2012 and $88 billion by 2020 in Ultra High Voltage transmission lines.  These lines will allow China to transmit power from huge wind and solar farms far from its cities.  While every country’s transmission needs are different, this is a clear sign of China’s commitment to developing renewable energy.

The United States, meanwhile, has fallen behind.

– U.S. Secretary of Energy, Steven Chu

In an attempt to generate support for implementing a cap on carbon dioxide, Energy Secretary Steven Chu and others paint a very dire picture of the U.S.-vs.-China race for clean energy, implying that China is quickly outstripping us in that race.[i] However, all the facts are not on the table. In both 2008 and 2009, the U.S. added more non-hydroelectric renewable capacity than it added traditional capacity (natural gas, coal, oil, and nuclear).[ii] At the end of 2009, the U.S. ranked first in wind capacity in the world with China’s wind capacity about 30 percent less than the U.S. level. At the end of 2008 (the most recent data available), the U.S. ranked fourth in solar capacity, with only Germany, Spain, and Japan having a larger amount. Where China is outstripping us in domestic construction is in coal-fired, nuclear, and hydroelectric generating technologies. Because of U.S. legal and regulatory red tape, it is much harder to build these energy technologies in the U.S. than in China.

What Does the Capacity Data Show for Wind and Solar Power?

According to the Solar Energy Industries Association, the U.S. ranks fourth in the world in solar capacity with 8,800 megawatts at the end of 2008.[iii] Germany, Spain, and Japan, in that order, had larger amounts of solar power at the end of 2008 than the U.S.[iv] China had just 0.3 megawatts of installed solar PV capacity at the end of 2009[v] or 0.003 percent of the solar capacity of the U.S.

According to the Global Wind Energy Council, the U.S. leads the world in wind generating capacity, with 35.2 gigawatts at the end of 2009; Germany is second with 25.8 gigawatts, and China is third with 25.1 gigawatts.[vi] In 2009, the U.S. installed almost 10 gigawatts of wind capacity, a record,[vii] and China installed 13 gigawatts.[viii]

Why is China Building Wind and Solar Capacity?

China builds wind and solar because ratepayers in other countries are paying them to do so. China has been taking advantage of the Clean Development Mechanism (CDM) under the Kyoto Protocol to obtain funding for its solar and wind power.[ix] Under this program, administered by the United Nations, wealthy countries can contribute funds and get credit for “clean technology” built elsewhere as long as it is additional, that is, as long as that technology would not have been built otherwise. China is the world’s largest beneficiary of the program and has benefited to the point where 30 percent of its wind capacity is not operable because it is not connected to the grid.[x] However, in mid 2009, the U.N. started questioning whether the Chinese CDM program was in fact “additional,” because the U.N. found that China was lowering its subsidies to qualify for the program.[xi] That is, China was reducing its own government’s support in order to get international subsidies.

How Do the U.S. and China Electric Construction Programs Compare?

While China is building non-hydro renewable slightly faster than the United States, overall it is building new electrical generation much, much faster than the United States. The most comparable international database on electric generating capacity is found on the Energy Information Administration (EIA) website.[xii] Comparing the electric generating capacity data by technology type for the two countries, at the end of 2007 (the last year of comparable data), the Chinese had a total of 716 gigawatts of generating capacity, about 280 gigawatts less than the 995 gigawatts of capacity in the U.S.

The U.S. has been building generating capacity at a very slow rate, adding between 8 and 15 gigawatts a year since 2004. The Chinese in contrast, to fuel their bulging economy, have added between 75 and 106 gigawatts a year, from 2004 to 2007. Based on Secretary Chu’s comments, one might think that the additional capacity that China was adding was all non-hydroelectric renewable and nuclear capacity. However, that has not been the case. Between 2004 and 2007, the Chinese have added 226 gigawatts of fossil fuel generating capacity, 40 gigawatts of hydroelectric capacity, 2 gigawatts of nuclear capacity, and only 6 gigawatts of non-hydro renewable capacity.

What are China’s Electric Construction Plans?

Both China’s generating sector and its industrial sector rely heavily on coal, with 79 percent of its electric generation being coal-fired.[xiii] According to the National Energy Technology Laboratory (NETL), from 2004 through 2007, China has been building 30 to 70 gigawatts of coal-fired power a year, and has about 70 gigawatts more under construction. NETL sees China building over 185 gigawatts of coal-fired plants in the future.[xiv] (See figure below.)

According to Australia, China is planning to build 500 coal-fired plants over the next ten years.[xv] That means: every week or so, for the next decade, China will open another large coal-fired power plant.[xvi] Australia has just signed a $60 billion deal with China to build a coal mine in Queensland and a 311-mile rail way for transporting the coal to the coast for export to China’s power plants.[xvii]

While China has been slow in adding nuclear power plants, it currently has 20 nuclear reactors under construction and more starting construction this year.[xviii] Four AP 1000 reactors are under construction at 2 different sites: Haiyang and Sanmen.[xix] These are the same reactors that the U.S. Nuclear Regulatory Commission (NRC) has ruled need additional analysis, testing, or design modifications of the shield building to ensure compliance with NRC requirements before they can be constructed in the U.S.[xx] China expects to achieve a total nuclear capacity of 60 gigawatts by 2020, and 120 to 160 gigawatts by 2030,[xxi] surpassing the total nuclear capacity of the United States.

China has a goal to produce 15 percent of its energy from renewables by 2020.[xxii] To help meet this goal, China is planning to build the world’s largest wind farm in the northwest part of the country. The plan is for 5 gigawatts in 2010, expanding to 20 gigawatts in 2020, at a cost of $1 million per megawatt,[xxiii] or $1,000 per kilowatt, about half the cost of an onshore wind unit in the U.S., according to the Energy Information Administration.[xxiv]

What about the U.S.?

The U.S. has made it difficult to build generating plants in this country, particularly coal-fired and nuclear power plants. According to NETL, only eight coal-fired plants totaling 3,218 megawatts became operational in the U.S. in 2009, the largest increase in coal-fired capacity additions in one year since 1991.[xxv] Prospects of cap-and-trade legislation, reviews and re-reviews by the Environmental Protection Agency, direct action protests, petition drives, renewable portfolio standards in many states, competition from wind power, and lawsuits have slowed the construction of new coal-fired plants.[xxvi] As of late February, activists had derailed 97 of the 151 new plants that were in the pipeline in May 2007. According to the Sierra Club, 126 coal plants have been stopped since 2001.  And, for the first time in more than 6 years, not one new coal plant broke ground in 2009. The graph above compares the coal-plant additions in the U.S. to that of China, showing only a handful of coal plants under construction in the U.S.  With new coal-fired plants extremely limited by the above, some are purporting that the current direction for activists may be to phase out the existing fleet of coal-fired power plants.[xxvii] Because the capital cost of most of our coal-fired plants has been paid, that fleet produces almost 50 percent of our electricity at very little cost. Average production costs for coal-fired generators in 2008 were only 2.75 cents per kilowatt hour, second to our nuclear plants at 1.87 cents per kilowatt hour.[xxviii]

No nuclear plant has started up in the U.S. since 1996,[xxix] and no construction permits have been issued since 1979.[xxx]NRC requirements, financing difficulties, and slow fulfillment of the nuclear provisions of the Energy Policy Act of 2005 have slowed the construction of new nuclear power reactors. However, as part of the 2005 Energy Policy Act, President Obama announced last month that his administration is offering conditional commitments for $8.33 billion in loan guarantees for nuclear power construction and operation. Two new 1,100 megawatt Westinghouse AP1000 nuclear reactors are to be constructed at the Alvin W. Vogtle Electric Generating Plant in Burke, Georgia, supplementing the two reactors already at the site. The two new nuclear generating units are expected to begin commercial operation in 2016 and 2017 at a cost of $14 billion. As part of the conditional loan guarantee deal, the U.S. Nuclear Regulatory Commission must determine if the AP1000 fulfills the regulatory requirements for a construction and operating license.[xxxi] (These are the same units permitted, licensed, and being constructed in China right now.) But, as a recent Wall Street Journal energy conference noted, loan guarantees are “meaningless in the absence of regulatory certainty.” Further, Obama’s budget cutbacks for Yucca Mountain, the proposed nuclear waste repository, are yet another signal that President Obama may not “walk the talk.”[xxxii]

Natural gas and wind power are the technologies that seem best able to surmount the financial, regulatory, and legal hurdles of getting plants permitted and operational. In 2008, the U.S. added over 15,000 megawatts of electric generating capacity, of which 4,556 megawatts was natural gas-fired and 8,136 megawatts was wind power.[xxxiii] However, organized local opposition has halted even some renewable energy projects by using “not in my back yard” (NIMBY) issues, changing zoning laws, opposing permits, filing lawsuits, and bleeding projects of their financing.[xxxiv]

The Energy information Administration projects that the U.S. will need 200 gigawatts of additional generating capacity by 2035 to replace capacity that will be retired and to meet new electricity demand.[xxxv] Of that amount, EIA expects that 13 percent will be coal-fired, 53 percent natural gas-fired, 4 percent will be from nuclear power, and 29 percent from renewable power (23 percent is expected to be wind power), assuming that no changes would be made to current laws and regulations.[xxxvi]

Conclusion

China realizes that it needs affordable energy to fuel its economic growth, and is building all forms of generating technologies at breakneck speed. By contrast, the electric generating construction program in the United States has slowed tremendously, owing to regulatory, financial, and legal problems. Without reasonably priced energy, it will be difficult to achieve high levels of economic growth in the U.S., and industry will move offshore where energy is more affordable. Will Secretary Chu’s policies get us to affordable energy, or will the administration’s policies divert us from obtaining the energy that we need to fuel our economy?

[ii] Renewable Energy Policy Network for the 21^st Century, Renewables Global Status Report 2009 Update, May 13, 2009, http://www.ren21.net/pdf/RE_GSR_2009_Update.pdf

[iii] http://www.seia.org/cs/about_solar_energy/industry_data

[iv] Ibid.

[v] Center for American Progress, Out of the Running, March 2010, http://www.eenews.net/public/25/14571/features/documents/2010/03/04/document_cw_01.pdf

[vi] Global Wind Energy Council, http://www.gwec.net/index.php?id=13, and Global Wind Energy Council, Global wind power boom continues amid economic woes, March 2, 2010, http://www.gwec.net/index.php?id=30&no_cache=1&tx_ttnews[tt_news]=247&tx_ttnews[backPid]=4&cHash=1196e940a0

[vii] American Wind Energy Association, U.S. Wind Energy breaks all records, January 26, 2010, http://www.awea.org/newsroom/releases/01-26-10_AWEA_Q4_and_Year-End_Report_Release.html

[viii] Global Wind Energy Council, Global wind power boom continues amid economic woes, March 2, 2010, http://www.gwec.net/index.php?id=30&no_cache=1&tx_ttnews[tt_news]=247&tx_ttnews[backPid]=4&cHash=1196e940a0

[ix] CNN, U.N. halts funds to China wind farms, December 1, 2010, http://edition.cnn.com/2009/BUSINESS/12/01/un.china.wind.ft/index.html

[x] The Wall Street Journal, “China’s Wind Farms Come with a Catch: Coal Plants”, September 28, 2009, http://online.wsj.com/article/SB125409730711245037.html

[xi] CNN, U.N. halts funds to China wind farms, December 1, 2010, http://edition.cnn.com/2009/BUSINESS/12/01/un.china.wind.ft/index.html

[xii]http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=2&pid=34&aid=7&cid=r1,&syid=2004&eyid=2008&unit=MK

[xiii] Energy information Administration, International Energy Outlook 2009,  http://www.eia.doe.gov/oiaf/ieo/index.html

[xiv] National Energy Technology Laboratory, Tracking New Coal-fired Power Plants, January 8, 2010,  http://www.netl.doe.gov/coal/refshelf/ncp.pdf

[xv] http://windfarms.wordpress.com/2009/01/29/china-building-500-coal-plants/

[xvi] The New York Times, “Pollution From Chinese Coal Casts a Global Shadow”, http://www.nytimes.com/2006/06/11/business/worldbusiness/11chinacoal.html?_r=1

[xvii] Australia Signs Huge China Coal Deal, http://windfarms.wordpress.com/2010/02/06/australia-signs-huge-china-coal-deal/

[xviii] Nuclear Power in China”, World Nuclear Association, November 6, 2009, www.world-nuclear.org/info/inf63.html

[xix] Westinghouse News Releases, “Westinghouse and the Shaw Group Celebrate First Concrete Pour at Haiyang Nuclear Site in China”, September 29, 2009, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=200

[xx] Westinghouse Statement Regarding NRC News Release on AP1000 Shield Building, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=203

[xxi] Nuclear Power in China, World Nuclear Association, November 6, 2009, www.world-nuclear.org/info/inf63.html

[xxii] USA Today, “China Pushes Solar, Wind Power Development”, http://www.usatoday.com/money/industries/energy/environment/2009-11-17-chinasolar17_CV_N.htm

[xxiii] The Wall Street Journal, “Wind Power: China’s Massive and Cheap Bet on Wind Farms”, July 6, 2009, http://blogs.wsj.com/environmentalcapital/2009/07/06/wind-power-chinas-massive-and-cheap-bet-on-wind-farms/

[xxiv] Energy information Administration, Assumptions to the Annual Energy Outlook 2009, Table 8.2, Electricity Market Module, http://www.eia.doe.gov/oiaf/aeo/assumption/index.html

[xxv] National Energy Technology Laboratory, Tracking New Coal-fired Power Plants, January 8, 2010,  http://www.netl.doe.gov/coal/refshelf/ncp.pdf

[xxvi] A messy but practical strategy for phasing out the U.S. coal fleet, http://www.grist.org/article/death-of-a-thousand-cuts/

[xxvii]Ibid.

[xxviii]http://www.nei.org/resourcesandstats/documentlibrary/reliableandaffordableenergy/graphicsandcharts/uselectricityproductioncosts

[xxix] “Nuclear Power: Outlook for new U.S. Reactors”, Congressional Research Service, March 9, 2007, www.fas.org/sgp/crs/misc/RL33442.pdf

[xxx] Energy Information Administration, Annual Energy Review 2008, Table 9.1, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec9_3.pdf

[xxxi] Environment News Service, Obama Backs First New U.S. Nuclear Plant with $8.3 Billion, February 16, 2010, http://www.ens-newswire.com/ens/feb2010/2010-02-16-091.html

[xxxii] The Wall Street Journal, An Energy Head Fake, March 11,2010, http://online.wsj.com/article/SB10001424052748704784904575112144130306052.html?mod=WSJ_Opinion_AboveLEFTTop

[xxxiii] Energy Information Administration, Electric Power Annual, Tables 1.1 and 1.1.A, http://www.eia.doe.gov/cneaf/electricity/epa/epa_sum.html

[xxxiv] For a repository of stalled and stopped energy projects, see U.S. Chamber of Commerce, “Project No Project Energy-Back On Track”, http://pnp.uschamber.com/

[xxxv] Energy Information Administration, Annual Energy Outlook 2010 Early Release, Table A9, http://www.eia.doe.gov/oiaf/aeo/pdf/appa.pdf

[xxxvi] Ibid.

Washington, DC – In a perceived attempt to lure wary senators toward support of a job-killing cap-and-trade bill that will increase energy costs across the board, today President Obama committed $8 billion in taxpayer-backed loans to construct two new reactors in Georgia. The president made the announcement in Lanham, Maryland, where he also spoke about “clean” and “green” energy jobs.

However, President Obama did not mention that his budget eliminates funding for the nuclear waste repository at Nevada’s Yucca Mountain. Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987, Yucca Mountain is the only permanent nuclear waste repository in the United States.

“As is the case with the rest of this Administration’s energy proposals, there is a complete and daunting lack of consistency on the issue of nuclear waste and nuclear loan guarantees,” said Thomas J. Pyle, president of the non-partisan Institute for Energy Research (IER). “Putting American taxpayers on the hook for $8 billion in an attempt to garner support for a job-killing cap-and-trade package is a purely political ploy, especially when measured against the closure of Yucca Mountain.

“Nuclear energy is an important component towards securing our nation’s long-term energy needs. But without a plan for spent fuel rods, this administration is simply using taxpayer-backed loan guarantees as an effort to curry favor with a few senators,” continued Pyle. “This announcement has nothing to do with securing America’s energy future and everything to do with the business-as-usual Washington horse-trading that the American people are tired of.”

For additional information, please contact Patrick Creighton, 202-621-2947, or Laura Henderson, 202-621-2951.

#####

Washington, DC – In anticipation of President Barack Obama’s return from Asia, the free-market Institute for Energy Research (IER) today released and delivered a policy brief for the president and his advisors on China’s booming energy economy and growth.

Thomas J. Pyle, president of IER, issued this statement:

“By all accounts, the president’s trip to Asia was a successful one, and we welcome him home. However, it’s critical to highlight the commonsense energy policies that China is pursuing. Because of China’s aggressive pursuit for affordable, reliable and secure energy – of all forms – their nation continues to be one of the world’s most powerful economic engines. And our team of experts have prepared a compelling outline of ways the U.S. can learn from China and once again make energy a top priority in this country.

“China is manufacturing coal-fired power plants by the week, nuclear plants every few months, the largest hydro-electric dams on earth, windmills and solar panels for export, and securing up oil and gas reserves around the world. They understand that affordable energy is key to economic activity, growth and prosperity.

“Unfortunately, policymakers in Washington are working to increase the cost of energy and limit access to our most affordable resources while others work tirelessly to shut down our nation’s power plants, regardless if it results in the loss of jobs and higher energy costs. Litigation and inaction from federal bureaucracies continues to delay responsible offshore energy exploration. And while China is deploying next generation nuclear technologies, our government continues to say no to low-carbon nuclear energy.

“We hope someday that expensive and unreliable alternative and renewable energy forms can exist in the market place without significant taxpayer assistance and government mandates. And we hope the president reads this paper with an open mind.”

NOTE: Click HERE to view the briefing paper sent to the President today.

#####

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The Energy Information Administration (EIA) produces forecasts of energy supply and demand for the next 20 years using the National Energy Modeling System (NEMS)[1]. These forecasts are updated annually and published in the Annual Energy Outlook (AEO).[2] All sectors of the energy system are represented in NEMS, including the electric power generation, transmission, and distribution system.

To meet electricity demand, the EIA represents the existing generating plants, retires those that have come to the end of their economic life, and builds additional plants to meet projected demand from the residential, commercial, industrial, and transportation sectors. As a result, EIA must represent a slate of technologies, their capital and operating costs, their availability and capacity factors, the financial structure and subsidies, the time to construct the plant, the utilization of the plant, and expected future cost changes, including fuel input for fossil and nuclear plants.

To determine the most economic technology for the type of demand (base, intermediate, or peaking load) for which new capacity is needed, NEMS competes the technologies based on the economics of their levelized costs. Levelized costs represent the present value of the total cost of building and operating a generating plant over its financial life, converted to equal annual payments and amortized over expected annual generation from an assumed duty cycle.

The table below provides the average national levelized costs for the generating technologies represented in the AEO2010 reference case.[3] The values shown in the table do not include financial incentives such as state or federal tax credits, which impact the cost and the competitiveness of the technology. These incentives, however, are incorporated in the evaluation of the technologies in NEMS based on current laws and regulations in effect at the time of the modeling exercise, as well as regional differences in the cost and performance of the technology, such as labor rates and availability of wind or sun resources.

In the AEO2010 reference case, a 3-percentage point increase in the cost of capital is added when evaluating investments in greenhouse gas intensive technologies such as coal-fired power plants without carbon capture and sequestration (CCS) technology and coal-to-liquids plants. The 3-percentage point adjustment is similar to a $15 per ton carbon dioxide emissions fee when investing in a new coal plant without CCS technology. This adjustment represents the implicit hurdle being added to greenhouse gas intensive projects to account for the possibility that they may need to purchase allowances or invest in other greenhouse gas emission-reducing projects that offset their emissions in the future. Thus, the levelized capital costs of coal-fired plants without CCS are likely higher than most current coal project costs.

The levelized cost for each technology is evaluated based on the capacity factor indicated, which generally corresponds to the maximum availability of each technology. However, some technologies, such as a conventional combined cycle turbine, that may look relatively expensive at its maximum capacity factor may be the most economic option when evaluated at a lower capacity factor associated with an intermediate load rather than base load facility.[4]

Simple combustion turbines (conventional or advanced technology) are typically used for peak load, and are thus evaluated at a 30 percent capacity factor. Intermittent renewable resources, e.g. wind and solar, are not operator controlled, but dependent on the weather or the sun shining. Since the availability of wind or solar is dependent of forces outside of the operator’s control, their levelized costs are not directly comparable to those for other technologies although the average annual capacity factor may be similar. Because intermittent technologies do not provide the same contribution to system reliability as technologies that are operator controlled and dispatched, they may require additional system investment as back-up power that are not included in the levelized costs shown below.

Levelized Cost of New Generating Technologies, 2016

($2008 per megawatt hour)

Source: Energy Information Administration, Annual Energy Outlook 2010, http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html

[1] Energy Information Administration, NEMS documentation, http://www.eia.doe.gov/oiaf/aeo/overview/index.html

[2] Energy Information Administration, Annual Energy Outlook 2010, http://www.eia.doe.gov/oiaf/aeo/index.html

[3] Energy Information Administration, Annual Energy Outlook 2010, http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html

[4] Base load plants are facilities that operate almost continuously, generally at annual utilization rates of 70 percent or higher. Intermediate load plants are facilities that operate less frequently than base load plants, generally at annual utilization rates between 25 and 70 percent. Peaking plants are facilities that only run when the demand for electricity is very high, generally at annual utilization rates less than 25 percent.

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Energy makes modern society possible. It lights the night, heats our homes, powers our entertainment, and most importantly, it helps us conserve the ultimate non-renewable resource—time. Energy amplifies our ability to do work. Machines help autoworkers assemble cars, power tools help construction workers build our homes, gasoline-powered automobiles help us take care of our families, diesel-power trucks distribute fresh produce across the country, and electricity-powered computers give us unprecedented access to information. But the energy that supplies 85 percent of our needs—coal, oil, and natural gas—are under attack. Politicians and special interest groups are proposing various methods to tax these abundant and reliable sources of energy.

The newest attack on oil, natural gas, and coal are proposals to tax carbon dioxide emissions. Noted economist Art Laffer and current U.S. Rep. Bob Inglis (R-S.C.) argued in favor of a carbon tax in a New York Times[1] op-ed. Author, commentator, and syndicated columnist Charles Krauthammer made his case for a large increase in the gas tax in the Weekly Standard .[2] And Fred Smith, the CEO of FedEx, has publicly declared his support for a tax on carbon dioxide emissions.

The arguments boil down to the assertion that carbon taxes are favorable because they are better than cap and trade schemes. This is correct, but it does not mean that we should implement carbon taxes. Carbon tax implementation would run into many of the same problems that have plagued cap and trade. Politicians cannot resist new opportunities to raise tax revenues and dole out our dollars to favored constituencies, especially when the revenues range from hundreds of billions to trillions of dollars. Carbon taxes might hold some allure, but ultimately they are economically destructive. Neither carbon tax nor cap and trade is good for American consumers.

Reasons Why Carbon and Energy Taxes are a Bad Idea:

1. Carbon taxes are taxes on 85 percent of the energy we use. A carbon tax would impose a new tax on the vast majority of our nation’s economic activity. Fossil fuels power our nation and produce 85 percent of the energy we consume in the United States. [3] Nuclear and hydro power produced an additional 11 percent of our energy.[4] The remaining 4 percent comes from other renewables like biofuels, wind, and solar.[5] Carbon taxes may make hydro and nuclear power more attractive, but few sites remain where it is possible to build large hydroelectric dams and new nuclear power plants face major political obstacles.

2. A carbon tax that is perfectly offset by other tax cuts is neither a practical nor a political reality. The history and nature of politics shows that once politicians institute a tax, they will not give it up. Still, some argue in favor of a “tax swap” to reduce income taxes while implementing a new tax on carbon dioxide emissions. Theoretically, this could make sense. However, the argument does not reflect political reality.

The first challenge for promoters of a carbon tax “tax swap” is getting lawmakers to pass a carbon tax. Lawmakers are very wary of imposing easily identifiable taxes across the entire population. Instead, politicians prefer to hide the costs of government programs, while rewarding discrete and identifiable groups. Implementing carbon taxes would result in an identifiable tax increase similar to the unpopular gas tax increases that led to voter displeasure revolts against President George H.W. Bush and President Bill Clinton.

The second challenge for promoters of a “tax swap” is getting Congress to reduce income taxes. Congress could decrease some income taxes, but it is highly unlikely income taxes would be decreased for all income brackets.

Taxpayers will likely fight against a “tax swap” because they understand there is nothing to stop future lawmakers from increasing carbon taxes or returning income taxes to their former levels. Worse, from a taxpayer’s perspective, a carbon tax will give lawmakers another vehicle to raise large amounts of tax revenue.

Some argue that a revenue-neutral “tax swap” would be economically beneficial. There is, however, little evidence politicians are concerned about the economic effectiveness of plans to reduce carbon dioxide emissions. Most economists agree that carbon taxes are a superior to cap and trade.[6] Carbon taxes are more transparent, more understandable, and less subject to political manipulation. Though economists prefer carbon taxes, congressmen strongly prefer cap and trade plans.[7] Lawmakers have floated many cap and trade proposals, but they have not discussed any serious carbon tax proposals.

Lawmakers say they favor economically efficient global warming plans, but their actions demonstrate that the discussion about efforts to reduce greenhouse gas emissions is not about science or economics—it is about politics. Offsetting income taxes with carbon taxes is not a political reality because politicians will not propose such obvious tax increases on all Americans.

3. Politicians like to reward special interest groups with new tax revenues. When politicians have large amounts of tax dollars at their disposal, they tend to spend it on projects that reward special interest groups. A carbon tax would likely generate over $1 trillion in new revenue. Much of this revenue would likely be spent on inefficient “pork” projects.

The proposed cap and trade schemes contain hundreds of billions of dollars for special interests. The recession has spurred additional calls for hundreds of billions of dollars in additional spending to create “green jobs.” For example, the Center for American Progress is calling on Congress to spend $100 billion to create two million “green jobs”[8] and the Apollo Alliance wants Congress to spend $500 billion to create five million “green jobs.”[9] If a carbon tax were in place, lawmakers would almost certainly divert resources to “green job” subsidies or other similar programs, rather than back into taxpayers’ wallets.

4. It is impossible to create an optimal carbon tax. A carbon tax would need to be set at an optimal level that accounts for the economy and climate science. This is an impossible task. One of the greatest insights of the 20^th century was that economically efficient central planning is not possible. Friedrich Hayek and others demonstrated that central planners cannot aggregate all of the information necessary to make economically efficient choices.[10] Their insight remains true today. A planner (or Congress) cannot create an optimal tax because he or she does not have all of the necessary information. With global warming, the lack of perfect information is further compounded by partisan politics and uncertain climate science. This makes it impossible to determine an optimal carbon tax.

The cost of a carbon tax will increase the costs of nearly everything that is produced, manufactured, or transported, including food and gasoline. How one would construct a credible methodology for accurately and precisely measuring and accounting for these effects remains, perhaps intentionally, an unaddressed question.

5. A carbon tax is a regressive tax, but increased wealth transfers will likely make it increasingly progressive. Lower income families spend more of their income on energy than higher income families. The Wall Street Journal explains:

The Congressional Budget Office—Mr. Orszag’s former roost—estimates that the price hikes from a 15% cut in emissions would cost the average household in the bottom-income quintile about 3.3% of its after-tax income every year. That’s about $680, not including the costs of reduced employment and output. The three middle quintiles would see their paychecks cut between $880 and $1,500, or 2.9% to 2.7% of income. The rich would pay 1.7%. Cap and trade is the ideal policy for every Beltway analyst who thinks the tax code is too progressive (all five of them).[11]

It appears that some of the proponents of carbon taxes are some of those five beltway analysts who believe the tax code is too progressive. They argue in favor of a carbon tax because it will not retard the formation of capital because it applies to everyone. In other words, since it would be spread over the population without regard to income, carbon tax proponents argue it will not reduce the incentives for high-income earners to generate wealth and create new jobs.

This alleged advantage, however, would never last politically because a carbon tax will be a visible and ever-increasing new tax. In response to that reality, lawmakers are likely to execute new, politically popular transfers of wealth—all with an eye on limiting the tax’s effect on lower-income families. Sales taxes, for example, could be uniformly applied across the economy, but in practice, sales taxes vary on certain items, in part, to help lower-income Americans deal with the increased costs imposed by them.

Carbon taxes would likely be accompanied by various rebate schemes to soften the regressive nature of the tax and make it a more progressive tax. This is currently happening with cap and trade proposals. One plan calls for the government to auction all emission permits and give each citizen a $700 check every year.[12] Another option is to only give the rebate checks from auction revenues to lower-income citizens.[13]

If the government imposes a carbon tax, it is very unlikely that the tax will remain uniform. In the end, not only will it hit the poor with a disproportionate burden of a carbon cap, but it will create yet another series of loopholes in the tax code.  As history has shown, such a plan will further distort the market, render the tax code even more complicated, and hide yet another round of handouts to well-connected special interests.

6. A carbon tax set at a wrong level will cause great economic harm. Even the proponents of carbon taxes, such as Yale University Professor William Nordaus, find that once there is deviation from worldwide participation, the costs of achieving environmental global improvements dramatically rise. Nordhaus’ economic model shows that an overly ambitious and/or inefficiently structured policy can swamp the potential benefits of a perfectly calibrated and efficiently targeted plan.[14] For example, Nordhaus’ optimal plan yields net benefits of $3 trillion ($5 trillion in reduced climatic damages and $2 trillion in abatement costs). Yet, other popular proposals have abatement costs that exceed their benefits. The worst is former Vice President Al Gore’s 2007 proposal to reduce carbon dioxide emissions 90 percent by 2050. Nordhaus’ model estimates this plan would make the world more than $21 trillion poorer than if there were no controls on carbon dioxide.[15]

7. Realistically, a carbon tax would lead to lower energy use and lower economic output because low-carbon replacement technologies simply do not exist. Carbon taxes effectively increase the cost of fossil fuels in an effort to make non-fossil fuels more economically attractive. The technologies to significantly reduce greenhouse gas emissions from fossil fuels, however, are decades away and extremely costly.[16] Instead, the only real way to reduce greenhouse gas emissions in the short run is to reduce energy use and economic output.

Consider automobile use and gas prices. People have begun to transition toward fuel-efficient cars, but the real impact of high gasoline prices in 2008 was to reduce vehicle miles traveled. Just as higher fuel prices led to less driving, higher energy prices will lead to reduced energy consumption. That will lead to a corresponding drop in our ability to make economic choices.

Given current technologies, carbon taxes will result in less economic output. The graphic below illustrates that point. The implication is clear—there is a strong correlation between energy use and GDP.

8. Just because a proposal is “budget neutral” for the government does not mean it is “budget neutral” for American families. Carbon taxes or cap and trade programs will transfer wealth from rural areas, where people drive more and use more energy, to more densely populated urban areas.[17] Not coincidentally, many urban and Northeastern politicians favor a cap and trade program or carbon taxes.

Also, carbon taxes will disproportionally harm states that generate the majority of their electricity from coal-fired power plants.[18] These states tend to be more rural states.

9. Domestic carbon taxes, even in the best case, can only produce marginal impacts on climate. In 2006, China surpassed the United States as the world’s largest emitter of carbon dioxide.[19] But the difference in emission growth rates is striking. According to data from the Global Carbon Project, from 2000 through 2007, global total greenhouse gas emissions increased 26 percent. During that same period, China’s carbon dioxide emissions increased 98 percent, India’s increased 36 percent and Russia’s increased 10 percent. Carbon dioxide emissions in the United States increased by three percent from 2000 through 2007.[20] These data are displayed in the graphic below:

As time goes on, the United States will emit a smaller and smaller share of the world’s total greenhouse gas emissions,[21] which makes unilateral efforts— such as a domestic carbon tax—an ineffective way to influence climate. If the United States were to completely cease using fossil fuels, the increase from the rest of the world would replace U.S. emissions in less than eight years.[22] If we reduced the carbon dioxide emissions from the transportation sector to zero, the rest of the world would replace those emissions in less than two years.[23] Increases in worldwide carbon dioxide emissions are driven by developing economies, not the United States.

10. Domestic carbon taxes will force more industries to leave America. Energy costs are a major expenditure for heavy industry. America’s natural gas prices are the highest in the world,[24] even though we have the world’s sixth largest proven natural gas reserves.[25] The high price of natural gas has significantly contributed to the loss of more than three million manufacturing jobs since 2000.[26] Carbon taxes will drive up the cost of natural gas because companies would use it as a substitute for coal in electricity production, which means increased electricity costs for industry and increased natural gas prices. This is especially troublesome for chemical companies, all of which use natural gas not only as an energy source, but also as a feedstock. Higher natural gas prices will force them to pursue options offshore and overseas, reducing American jobs.

11. Domestic carbon taxes cannot address “leakage.” High costs of doing business in America will force jobs and economic activity to leave this country in favor of countries with lower energy prices. China and India have stated they will not impose burdensome climate regulations on their citizens.[27] Because not all countries will implement carbon taxes, industries will take their jobs to countries where taxes do not eat their profits. Despite a huge American economic sacrifice, global emissions will remain the same.

12. Carbon taxes will lead to calls for trade protectionism. Carbon taxes will lead to reduced economic competitiveness. In turn, organized labor will likely call for new barriers to trade. For example, a top priority for the United Steelworkers is a “border adjustment” to penalize the steel imports from countries that do not curb their greenhouse gas emissions.[28] Increased U.S. trade protectionism will almost certainly lead to greater trade protectionism worldwide that will further harm the American economy and all of America’s trading partners.

13. If we are truly concerned about reducing carbon dioxide emissions, the best path forward is increasing humankind’s ability to adapt. Rich countries and societies can adapt more easily to changed circumstances than poor countries. Environmental improvements are more likely to be realized in prosperous societies than in poorer ones.[29] Carbon taxes and cap and trade reduce society’s aggregate wealth, which make environmental improvements more difficult to achieve.

14. Real world experience counsels against a carbon tax. Ken Green, a former supporter of a revenue-neutral carbon tax, changed his mind because of political and economic realities. Mr. Green writes: [30]

I previously felt that a revenue-neutral carbon tax was a good idea, because it would be both effective and could even be economically beneficial. But three developments have caused me to retract my support. First, rising energy costs have already imposed a huge carbon tax with little GHG reduction. This suggests that the elasticity of energy use could be lower than prior estimates, meaning it would be a useless gesture. Second, as implementations of carbon taxes in Europe and Canada have demonstrated, governments simply cannot implement such tax systems without sucking up some of the revenue, and using the rest to benefit crony-capitalists and steer money to favored constituencies. And finally, because using biofuels such as ethanol would let people save on carbon taxes, demand for such fuels will grow, only compounding the environmental and nutritional mischief they cause.

Just because a carbon tax is a bad idea does not mean that cap and trade is better

Nearly all of the above arguments against a carbon tax apply equally to cap and trade schemes. The only real difference is that cap and trade is a stealth tax that brings a large amount of reporting, implementation, and regulatory problems.

The point of cap and trade plans, like carbon taxes, is to increase the price of energy from oil, coal, and natural gas. Lawmakers may say they have plans to rebate some people so that everyone does not suffer, but it is not possible to craft a cap and trade plan that is perfectly offset by rebates. Just because a politician promotes a plan that is “budget neutral” for government does not mean it is “budget neutral” for American families. When politicians redistribute money, there will be winners and losers. The winners will be the politically well-connected groups and the populace as a whole will lose.

Like carbon taxes, it is not possible to set a cap for cap and trade plans at an optimal level. The smartest people in the world could not aggregate enough data quickly enough to discover the optimal level of the cap or a cap and trade scheme or the level of a carbon tax. It would require too much data about American’s preferences and about uncertain climate science. To complicate matters, if the cap set at the wrong level, or if the plan does not include all nations, the inefficiencies will swamp any possible benefits. Most disturbingly, if the United States unilaterally reduces our carbon dioxide emissions, it will not have a real effect on global carbon dioxide concentrations. This means there will be no environmental benefits to the United States unilaterally reducing carbon dioxide emissions.

Cap and trade schemes are very regressive taxes. They will transfer wealth from poorer areas of the country to wealthier areas. Cap and trade will also reduce energy use and thereby reduce economic output. Also, if we drive up costs, cap and trade plans will reduce American economic competitiveness and cause more jobs to flee to foreign countries.

In short, cap and trade and carbon taxes are two different ways to raise energy prices. Both carbon taxes and cap and trade would harm the United States’ economy without making any meaningful differences in global concentrations of carbon dioxide.

Conclusion

Energy is the lifeblood of the economy. Policies that increase the price of energy harm the economy. However, the entire point of policies like carbon taxes and cap and trade is to increase energy prices. These cost increases make the economy less efficient domestically and it makes the United States less economically competitive internationally. Higher energy prices harms America’s ability to grow its economy at home and it means more American jobs will be shipped overseas.

Now is not the time to implement an economically harmful plan like carbon taxes or cap and trade. Americans need an efficient economy to reverse the recession and improve the lives of American workers. Carbon taxes and cap and trade will just make it more difficult to reverse the recession.

[2] Charles Krauthammer, The Net-Zero Gas Tax: A Once in a Generation Chance, Jan. 5, 2009, http://weeklystandard.com/Content/Public/Articles/000/000/015/949rsrgi.asp

[3] Energy Information Administration, U.S. Energy Consumption by Energy Source, http://www.eia.doe.gov/cneaf/alternate/page/renew_energy_consump/table1.html. (May 2008).

[4] Id.

[5] Id.

[6] See e.g. William D. Nordhaus, Life After Kyoto: Alternative Approaches to Global Warming Policies, NBER Working Paper No. 11889, Dec. 9, 2005, http://www.econ.yale.edu/~nordhaus/homepage/kyoto_long_2005.pdf; N. Gregory Mankiw, One Answer to Global Warming: A New Tax, N.Y. Times, Sept. 16, 2007, http://www.nytimes.com/2007/09/16/business/16view.html; Kenneth P. Green et. al., Climate Change: Cap vs. Taxes, American Enterprise Institute Environmental Policy Outlook, June 1, 2007, http://www.aei.org/publications/filter.all,pubID.26286/pub_detail.asp.

[7] The following is some of the cap and trade bills introduced during the 110^th Congress: S. 2191, The Climate Security Act of 2008; S. 1766, the Low Carbon Economy Act, S. 280, the Climate Stewardship and Innovation Act; S. 309, the Global Warming Pollution Reduction Act; S. 485, the Global Warming Reduction Act; H.R. 620, the Climate Stewardship Act; and H.R. 1590, the Safe Climate Act of 2007.

[8] Robert Pollin, et. al, Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy, Sept. 2008, http://www.americanprogress.org/issues/2008/09/pdf/green_recovery.pdf.

[9] Jeffery Ball, Does Green Energy Add 5 Million Jobs? Potent Pitch, but Numbers are Squishy, Wall Street Journal, Nov. 7, 2008, http://online.wsj.com/article/SB122601449992806743.html.

[10] See e.g. Friedrich A. Hayek, The Use of Knowledge in Society, 4 Am. Econ. Rev. 519 (Sept. 1945).

[11] Editorial, Who Pays for Cap and Trade? Wall Street Journal, March 9, 2009.

[12] James K. Boyce & Matthew Riddle, Cap and Dividend: How to Curb Global Warming While Protecting the Incomes of American Families, Political Economy Research Institute (Nov. 2007), http://www.peri.umass.edu/fileadmin/pdf/working_papers/ working_papers_101-150/WP150.pdf.

[13] Robert Greenstein et. al., Designing Climate-Change Legislation that Shields Low-Income Households from Increased Poverty and Hardship, Center on Budget and Policy Priorities (May 9, 2008), http://www.cbpp.org/10-25-07climate.pdf.

[14] Robert P. Murphy, Rolling the DICE: Nordhaus’ Dubious Case for a Carbon Tax, p. 20, June 2008, http://www.instituteforenergyresearch.org/wp-content/uploads/2008/06/2008-06_rolling_the_dice_murphy.pdf.

[15] Id. at 20.

[16] See Kenneth P. Green, Climate Change: Science and Policy, Oct. 27, 2008, http://www.aei.org/publications/filter.all,pubID.28838/pub_detail.asp.

[17] Alaska has the higher per capita energy use, followed by Wyoming, Louisiana, North Dakota and Texas. The states with the lowest energy use per capita are Rhode Island, New York, Massachusetts, California, and New Hampshire. The average Rhode Islander uses only 18% as much energy as an Alaskan and 22% as much energy as someone from Wyoming. See Energy Information Administration, Table R2. Energy Consumption by Source and Total Consumption per Capita, Ranked by State, 2006, Nov. 28, 2008, http://www.eia.doe.gov/emeu/states/hf.jsp?incfile=sep_sum/plain_html/rank_use_per_cap.html.

[18] The states with the most affordable electricity either generate the majority of their electricity from coal-fired power plants or from hydro power. See Energy Information Administration, Table S1. Energy Consumption Estimates by Source and End-Use Sector, 2006, State Energy Consumption Estimates: 1960 through 2006, Nov. 2008, http://www.eia.doe.gov/emeu/states/sep_use/notes/use_print2006.pdf; Energy Information Administration, Table 5.6.B. Average Retail Price of Electricity to Ultimate Customers by End-Use Sector, by State, Year-to-Date through September 2008 and 2007, Dec. 12, 2008, http://www.eia.doe.gov/cneaf/electricity/epm/table5_6_b.html.

[19] See e.g. Netherlands Environmental Assessment Agency, China now no. 1 in CO2 emissions; USA in second position, June 19, 2007, http://www.pbl.nl/en/news/pressreleases/2007/20070619Chinanowno1inCO2emissionsUSAinsecondposition.html.

[20] Calculated using the emission data from the Global Carbon Project. In 2000, China emitted 910,950 GgC, India 316,804 GgC, Russia 391,652 GgC, and the U.S. 1,541,013 GgC. By 2007, China emitted 1,801,932 GgC, India 429,601 GgC, Russia 432,486 GgC, and the U.S. 1,586,213 GgC.

[21] According to the Global Carbon project, in 2007, China emitted 21% of the world’s carbon equivalent and the U.S. emitted 19%.

[22] Calculated using the emission data from the Global Carbon Project. According to these data, the U.S. emitted 1,586,213 GgC in 2007. Without the U.S., the world’s emissions were 5,203,987 GgC in 2000, increasing to 6,884,787 GgC in 2007.

[23] Calculated using the emission data from the Global Carbon Project. According to EPA, the GHG emissions from the transportation sector total 28% of total U.S. emissions. Environmental Protection Agency, Regulating Greenhouse Gas Emissions Under the Clean Air Act; Proposed Rule, 73 Fed. Reg. 44354, 44403 (July, 30, 2008). Twenty eight percent of the U.S.’s 2006 carbon dioxide emissions are 436,141 GgC. From 2005 to 2007, the world’s emissions, with the emissions from the U.S., grew by 476,324 GgC.

[24] Paul N. Cicio, Testimony of Paul N. Cicio, President of Industrial Energy Consumers of America before the House of Representatives, Dec. 6, 2007, http://www.ieca-us.com/documents/IECAHouseTestimony-NaturalGas_12.06.07.pdf.

[25] Energy Information Administration, Annual Energy Review 2007, Table 11.4, http://www.eia.doe.gov/emeu/aer/txt/ptb1104.html.

[26] See Testimony of Paul N. Cicio.

[27] See e.g. Shai Oster, China Asks Rich to Pay for Cleanup, Wall Street Journal, Oct. 30, 2008, http://online.wsj.com/article/SB122530768753281185.html; Nitin Sethi, As Climate Talks Resume, India Accuses UN of Bias, The Times of India, Aug. 21, 2008, http://timesofindia.indiatimes.com/Climate_talks_resume_today_India_accuses_UN_of_bias/articleshow/3386789.cms.

[28] Christa Marshall, Report says climate rules could shut down energy-intensive companies, ClimateWire, Feb. 2, 2009.

[29] Bruce Yandle, Environmental Kuznets Curves: A Review of the Findings, Methods, and Policy Implications, 2004, http://www.perc.org/articles/article207.php.

[30] Kenneth P. Green, Climate Change: Science and Policy, http://www.aei.org/publications/filter.all,pubID.28838/pub_detail.asp.

Energy is the lifeblood of our economy.  As our competitors around the globe have shown us in recent years, job creation and economic growth begin with access to abundant, affordable energy supplies. 

Unfortunately, the Obama administration’s stimulus proposals are founded on the fundamentally flawed notion that we will achieve prosperity if we make coal, oil, and natural gas, which make up 85 percent [1] of the energy that fuels our economy, more expensive and less available.  Meanwhile, President Obama wishes to spend billions of taxpayer dollars on the most expensive and least efficient energy sources and force American consumers to pay more to purchase them.

Energy is, literally, “the capacity to do work.”  More energy means more work, more jobs, and more economic growth.  Less affordable energy means less work performed here at home.  Affordable energy creates jobs and stimulates investment in America.

IER supports government policies that encourage private investment, foster job creation, and provide American consumers access to the vast, proven, affordable energy supplies they own beneath the 2.3 billion acres of government lands not leased for responsible energy production.  These enormous taxpayer-owned resources, and the American jobs they would create, have been held hostage by a decades-long government policy of saying, “No, we can’t”.

Today, IER is offering a bold economic stimulus plan that will create jobs, strengthen our economy, enhance our national energy security, and make the U.S. more competitive in the world.  Best of all, it won’t cost taxpayers a dime.  In fact, it could generate hundreds of billions of dollars, along with jobs and new energy supplies for the future.

IER’s plan represents the most significant change in government energy policy in more than three decades.  We urge the Obama Administration to say, “Yes, we can” to our two-part plan, which begins by embracing the fundamental medical precept: First, Do No Harm:

• Vow to defend jobs and investments against expensive, job-killing climate regulations.  German Chancellor Angela Merkel recently stated that she would not allow EU climate regulations that “take decisions that would endanger jobs or investments in Germany.”  President Obama should follow suit and vow to defend American jobs against costly climate regulations.
• Halt EPA’s attempt to regulate carbon dioxide using the Clean Air Act. The Clean Air Act was designed to regulate regional air pollutants, not global concentrations of carbon dioxide.  President Obama needs to apply a cost-benefit analysis to EPA’s proposal to make 85 percent of the energy that fuels our economy more expensive and less available, cost Americans $7 trillion over the next 20 years, and accomplish little, if any, real reductions in global temperature.
• Renounce plans to bankrupt coal companies. As a presidential candidate, Obama said he would bankrupt coal-fired power plants with climate regulations. America currently gets 48 percent of our electricity from coal. Unlike wind and solar, coal is reliable, affordable, and proven. Wind and solar cannot power modern society’s always-on electricity needs.
• Join other policymakers in denouncing billions for “project[s] that depend on significant taxpayer subsidies while potentially doubling power costs” for American consumers and abandon all efforts to implement Federal Renewable Fuels Standards, Federal Renewable Portfolio Standards and Low Carbon Fuel Standards.

And second, say “Yes, we can” and pursue the following landmark changes in federal energy policy:

• End subsidies for all forms of energy and return the money to American taxpayers. The government should not be in the business of picking winners and losers in energy production.  Furthermore, according to the Congressional Budget Office (CBO), direct payments to individuals and cutting taxes have the fastest and most significant impacts on the economy.
• Continue our progress on the most significant change in energy policy in decades: Streamline regulations to produce energy from American resources on American lands and coastal waters.  ICF International recently released a study that shows developing America’s abundant but currently off-limits domestic energy supply would create 160,000 new jobs alone and generate $1.7 trillion for local, state, and federal tax revenue.
• Provide coastal states with 50 percent of revenue from offshore and onshore energy leasing.  Last year alone, the U.S. raised over $23 billion from energy leasing on federal lands.
• Support exploration and energy production in ANWR. According to the Energy Information Administration, ANWR “is the largest unexplored, potentially productive geological onshore basin in the United States.”  It contains a mean expected value of 10.4 billion barrels of oil. Opening ANWR would create hundreds of thousands of American jobs, generate billions of dollars in state and federal revenue, and enhance our energy security.
• Expedite job creation by waiving all regulations on federal lands for the expedited construction of the Alaska natural gas pipeline.  Congress did this in 1973 for the 800 mile-long Trans-Alaska Oil Pipeline, which was built in just three years and has since delivered 16 billion barrels of oil to American consumers. Russia, Iran, and Qatar control 60 percent of the world’s natural gas supplies. We should use our abundant supplies of natural gas, and not allow another OPEC-style cartel to limit our energy sources.
• Allow the exploration and experimentation necessary to produce affordable energy from America’s oil shale resources. The western United States is home to an estimated 800 billion barrels of recoverable oil equivalent in oil shale. This is about three times the amount of proven oil reserves in Saudi Arabia. This resource is untapped and needs research to develop economically.
• Permit the exploration and experimentation necessary to produce affordable energy from methane hydrates.  A 2007 study found that the U.S. has about 5,700 trillion cubic feet of methane hydrates—about 900 times the current annual gas consumption in the U.S. Like oil shale, this resource is untapped, and companies need to research ways to bring it to market.
• Limit frivolous lawsuits designed to thwart responsible development of American energy and the American jobs it creates. The following quote sums up this problem best.  In an interview with Dow Jones Newswires in January 2003, The Wilderness Society’s Peter Morton threatened:  “If you bid on a lease on public land, you can expect (environmental litigation).“
• Remove regulatory impediments and repeal punitive laws that make it increasingly difficult to build or expand refineries.  While existing refineries have gone to great lengths to expand their capacity to meet growing domestic demand, refinery expansions are becoming more and more difficult due in part to regulatory impediments, bureaucratic red tape and a barrage of punitive federal legislation in recent years.
• Resolve issues involving the Yucca Mountain Repository for spent nuclear fuel.  The Federal government has been studying Yucca Mountain as a fuel repository for the last 30 years.  Ratepayers have paid billions to the Nuclear Waste Fund—it’s time for the Federal government to move forward and provide a return on that investment.
• Remove regulatory barriers to building the next generation of nuclear power plants. The Federal government should not stand in the way of developing nuclear fuel reprocessing, pebble-bed reactors, or whatever forms of nuclear energy are economical.

[1] According to EIA, in 2007 39 percent of our energy came from petroleum, 22 percent from coal, 23 percent from natural gas, 8 percent from nuclear, 2.4 percent from hydroelectric, 2.1 percent from wood derived fuels, 1.0 percent from biofuel, 0.3 percent from geothermal, 0.3 percent from wind, and 0.1 percent from solar. The latest data from EIA is available here: http://www.eia.doe.gov/cneaf/alternate/page/renew_energy_consump/table1.html

GREEN JOBS: Fact or Fiction?

An Assessment of the Literature

January 2009

By Robert Michaels and Robert P. Murphy

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Introduction and Executive Summary
I. Green Recovery, Center for American Progress
II. Job Opportunities for the Green Economy, Political Economy Research Institute
III. Current and Potential Green Jobs in the U.S. Economy, Global Insight
IV. Renewable Energy and Energy Efficiency, American Solar Energy Society

Introduction and Executive Summary

Data compiled and recently released by the National Bureau of Economic Research (NBER) indicates that not only is the U.S. economy currently in recession, it has been for more than an entire year (since December 2007). What started as a financial crisis on Wall Street quickly evolved into a much deeper economic crisis on Main Street, with unemployment now at a 16-year high. What’s worse, the recovery seems elusive, and a prolonged recession cannot be ruled out. Keynesian economics is once more fashionable in the corridors of power in Washington, with plans taking shape for a massive infrastructure program (much of it expected to be “green”) to get the economy moving again.

In this environment, some have seized upon the “Green Economy” as a cure for both the nation’s current economic ills, and as a way to address the issues of global warming and energy security. According to this view, government at all levels can use fiscal and regulatory measures to spur massive new investments in renewable energies and energy efficiency, which will create millions of new “green jobs.” Proponents claim that such programs will not only rescue the economy from recession, but will also put the country on track to a sustainable, low-carbon energy future. The new Administration and the incoming 111th Congress are in apparent agreement with this overall strategy, differing perhaps only in the details.

Unfortunately, it is highly questionable whether a government campaign to spur “green jobs” would have net economic benefits. Indeed, the distortionary impacts of government intrusion into energy markets could prematurely force business to abandon current production technologies for more expensive ones. Furthermore, there would likely be negative economic consequences from forcing higher-cost alternative energy sources upon the economy. These factors would likely increase consumer energy costs and the costs of a wide array of energy-intensive goods, slow GDP growth and ironically may yield no net job gains. More likely, they would result in net job losses.

In the present article we critically examine four recent studies on the alleged benefits of government programs to foster green job creation: the Center for American Progress’ (CAP) Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy [i], the Political Economy Research Institute’s (PERI) Job Opportunities for the Green Economy: A State-by-State Picture of Occupations that Gain From Green Investments [ii], the U.S. Conference of Mayors’ Current and Potential Green Jobs in the U.S. Economy [iii], and finally the American Solar Energy Society’s (ASES) Renewable Energy and Energy Efficiency: Economic Drivers for the 21st Century [iv]. Although each report is unique, a common characteristic is that they all rest on incomplete economic analysis, and consequently greatly overstate the net benefits of their policy recommendations. Below we summarize these general problems, while in subsequent sections we analyze each report in turn.

Mistaking a labor-intensive energy sector as the goal, rather than efficient energy provision.

Energy is the lifeblood of the economy. The primary objective of the energy sector is to supply cost-effective energy to the broader economy, allowing it to grow and increase the standard of living of its citizens. Artificially pumping up employment in the energy sector per se—and thereby driving down productivity, while driving up costs to the broader economy—is counterproductive to overall net job creation and economic growth. It is a sign of increased efficiency if more energy can be produced and delivered with fewer workers, because this expands the overall output potential of the economy. Yet the green jobs studies that we analyze in this report reach the opposite conclusion, and favor energy sources that require more workers to yield a given amount of energy. By analogy, the number of workers in the U.S. devoted to agriculture has steadily declined over the last century, and this is a healthy sign of progress in the U.S. economy. Government efforts to reverse the trend, and force more workers back into agriculture, would not “create jobs” in the long-run, but would simply raise food prices and shrink other sectors.

Counting job creation but ignoring job destruction.

Even if job creation per se is the goal, the studies fail to properly account for the job destruction that their recommendations would entail. For example, the Center for American Progress (CAP) study recommends a $100 billion expenditure to be financed through the sale of carbon allowances under a cap-and-trade program. CAP estimates that this “fiscal stimulus” will result in the creation of two million jobs [v]. Yet the CAP methodology treats the $100 billion as manna from heaven; it does not consider the direct and indirect adverse effects (including job destruction) of imposing higher costs on a wide array of energy-intensive industries and thereby raising prices for consumers.

Double counting of jobs and overly simplistic treatment of the labor market.

The green studies critiqued in this report implicitly assume that there is a limitless pool of idle labor which can fill the new “green” slots created by government spending. Yet to the extent that some of the new green jobs are filled by workers who were previously employed, estimates of job creation are overstated, perhaps significantly so. In addition, the studies do not account for the rise in worker productivity over time. Thus their long-range forecasts of total jobs created by green programs are inflated, even on their own terms.

To its credit, CAP alludes to potential “inflationary labor shortages from job creation” [vi] due to its proposed program, but dismisses the concern as irrelevant for an economy in recession. The thinking is that the workers going into the new green jobs will simply reduce the unemployment rate, rather than siphoning talented people away from other industries. The CAP analysis ignores the fact that other industries, not favored by the green subsidies or mandates, would have been able to draw on the pool of unemployed workers as the economy recovers. With fewer workers seeking jobs, job creation in “non-green” sectors will be lower than it otherwise would have been. Moreover, some of the infrastructure plans will require a long time to implement and then reach completion. Their implementation over time could contribute to “inflationary labor shortages” once the current recession has passed.

Ignoring the role of the private sector.

Nowhere in CAP or the other three studies is there a discussion of the role of the private sector in their proposed green jobs programs. No consideration appears to have been given to the fact that government cannot direct the labor and capital markets more efficiently than market wage and interest rates. In fact, history is replete with evidence that government lacks this ability. The syn-fuels program of the late 1970s is a classic example of labor and capital being pulled, at government’s direction, into lower-value uses than the industries into which market forces would have channeled them. The studies also omit any discussion of cutting the marginal tax rates on labor and capital to increase incentives to work and invest. Arguably this is the most effective, and only sustainable way to revive economic growth.

How much government support of “green” markets is enough? Are the programs sustainable?

The studies propose potentially massive government intervention in energy markets, both with respect to electricity generation and transportation fuels. It is important to consider the current levels of subsidies before considering further market intervention in the energy markets. In FY 2007, total federal energy subsidies were estimated by the U.S. Department of Energy’s Energy Information Administration (DOE EIA) [vii] at $16.6 billion, spread across more than a dozen energy sources as seen in the figures at the right and below.

On an absolute dollar basis, renewables receive over twice the level of subsidies compared with conventional energy sources. And on a dollar per Btu or MWh basis, the level of subsidy of renewable energy is orders of magnitude (more than 100 times) greater than levels for conventional energy.

Government picking of winners and losers, a classic example of unsound energy policy.

All sources of commercially viable energy have a role in supplying the energy required by U.S. consumers and the nation’s economy. In fact, at some point in the future—especially if oil prices return to their previous levels—it may be efficient for the United States to obtain a significantly larger share of its electricity and transportation needs from renewable energy sources. However, the programs proposed in the studies reviewed in this paper would require, at some level, government officials to make choices as to which technology areas to further support/subsidize (solar, wind, ethanol, etc.). It is very unlikely that government-directed programs picking winners and losers would yield a more efficient energy mix than what would be determined in the market absent massive government intervention. On what basis will government officials make the decisions as to what technologies to support, and given the existing levels of subsidies, would the additional levels of support be sustainable in the future?

Similar reasoning applies to assessments of efficiency measures that “pay for themselves.” If adding new insulation, or installing a solar panel, really would save more money than the initial cost (including interest), then it is unclear why governments need to further subsidize the improvements. Presumably private business and households do not need to be aided in the process of furthering their self interest.

Assuming that potential benefits from new technologies will only occur through government programs.

Another major issue with the studies is to conflate the benefits of new technologies and energy efficiency, with the benefits of government programs in these areas. For example, the American Solar Energy Society (ASES) report estimates that by 2030, the state of Ohio could see two million jobs related to energy efficiency [viii]. Such figures lead it to conclude that “if we fail to invest in RE&EE [renewable energy and energy efficiency], the United States runs the risk of losing ground to international RE&EE programs and industries.” [ix] But if the “we” refers to taxpayers, rather than private investors, the ASES argument is unsound. After all, many industries will provide millions of jobs for Ohio in the year 2030, and this happy outcome doesn’t require government funding or oversight.

Having summarized some of the major shortcomings common to the four studies, we now proceed to an analysis of each

I. Green Recovery, by Pollin et al., Center for American Progress (CAP)

Both of Pollin’s papers, Center for American Progress and Political Economy Research Institute (CAP and PERI), are built around a policy that will allocate $100 billion from the federal government among six “green economy” strategies: retrofits to buildings, expansion of mass transit, building a “smart” electric grid that allows better management of production and consumption, expanding wind power, expanding solar power, and promoting research in “next generation” biofuels [x]. In this section we discuss the CAP study, while in Section II we address the PERI study.

A. No Free Lunch on Emission Allowances: Study Fails to Incorporate the Costs of the Proposed Program

CAP sees a need for only two annual deficit payouts of $100 billion. It expects that in two years the federal government will be auctioning permits required to emit greenhouse gases, and that the program will produce $75 to $200 billion in annual revenue [xi]. If so, as the reasoning goes, the government can invest it in the green program with no adverse effects as business will pay for the permits. In reality the requirement to purchase the permits amounts to a new tax that must be borne by someone. Either output prices will rise or the profits that can be reinvested in businesses will fall. Either way, some of the demand for the economy’s output will vanish. The CAP study touts the benefits of a “multiplier,” whereby federal spending of $100 billion leads to spillover benefits, increasing the total economic expansion beyond the initial injection. Yet CAP fails to acknowledge that this multiplier effect also works in reverse. If carbon-intensive industries must pay an additional $100 billion to the federal government to purchase emission permits, then ultimately this implicit tax hike will contract economic output beyond this figure, because workers in the penalized industries now have less money to spend on local goods and services such as restaurants, etc. The government doesn’t create wealth simply by taking $100 billion from one group of firms and handing it over to a different group of businesses.

B. Flawed Measurements of Green and Other Jobs

The CAP study generates its main results through three steps: (1) estimating the direct effects of the spending on workers and goods, (2) using an input-output table which estimates the “indirect” effect on employment due to purchases made by the direct recipients, and (3) estimating “induced” jobs that come from later rounds of re-spending through a “multiplier” process. CAP’s readers will be unable to trace the path of the calculations in (1) and (2) because it does not present the complex underlying model, instead promising full details in a forthcoming study [xii]. Because CAP has no explicit model to generate induced jobs, the authors searched the economic literature for multiplier values. Faced with a range of possible values (some negative), they arbitrarily chose to estimate them as 1/3 of the total direct and indirect jobs, asserting that the choice was “conservative.” [xiii]

Despite the appearance of sophistication, the CAP analysis generates spurious numbers because of the improper underlying assumptions. In subsection A above, we have already discussed the problem with the “multiplier” approach: it counts the positive spillover effects on job growth from an exogenous increase in spending, but the analysis doesn’t use the same approach to account for the destruction of economic activity from the tax hike (or deficit increase) needed to fund the original injection of federal dollars. The CAP analysis neglects the adverse economic impacts that its recommended cap-and-trade system would yield, particularly for energy-intensive goods and services.

Finally, the input-output model implicitly assumes an infinitely elastic supply of unemployed workers. The CAP analysis counts up all of the jobs created directly and indirectly as a result of the green jobs program, but it does not account for the fact that at least some of those workers (and the money they in turn spend) will be siphoned from other industries. To the extent that some of the workers in the new, green positions simply will have moved from previous jobs, obviously there is no increase in total “spending” in the economy. In fact such cases present net losses to total output, because the government intervention directs those workers from higher-valued occupations into lower-valued ones. (If the opposite were true, then it wouldn’t take federal programs to move the workers.)

C. CAP’s Unrealistic Model of Labor Markets

CAP’s basic model of unemployment is very unrealistic. Unemployment is almost everywhere a transitional stage in which a person moves between a job that he or she no longer has (possibly because of a voluntary separation) and an open vacancy. CAP instead envisions a large number of unemployed who have for some reason lost their jobs and would take any that were available, if only someone (here the government) spent enough money to fund the positions. As an example, CAP notes that employment of construction workers dropped by 800,000 between July 2006 and July 2008 [xiv]. The report calculates that its green program will generate 2 million year-long jobs, and if they are the right types, the 800,000 construction workers will fill some of them, along with 1.2 million others. The study sees no costs of job transfer because recent data tell us that 8 million people will still be unemployed. This might be the case if the unemployed were a large stagnant pool, but they are not.

Workers change jobs and enter or leave the labor market at surprisingly high rates, and employers originate and close job slots with similar speed. In a typical quarter between 2000 and 2005, over 9 percent of U.S. workers changed employers, entered unemployment, or left the labor force. Another 9 percent were hired from other employers, left unemployment upon finding jobs, or entered the labor force from outside [xv]. Construction workers are more mobile than average. The same quarterly data show that for every 100 construction job slots in existence, approximately 14 new ones open up and another 14 are “destroyed” as projects are completed [xvi]. The project-specific nature of much construction work is one factor responsible for their above-average unemployment rates. Implementing CAP’s green policy will not change this characteristic of the construction industry—workers will simply be retrofitting older buildings instead of building new ones.

The unemployed themselves are a heterogeneous group. In 2007, 7.1 million were unemployed at any one time on average. One million of them were on temporary layoffs with high probabilities of returning to their old jobs [xvii]. Another 2.8 million were either entering the job market for the first time or returning from spells out of the labor force when they were not seeking work. Moreover, 1.1 million were between 16 and 19 years old, many surely living with families and hardly in hardship [xviii]. For the workforce as a whole, in October 2008 the median spell of unemployment was 10.6 weeks, during which many received unemployment compensation [xix]. The unemployment rate fluctuates with general economic conditions. In October 2007 it was 6.5 percent for construction workers (all workers average 4.4 percent) but the subprime crisis and drop in housing construction and deteriorating national economic conditions had brought it up to 10.7 percent in October 2008 [xx]. As of the latter month, the median spell of unemployment for construction workers was 8.8 weeks, two weeks less than the national average [xxi].

In short, the CAP study would have us believe that there is a large, stagnant pool of unemployed workers, who can be tapped to fill new green job slots without reducing output in other industries. But in reality, “the unemployed” is a constantly changing group, and government-created job openings will certainly hamper the private sector’s ability to direct job seekers into the most productive outlets.

D. Domestic Content

Economists disagree on many things, but the one area of consensus is that free trade raises living standards for all countries. Yet the CAP study contends that its green program is additionally desirable because a high proportion of the payouts will be spent on domestically produced goods, whose manufacture increases domestic employment:

The green investment program relies much more on products and services made within the U.S. economy and less on imports compared to spending either within the oil industry or on household consumption. These direct and indirect effects on job creation are the most sig¬nificant reason why the green investment stimulus program creates more jobs than a household-consumption stimulus. [CAP, p. 11]

Even on its own terms the CAP analysis doesn’t consider that with a massive new stimulus of $100 billion from the federal government, the green sector may see some of its costs rise, and will turn more and more to foreign imports for some of its key components. There is already a growing volume of international trade in renewables hardware, and the CAP program would amplify the trend [xxii]. There is of course nothing wrong with the renewables industries drawing on the cheapest inputs available, but the trend undercuts one of CAP’s arguments.

To repeat, the goal of energy producers is not to “create American jobs” but to provide energy to consumers at the lowest prices possible. If the energy industry uses some of its earnings to make foreign purchases, this is to contain costs and keep energy prices lower than they otherwise would be.

II. Job Opportunities for the Green Economy, by Pollin and Wicks-Lim (PERI)

As noted in Section I above, both of Pollin’s papers (CAP and PERI) are built around a policy that will allocate $100 billion from the federal government among six “green economy” strategies: retrofits to buildings, expansion of mass transit, building a “smart” electric grid that allows better management of production and consumption, expanding wind power, expanding solar power, and promoting research in “next generation” biofuels [xxiii]. In the previous section, we discussed various shortcomings in the CAP analysis, touting the alleged benefits of this program. In the present section, we focus on an issue unique to the PERI study.

The job-creation strategies recommended in CAP and PERI can only work if a sufficient number of workers with the requisite skills are available. The PERI study seeks to demonstrate that the relevant workers really are available to fill the millions of newly-created green positions. The PERI authors use input-output tables and occupational statistics to choose ten “representative jobs.” For example, wind farms require sheet metal workers, biofuels require chemists, and both require industrial truck drivers. PERI then examines the availability of people qualified for these jobs in each of 12 states. Using data on the numbers in each state employed in each type of job, the study concludes that the requisite skills to carry out its program are currently available.

Although it is less clear in PERI, the CAP study makes clear that “job creation” means that the chosen policy will reduce unemployment rather than take already-employed workers from their positions. If so, the data employed in PERI are thoroughly inappropriate. To see if the newly created jobs can be filled, instead of counting the employed the PERI study should have determined how many qualified people are unemployed. If there are 1,000 machinists in the state and 95 percent of them are employed, there are only 50 people who matter for (net) job creation. If an employed person changes to a green employer and no unemployed are available, his or her previous output is lost – one job has been created and another lost. PERI presents no data on whether the state’s unemployed population have characteristics that would allow them to quickly fill new jobs, many of which appear to require dedicated education or substantial training.

The PERI study fails to note that the skilled workers who are important to its findings generally have lower unemployment rates than the average for the labor force as a whole. In October 2008 the national unemployment rate was 6.1 percent, but “Managerial, Professional, and Technical” workers had an overall unemployment rate of 3.0 percent [xxiv]. The highest occupational unemployment rate was 10.1 percent for construction workers, a consequence of the past year’s collapse of homebuilding. In general, however, the “good jobs” are those with low turnover that have smaller numbers of unemployed. This means that federal efforts to create high-paying jobs will likely fill many of the new positions from the pool of already-employed workers, rather than drawing entirely from the ranks of unemployed workers.

III. U.S. Conference of Mayors, Current and Potential Green Jobs in the U.S. Economy,by Global Insight

A. How to Categorize Green Jobs?

This study and the next (ASES) attempt to estimate long-term employment in growing markets for renewable power and energy efficiency. While PERI and CAP looked at the effects of a single spending injection, these studies examine the jobs created by longer lasting green policies. Any estimates will depend on which particular workers and products are classed as green, and there are no clear boundaries between green and non-green. This arbitrariness allows researchers to choose boundaries that might give their readers quite different impressions about markets. It appears that these two studies are seriously biased toward a vision of large markets with high potentials for growth.

The Conference of Mayors study estimates that there are 751,000 green jobs today. As an example of the problem in defining the boundary between green jobs and ones of a different color, consider the choices of industries and job types to include in “renewable power generation,” an activity that bridges several standardized federal classifications. The study’s authors used a proprietary database to estimate 127,000 jobs in this area—a figure that appears quite high, but one that readers without access to the data cannot analyze. We can, however, conclude that the researchers probably created an overly high figure on several grounds. First, unlike most other studies, this one defined large hydroelectric and nuclear facilities as renewable alongside the more usual wind, biomass, geothermal and solar resources [xxv]. In 2006, nuclear units provided 19.3 percent of the nation’s power and hydroelectric facilities produced 7.1 percent. In contrast, the narrower class of renewables produced only 2.4 percent of the nation’s power [xxvi]. As defined in the study, “renewable” power output is twelve times greater than that of generators customarily defined as renewable by most environmental advocates. If so, considerably fewer than 127,000 workers currently hold jobs associated with non-hydro and non-nuclear renewables.

Other data in the study are also hard to interpret. The study claims that over half of those employed in green jobs (in the combined renewable and efficiency areas) held engineering, legal, research and consulting positions, a seemingly high figure that apparently does not include managers and supervisors. Lacking access to Global Insight’s database, we cannot further check their calculations or comment on the reasonableness of such numbers.

B. Productivity and Employment

As best can be determined, none of the four studies attempts to account for growth in worker productivity. This means that if output of a certain industry doubles, these studies assume that employment will do likewise. In reality, workers everywhere in the economy become more productive with the passage of time – their formal education continues to increase, they accumulate experience on the job, and they have more productive technologies to work with. Adjusting for expected productivity increases dramatically lowers the employment potential calculated in studies like these. A consensus estimate is that worker productivity in the U.S. has increased on average by 2 percent per year since 1970 [xxvii]. The compound growth of productivity means that a worker in 2038 will be the equivalent of 1.81 workers in 2008. If productivity does not increase, the Council of Mayors study projects a growth in green jobs from 750,000 today to 4.2 million in 2038. If we adjust for productivity growth, the planned 2038 outputs of renewable power, retrofits, etc. will require only 2.3 million workers rather than the 4.2 million that the study forecasts.

C. Renewable Generation: Performance and Potential

After broadly defining the renewable industry, the Council of Mayors study goes on to paint a picture of expanding markets that can only grow further. In reality, with the single exception of wind, U.S. power production from renewables has stagnated for the past fifteen years. Table 1 below shows that the total output of wood burning, waste burning, geothermal and solar power plants fell from 73.0 billion kilowatt hours (twh) in 1994 to 69.8 in 2007 [xxviii].

U.S. Power Generated by (non-Hydro) Renewables, 1994 and 2007

Source: U.S. Energy Information Administration, Electric Power Monthly (Aug. 2008) Net Generation by Other Renewables: Total, at http://www.eia.doe.gov/cneaf/electricity/epm/table1_1_a.html

The seemingly impressive growth figures that appear in the Council of Mayors study reflect careful choices of data rather than meaningful trends. For example, on page 7 the study enthuses about a 23% increase in solar output between 2000 and 2007, which equates to 2.95 percent per year. Electricity generated from solar sources (photovoltaic plus thermal) equaled .0145 percent of total power, which grew at 1.28 percent per year in the same period. If its noted recent rates of growth persist, solar will produce 1 percent of the nation’s power supply by the year 2261 [xxix].

The failure of all renewables (other than wind) to expand from 1994 to 2007 occurred in the face of increasing political pressures to build renewables for the mitigation of climate change, including laws in over half the states that require utilities to invest in renewables. Indeed, the growth of wind power is largely an artifact of its favorable tax treatment rather than its economic viability. Wind turbines receive a federal production tax credit, currently 2 cents per kilowatt-hour, accelerated depreciation and additional benefits in some states. Investment in wind turbines has dropped by 75 percent or more in periods when a federal production tax credit lapsed [xxx]. After massive infusions of research and development funding, renewables remain the economic choice only in special situations. Renewables have environmental impacts of their own, and residents in numerous localities are coming to resist them as they already resist the siting of conventional powerplants near them. The growth of a renewables industry is far from guaranteed, and there are no known official projections that match the expected growth figures in the Council of Mayors study.

The document contains other misleading statements about the performance of renewables. With the exceptions of geothermal and hydro power, renewables are intermittent, e.g. solar units only produce when the sun is shining and wind units when the wind is blowing. Reliability requires additional investments in a full scale power grid and conventional generation. Thus the claim on page 6 that “wind generation in 2007 was enough to power more than 2.9 million homes” is misleading. Even though the total power generated by wind was equal to the total power used by 2.9 million households, it is not true that wind alone could have powered them, because of its intermittent nature.

IV. American Solar Energy Society, Renewable Energy and Energy Efficiency: Economic Drivers for the 21^st Century (ASES)

A. Definitional Differences

With no standardized definitions of the renewable and energy efficiency industries, authors of reports like these have a wide range of plausible choices. The Conference of Mayors calculated 751,000 jobs in the two industries today [xxxi]. ASES chose a far more expansive definition, and also provided figures on both direct jobs and indirect ones created by the input purchases of directly funded employers. It estimated 193,550 direct workers in renewable energy, 50 percent more than the Council of Mayors assumed under its own expansive definition of renewables. Both include workers in retrofits and directly related manufactures, e.g. insulation, in their definitions of the efficiency industry. ASES, however, includes jobs in the building of cars that exceed federal fuel economy standards by 10 percent or more, as well as appliances, computers and HVAC equipment that meets Energy Star or similar standards. Definitions like these yield a total of 3.5 million direct jobs in efficiency today, and 8.0 million direct and indirect [xxxii]. To see the arbitrariness, note that ASES’ estimate of today’s total jobs in the efficiency industry is 2.7 times the number of efficiency jobs the Council of Mayors projects for 2038 [xxxiii].

Unllike the Council of Mayors, ASES provides three growth scenarios but does not state their assumptions in detail. There is a “base case” in which laws and technology change little from today, a “moderate scenario” and an “advanced scenario” with legal and technological innovations that strongly favor renewables [xxxiv]. The base case brings forth 16.3 million direct and indirect jobs by 2030, and the advanced scenario 40.1 million. Like all of the other studies, it does not net out any employment lost as opportunities in the conventional power industry vanish and as industries that produce energy-intensive goods shrink due to higher energy costs rippling through the economy. Extrapolating from available data, the study estimates that renewables and efficiency will directly employ 17.4 million workers in 2030 in the advanced scenario [xxxv]. In a projected labor force of 180 million, fully 10 percent will be directly employed in renewables and efficiency.

B. The Implications of Job Creation

The larger the percentage of the workforce engaged in producing renewable power and efficiency, the smaller will be the output of other goods. The ASES study appears to argue that growth in renewable and efficiency workers is in itself desirable, but it is hard to see why if this shrinks the workforce available to produce other valuable goods and services. ASES and the Council of Mayors say nothing about where these workers will come from and how the change will affect the well-being of consumers.

The fact that building and operating renewable power generators requires more labor time than for conventional generators is a signal that the nation should not rush toward renewables in the haste that so many are urging today. If a megawatt of solar capacity requires four times the workers as a megawatt of coal-fired power, building the solar plant makes the nation poorer, other things equal [xxxvi]. The public is worse off because it sacrifices the outputs that those workers could have produced had they been employed elsewhere. The people purchasing the solar power enjoy a lower standard of living than was necessary.

Solar power is expensive, but may have environmental virtues that conventional power does not. The way to make a case for it is to compare its environmental attributes and its cost, which will be higher if more workers are required to build it. All of these studies implicitly argue in favor of renewables and efficiency improvements because building them creates job slots that conventional power does not. But this confuses mere job creation per se with the more important goal of creating high value-added jobs that efficiently use scarce labor resources to produce the most valuable output possible. Other things equal, it is a vice, not a virtue, if one production technique requires more labor hours to produce the same amount of energy. Indeed, it is precisely because of their higher costs that alternative sources currently do not pass the market test, and cannot compete without government assistance.

[ii] Robert Pollin and Jeannette Wicks-Lim, Job Opportunities for the Green Economy: A State-by-State Picture of Occupations that Gain from Green Investments, Political Economy Research Institute, University of Massachusetts, Amherst, June 2008. Cited in text as “PERI.”

[iii] U.S. Conference of Mayors, Current and Potential Green Jobs in the U.S. Economy, prepared by Global Insight, Oct. 2008. Cited as “Conference of Mayors.”

[iv] American Solar Energy Society, Renewable Energy and Energy Efficiency: Economic Drivers for the 21^st Century, prepared by Management Information Services, Inc., 2007. Cited as “ASES.”

[v] CAP p. 3.

[vi] CAP p. 12.

[vii] EIA, “Federal Financial Interventions and Subsidies in Energy Markets 2007” (April 2008), Table ES5, page xvi, available at: http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html.

[viii] ASES p. 46.

[ix] ASES p. 51.

[x] PERI p. 3.

[xi] CAP p. 15. He provides no citations for the dollar amounts.

[xii] CAP p. 20.

[xiii] CAP p. 22.

[xiv] CAP pp. 12-13.

[xv] Steven Davis et al, “The Flow Approach to Labor Markets: New Data Services and Micro-Macro Links,” Journal of Economic Perspectives 20 (Sum. 2006) 3-26, p. 6.

[xvi] Ibid p. 8.

[xvii] Lawrence Katz and Bruce Meyer, “Unemployment Insurance, Recall Expectations, and Unemployment Outcomes,”Quarterly Journal of Economics 105 (Nov., 1990), 973-1002.

[xviii] U.S. Bureau of Labor Statistics, Current Population Survey Table A-27 (Nov. 2008), at http://www.bls.gov/cps/cpsaat27.pdf.

[xix] U.S. Bureau of Labor Statistics, Economic News Release, Table A-9 (Nov. 2008), at http://www.bls.gov/news.release/empsit.t09.htm.

[xx] U.S. Bureau of Labor Statistics, Economic News Release, Table A-10 (Nov. 2008), at http://www.bls.gov/news.release/empsit.t10.htm.

[xxi] U.S. Bureau of Labor Statistics, Current Population Survey Table A-37 (Nov. 2008), at http://www.bls.gov/web/cpseea37.pdf.

[xxii] International trade in renewable hardware is large and increasing. General Electric is the only important US producer of wind turbines, and its share of the domestic market fell from 59 to 44 percent between 2005 and 2007. U.S. Department of Energy, Annual Report on U.S. Wind Power Installation, Cost, and Performance Trends 2007 at 10. China is rapidly increasing its production of photovoltaics for both domestic use and exports.

[xxiii] PERI p. 3.

[xxiv] Engineers, architects, and legal occupations (all important in some job creation studies) were slightly higher, at 3.7 percent. U.S. Bureau of Labor Statistics, Current Population Survey, Table A-30, at http://www.bls.gov/web/cpseea30.pdf.

[xxv] Conference of Mayors, p. 5.

[xxvi] U.S. Energy Information Administration, Electric Power Annual 2007. http://www.eia.doe.gov/cneaf/electricity/epa/epat1p1.html.

[xxvii] See U.S. Energy Information Administration, Outlook for Labor Productivity Growth 2004, at http://www.eia.doe.gov/oiaf/archive/aeo04/issues.html.

[xxviii] U.S. Energy Information Administration, Electric Power Monthly (Aug.. 2008) Net Generation by Other Renewables: Total, at http://www.eia.doe.gov/cneaf/electricity/epm/table1_1_a.html.

[xxix] Even at their 2006 – 2007 growth rates (Solar 19.23%, All power 2.33%), solar becomes 1 percent of total power generated in 2033. Data are from U.S. Energy Information Administration, Electric Power Monthly (Aug. 2008), Net Generation by Energy Source: Total (All Sectors) at http://www.eia.doe.gov/cneaf/electricity/epm/table1_1.html and Net Generation by Other Renewables: Total (All Sectors) at http://www.eia.doe.gov/cneaf/electricity/epm/table1_1_a.html.

[xxx] Ryan Wiser et al, Using the Federal Production Tax Credit to Build a Durable Market for Wind Power in the United States, Lawrence Berkeley National Laboratory LBNL-63583 (2007) at 3. http://eetd.lbl.gov/ea/emp/reports/63583.pdf.

[xxxi] Conference of Mayors, p. 5.

[xxxii] ASES p. 31.

[xxxiii] The Council of Mayors number (at 17) is the total (4.2 million) less renewable power generation (1.2 million).

[xxxiv] ASES p. 39.

[xxxv] ASES does not split its projections into direct and indirect jobs. Today, however, they estimate direct jobs at 43 percent of the total. ASES p. 31.

[xxxvi] These are the numbers assumed by Daniel Kammen et al, Putting Renewables to Work: How Many Jobs Can the Clean Energy Industry Generate?” University of California Berkeley Renewable and Appropriate Energy Laboratory, 2004 at 10. http://rael.berkeley.edu/files/2004/Kammen-Renewable-Jobs-2004.pdf.

FOR IMMEDIATE RELEASE:
Tuesday, December 16, 2008
CONTACT:
Trice Whitefield
(703) 516-2173
Interviews@FactsOnEnergy.org

U.S. Reliance on Fossil Fuels Forecast to Continue
According to the Energy Information Administration, fossil fuels will supply 79 percent of energy demand in 2030.

Washington, DC — The U.S. Energy Information Administration (EIA), an independent branch of the U.S. Department of Energy, today released its projections for America’s energy supply, demand, and prices in 2030. According to the agency’s projections, U.S. energy demand will be 11 percent higher in 2030 than in 2007, and fossil fuels will dominate supply, with petroleum contributing 34 percent, natural gas 22 percent, and coal 23 percent. Moreover, though growth is expected in the domestic production of the country’s oil and natural gas resources and in nuclear and renewable supplies, the United States will still need to import petroleum. Thus, unless lawmakers take action to encourage even greater exploration and development of our nation’s oil and natural gas resources, America will continue to rely on energy from unstable overseas regimes.

The EIA, assuming higher crude oil prices than it did in last year’s Annual Energy Outlook, now projects vehicle miles traveled by light-duty vehicles in 2030 to be 6 percent lower than it did in last year’s forecast and new light-duty vehicle efficiency improvements to be almost 4 percent higher, reaching an average of 37.9 miles per gallon. Assuming higher crude oil prices and additional off-shore access to oil resources results in predictions of domestic oil production in 2030 that are almost one-third higher than in last year’s forecast. While expectations for petroleum imports in 2030 are 28 percent lower than in last year’s forecast, and 25 percent lower than imports today, the United States will still need to rely on unstable suppliers abroad if current energy policies remain unchanged.

With U.S. energy security at stake, Congress should open access to our vast domestic petroleum supplies and encourage American industry to responsibly develop them. New research shows that increasing production from currently and previously restricted Federal lands would create 160,000 new jobs, generate an extra $1.7 trillion in tax revenue, and provide a major boost to a flagging national economy.

Assuming increased onshore natural gas reserves and additional off-shore access, the EIA now expects domestic natural gas production in 2030 to be 21 percent higher than it did in last year’s forecast. The higher production results in predictions of lower natural gas imports (44 percent lower) and higher natural gas demand (7 percent higher), providing additional supplies for electric generation, residential and commercial heating, and industrial uses. With the natural gas forecast up, coal demand in 2030 is now expected to be 12 percent lower than it was in last year’s forecast.

As the EIA’s report shows, fossil fuels meet 85 percent of America’s current energy demand and are expected to meet 79 percent of demand in 2030: heating homes, powering businesses, transporting people, and moving goods. Since these traditional fuels continue to be more efficient and cost-effective than any other energy source, our leaders on Capitol Hill should stop restricting access to abundant domestic energy supplies. Only then can we ensure an energy future that can fuel a growing economy and maintain the standard of living we expect for our children and grandchildren.

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

Before Wall Street’s implosion and the sharp economic downturn, energy policy dominated the headlines on the Presidential campaign trail. An overwhelming majority of Americans demanded access to offshore energy resources to help increase supplies and lower prices for everything from gas at the pump to groceries at the supermarket. As the outcry for more American energy grew louder, Congress and the presidential candidates finally listened, leading to the expiration of the 28-year old Congressional ban on exploration and production in the Outer Continental Shelf (OCS).

Amidst soaring gas prices this past summer, Senator John McCain reversed his long-standing opposition to offshore energy production by calling for an end to the federal OCS moratorium. And as the price continued to climb, President-elect Barack Obama joined in, expressing his support for a substantially more-limited drilling plan.

Based on the statements of President-elect Obama and the record of the newly expanded Congressional Democratic Majority, however, there is little doubt that the momentum for increasing domestic energy production will come to a grinding halt.

Taking him at his word, President-elect Obama is largely opposed to increasing the nuclear, oil, natural gas and coal energy supplies that powers our economy today and for the foreseeable future. And the Leaders on Capitol Hill, notably Senate Majority Leader Harry Reid (D-NV) and House Speaker Nancy Pelosi (D-CA), have expressed open hostility to the increased domestic production of oil and coal in particular.

The following is expected to top the legislative and regulatory agenda in Washington in the coming years with respect to energy and the environment. The analysis is based on the press accounts, direct statements and the legislative records of President-elect Obama, his advisors and the current leadership in Congress.

The Return of the Outer Continental Shelf and
Oil Shale Energy Moratorium

“The ban on OCS and oil shale development “will be a top priority for discussion next year.” –House Majority Leader Steny Hoyer (D-MD)

When oil prices hit $147 a barrel in July, President Bush overturned the executive moratorium on energy production on the outer continental shelf. Since then, oil prices have dropped dramatically. On October 1, the Congressional ban on offshore drilling to expired for the first time in 27 years. Ending these bans was an important factor in the initial drop in oil prices. But there are many in Congress who would like to reinstate the ban, despite great public support for increased domestic energy production. Late in the year, a bipartisan group of between 10 and 20 Senators attempted to make the ban permanent on much of the Outer Continental Shelf, and the House passed a bill that would have opened limited areas to drilling in exchange for placing those areas with the most oil and natural gas potential off limits. Expect these measures to return to the spotlight.

Cap & Trade: A New Energy Tax

“Coal makes us sick. Oil makes us sick…we’ve got to stop using fossil fuels.” –Senate Majority Leader Harry Reid (D-NV)

In the waning days of the campaign, a video of President-Elect Obama surfaced which revealed his desire to “take coal off the table as an ideological matter” and made clear that his policies would “bankrupt” electricity plants fueled by coal. These revelations were neither new nor surprising. After all, the very purpose of a cap-and-trade program is to dramatically increase the price of oil, natural gas, and coal to discourage their consumption. This tax on energy will be borne by all consumers in an attempt to use government policy to drive consumers to use alternative and more expensive forms of energy. If the U.S. was to commit to do this unilaterally, it would make the country less competitive while costing jobs, hindering economic growth and would do little, if anything, to reduce emissions of greenhouse gases on a global level. This indirect taxation would, however, fulfill the goal of providing the government with new sources of revenue.

“There is a growing tide even among House leadership about looking at a carbon bill as a way to raise revenue for other things.” – Mary Frances Repko, senior policy advisor to House Majority Leader Steny Hoyer

The Senate has attempted to pass a cap-and-trade bill for greenhouse gases for the past three Congresses, but have been unsuccessful each time. The main reason for its failure is simple. Up until now, Congress has lacked the votes to impose the massive cost of carbon dioxide regulation on the American people. This is because the only realistic way to regulate greenhouse gas emissions is to tax and regulate the use of energy, which, economically-speaking, is akin to taxing the consumption of oxygen. Nevertheless, one can be certain that President-elect Obama will work to approve a cap and trade program next year.

“No coal plants here in America.” – Vice President-elect Joe Biden

In the House, Energy and Commerce Chairman John Dingell (D-MI) has released a “discussion draft” greenhouse gas regulation bill. In the Senate, Environment and Public Works Chairwoman Barbara Boxer (D-CA) and Senator Joe Lieberman (I-CT) are likely to resurrect a revised draft of their climate bill from earlier this year.

Green Jobs & Renewable Energy Mandates: Robbing Peter to Subsidize Paul

With a troubled economy, President-elect Obama is promoting a “green jobs” agenda in an attempt to “create jobs by encouraging electricity production from solar and wind” sources. A part of such a bill would likely be a nationwide renewable portfolio mandate of 10% by 2012 and 25% by 2025.

Regulation mandating the use of electricity from renewable sources “is a breath of fresh air.” –President-elect Barack Obama

This was a part of the Obama-Biden energy platform. Also, as a Senator, Obama co-sponsored an amendment to the energy bill in 2005 to require a renewable portfolio mandate. The energy sources that Obama and Biden support currently provide only about 2.5% of our electricity (of all the electricity produced in 2007, wind produced 0.77%, solar produced 0.01%, waste produced 0.41%, geothermal produced 0.36%, and wood produced 0.93%). These energy sources are many times more expensive than those currently used. Mandating that a percentage of the electricity one uses be made from more expensive sources than the market would otherwise not provide for is akin to compelling people to purchase Perrier instead of reaching for the tap when they are thirsty.

A Subsidy Here, a Subsidy There and Pretty Soon
You’re Talking Real Money

“I will invest $15 billion a year in renewable sources of energy…”
–President-elect Barack Obama

The Federal government currently provides over $4 billion a year in subsidies for renewable and other alternative forms of energy. For ethanol in particular, there are additional regulations including a mandate for the country to use 36 billion gallons of ethanol by 2022 and a 2.5% duty on imported ethanol plus a 54 cents per gallon tariff. Obama wants to greatly increase these types of renewable energy subsidies, in part to reward some of his important supporters.

Windfall Profits Tax: There You Go Again

The President-elect has stated his intention to follow the example of the Carter Administration and enact a windfall profits tax on oil as part of an “emergency” economic plan. Carter’s windfall profits taxes led to lowered domestic energy production by 1.2% to 4.8% and an increased reliance on foreign oil imports. The reason is simple: by increasing the costs on U.S. production of oil, foreign oil becomes more economic. By way of example, if U.S. automakers were making profits and a federal tax were placed on them alone, the only beneficiaries would be foreign auto makers.

More Regulations on Tap for the Obama Energy Agenda

While there will no doubt be huge battles on Capitol Hill over the President-elect’s plans to increase the price of energy, his advisers and supporters have already signaled a willingness to increase energy costs through increased regulations, bypassing Congress altogether. Obama’s top adviser on global warming recently told Bloomberg.com that Obama “would initiate rulemakings” to regulate greenhouse gases using the Clean Air Act. Such a plan would be fantastically expensive, costing America about $7 trillion from 2010 through 2029 along with an estimated 2.9 million jobs. It would also have the perverse effect of incentivizing U.S. energy companies to lobby Congress for greenhouse gas legislation in the name of providing legislative and legal “certainty” for their businesses.

Besides regulating of greenhouse gases through the Clean Air Act, an Obama Administration could easily take a number of steps to hinder energy production without waiting for Congress to join the fray. For example, to ostensibly protect the polar bear (whose numbers may be near an all time high), they could use the Endangered Species Act to shut down exploration and production on the North Slope of Alaska. By applying the Safe Drinking Water Act to the water used in hydraulic fracturing of shale gas reservoirs, the Obama EPA could quickly shut down this form of production which has added huge new clean supplies of natural gas to U.S. reserves. Existing laws like the National Environmental Policy Act (NEPA), the Endangered Species Act (ESA), the Resource Conservation and Recovery Act (RCRA), Superfund (CERCLA), the Clean Air Act and the Clean Water Act all provide tremendous regulatory flexibility to the Executive branch, enabling an Obama Administration to erect a host of new rules to make energy more difficult to produce and more expensive for consumers, one of Obama’s stated goals.

Congressional Comings and Goings

The Democrats have increased their control of the House and Senate, expanding their margin in the House of Representatives by at least 20 seats and building a near filibuster-proof majority in the Senate.

The leadership of the Senate Environment and Public Works committee will continue under Chairman Barbara Boxer (D-CA), who has long been committed to addressing global warming through the regulation of greenhouse gases. Senator Jim Inhofe (R-OK), a fierce opponent of the Boxer climate bill, has been reelected and is expected to return as the Republican Ranking Member. Senator Boxer has announced she will introduce legislation to elevate EPA to a Cabinet-level position as her first order of business.

Senate Energy & Natural Resources Chairman Jeff Bingaman (D-NM) is expected to continue to hold that panel’s gavel, while the retirements of Ranking Member Pete Domenici (R-NM) and Senator Larry Craig (R-ID) has left an opening in the top post for the Republicans. Top contenders for the Ranking Republican slot include Senator Lisa Murkowski (R-AK) and Senator Jeff Sessions (R-AL).

The House Energy & Commerce Committee is currently chaired by Representative John Dingell (D-MI), with Representative Joe Barton (R-TX) serving as the Ranking Member. Dingell, who has introduced a cap-and-trade bill to serve as the basis for upcoming climate change discussions in the House, is currently facing a fierce challenge from ultra-liberal Representative Henry Waxman (D-CA) for the top post. Barton is expected to hold onto his post as Ranking Republican.

No leadership changes are expected for the House Natural Resources Committee, as both Chairman Nick Rahall (D-WV) and Ranking Republican Don Young (R-AK) were both reelected.

The Obama White House Staff: Clinton Veterans Already
Occupying Top Posts

At first glance, an Obama White House is looking very similar to the Bill Clinton’s White House. Obama has announced that former Clinton White House staff member, Representative Rahm Emanuel (D-IL), will be the new Chief of Staff. As a member of the House Democratic leadership, Rep. Emanuel has spearheaded misleading attacks against energy companies for not producing oil quickly enough on Federal leases and joined Speaker Pelosi in preventing legislation that would have increased access to oil and gas on federal lands from coming to the House floor.

The President-elect has also announced that the former Clinton White House Chief of Staff, John Podesta, will help oversee his transition team. Podesta and other former Clinton aides created the left leaning Center for American Progress in 2003, with generous funding from George Soros, to serve as a counter to free market groups such as IER. Podesta is a strong proponent of taxing greenhouse gas emissions through an auction-based cap-and-trade program and using those funds to subsidize politically-correct energy sources.

The following are some of the additional names that have been circulating as potential heads to the energy and environmental posts in the new Obama administration:

Secretary of Energy

• Ernest J. Moniz, MIT professor, former Energy Undersecretary for Clinton who has experience with the nuclear weapons stockpile and as Co-director of MIT’s Energy and Environment lab.
• Philip R. Sharp, Resources for the Future President, former ten-term Indiana Representative who pushed President Carter’s energy package.
• Edward G. Rendell, Pennsylvania Governor who pushed the state’s Renewable energy mandate.

Secretary of the Interior

• Rep. Jay Inslee (D-WA)
• Gov. Brian Schweitzer (D-MT)
• Rep. Norm Dicks (D-WA)
• Rep. George Miller (D-CA)

EPA Administrator

• Kathleen McGinty, a protégé of former Vice President Al Gore. McGindy chaired the Council of Environmental Quality during the Clinton Administration.
• Lincoln Chafee, former Republican Senator from Rhode Island who has since switched his party affiliation to Independent.
• Peter Lehner of the Natural Resource Defense Council and formerly in the New York Attorney General’s office heading the Environmental Protection Bureau.
• Robert F. Kenney Jr., an environmental activist and lawyer. Kennedy led opposition to the development of wind power development of the Massachusetts coast.
• Mary Nichols, current Chairman of the California Air Resources Board. The California Air Resources Board is working to implement California’s greenhouse gas regulations.

Attorney General

• Jamie Gorelick, partner at WilmerHale, former Deputy Attorney General under Clinton and Vice-chair of Fannie Mae.
• Eric H. Holder Jr., a Partner at Covington and Burling and former Deputy Attorney General who was made a trial court judge by President Reagan.
• Rep. Arthur Davis (D-AL) former Assistant U.S. Attorney and member of the House Judiciary Committee.

President-elect Obama has promoted and supported policies that will increase the cost of energy and make it more difficult to produce domestically. Under his proposals, significant resources will be used to discourage the production of economically viable energy sources and encourage—through mandates, tax credits and subsidies—those that are less economically viable. Finally, taxes will be increased—both directly and indirectly—with proposals such as cap-and-trade and the imposition of a profits tax on domestic oil companies. These new taxes will almost certainly kill American jobs and further strain our already fragile economy. When it comes to energy policy in America, this is most certainly not the kind of change we need.