Offshore wind development continues to face strong headwinds in the United States. Offshore wind has been touted as a good alternative to onshore wind because wind resources are generally better offshore, but the reality has been different so far. Offshore wind is far more expensive than onshore wind and even pro-green states like New York are having second thoughts. General Electric is facing lower than expected offshore wind orders and is considering laying off some of its wind workers in Norway. And even with substantial federal subsidies, some utilities are fighting back against the offshore wind industry mainly because of its expense.

The New York State Offshore Wind Project

New York State, which usually is an advocate of green energy, is foregoing an offshore wind project due to its high cost. The project was to develop offshore wind farms for Great Lakes Ontario and Erie, whose cost of construction would be recovered over the next 20 years by selling its generation to the New York Power Authority. The buyers of the power, the New York Power Authority, turned the project down due to its expense.

Five wind developers submitted proposals to develop an offshore wind farm on Great Lakes Ontario and Erie in the range of 120 to 500 megawatts. The lakes are thought to be one of the most reliable sources of electricity generated by wind in New York State because the wind blows uninterrupted. According to the New York Power Authority, a 150-megawatt wind farm would cost between $1.2 billion and $2.0 billion to build and would cost the Authority between $60 million and $100 million annually in power purchases.[i] That translates into a per kilowatt cost of $8,000 to over $13,000, much higher than the estimated cost of an offshore wind farm by the Energy Information Administration of $5,975 per kilowatt.[ii] In fact, the lower figure is over a-third higher.

It seems that New York is facing a similar problem to that of Massachusetts where Cape Wind off the coast of Cape Cod is having a problem finding buyers for its high cost offshore wind energy. Some Massachusetts utilities (e.g. NStar) are realizing that they can meet their state’s renewable mandates by purchasing renewable power from Canada or from onshore wind farms at much lower cost. National Grid, the utility ready to buy half of Cape wind’s power, estimates its deal will cost ratepayers $1.2 billion above the projected market price of comparable energy. In comparison, NStar claims its contracts with three land-based wind farms are $111 million below market price.[iii]

General Electric Rethinking Offshore Wind Operations

General Electric is facing slower than expected growth in offshore wind energy orders and is reviewing its development plans. In fact, it is considering laying off 40 workers in Norway and is holding off on a facility in the United Kingdom until equipment orders can support the plant.[iv] The company is planning to erect a 4.1 megawatt wind turbine prototype offshore in Gothenburg Harbor by the end of the year that the company feels will be good for shallower waters but is facing tough competition from other wind turbine manufacturers.[v]

For deep offshore waters, General Electric is working on a 10 to 15 megawatt wind turbine using superconducting magnets  for which the U.S. Department of Energy is providing $3 million. The project will be conducted in two stages, a development and evaluation stage that includes economic, environmental and commercialization potential, and a commercialization stage to determine its potential in scale and cost. The goal is to generate more wind power at lower cost.[vi]

Department of Energy Funds Offshore Wind Development

The U.S. Department of Energy has funded 41 wind energy projects to the tune of $43 million to accelerate offshore wind development.[vii] The funding is to be provided over 5 years to improve the technology of offshore wind turbines, including control systems and support-structure designs, and to eliminate market barriers that hinder development.

The Department of Energy has already funded innovative solar projects such as Solyndra[viii] which has resulted in a loss of taxpayer money since that company is now bankrupt and cannot repay the government the $528 million that the company has spent,[ix] including a very modern facility with robots and the latest in spas. Solyndra’ s plan sought to cut costs with an innovative cylindrical design that reduced the labor required for installation, but the company could not handle the high manufacturing costs. A similar problem could result with the Department of Energy’s offshore wind investment loans if the technology’s high costs cannot be brought down to a more competitive range compared to existing technologies.

Some Criticisms of Wind Power

There are some critics who complain about the visual appearance of wind turbines. Donald Trump, for example, is fighting an offshore wind farm in Scotland because of the view from his proposed golf course. The offshore wind farm, to be located about 1.5 miles from the golf resort, was to be a 33 wind turbine farm, but has since been scaled back to 11 turbines because of safety issues in the shipping channel serving the North Sea oil industry.[x]

Another criticism is that they kill birds. According to the Fish and Wildlife Service, windmills kill nearly half a million birds a year. The American Bird Conservancy projected that the number could more than double in 20 years if a government wind power goal of supplying 20 percent of the nation’s power by 2030 is attained. Recently golden eagles were found dead near the Pine Tree Wind Farm project, operated by the Los Angeles Department of Water and Power. Laws protect eagles and many migrating birds (e.g., the 1918 Migratory Bird treaty Act), but currently there are only voluntary guidelines for wind power producers.[xi] The irony is that seven oil and gas companies operating in North Dakota were recently brought to task for supposedly killing 28 migratory birds that were found dead near some oil waste lagoons. These misdemeanors carry fines of up to $15,000 for each dead bird and up to six months in prison.[xii]

Other criticisms besides cost, view, and bird kills deal with its intermittency, requiring back-up power; noise pollution; government subsidies; low capacity factors; and small environmental contribution to name just a few. A wind project in Vermont is found to be an example, where it will receive $44 million in federal production tax credits over 10 years, produce only one-third of its rated capacity of 63 megawatts, reduce few greenhouse gas emissions since only 4 percent of the state’s emissions come from electricity generation, remove 134 acres of forest which will increase erosion to headwater streams, and hurt the tourist population.[xiii]

Further, old or broken wind turbine blades cannot be recycled, posing a new problem for the industry. Denmark’s leading business newspaper Dagbladet Børsen recently warned, “As the wind becomes a central part of energy supply, a huge waste problem is growing with similar speed.” A key material in constructing wind turbines, carbon fiber composite, cannot be recycled and is either filling European landfills or is being burned creating toxic emissions. Nearly all turbine blades are manufactured from thermoset plastics, the only material currently known that meets reliability standards due to their relatively high strength and low weight properties. But the stress damage to fiber composites is poorly understood and wear and tear on blades can be considerable, reducing power generation by 20 to 30 percent, and needing to regularly replace blades.[xiv]

Conclusion

Offshore wind farms are struggling in the United States because they are far from cost effective compared to their onshore counterpart or to conventional generating technologies. An offshore wind farm in the United States is yet to be built though several proposals have been put forth. Prudency reviews by utility companies have kept them in check so far. Of course, besides cost, other factors regarding wind are the need for government subsidies costing taxpayers money, low capacity factors and emissions abatement, and environmental issues regarding views, bird kills, noise, and waste.

Just how flawed is the green energy loan guarantee program, you ask? According to the memo’s authors, one wind project in particular will receive $1.2 billion in government subsidies for a $1.9 billion project, making it about 65 percent subsidized. And, the authors omit that the project will only create 400 construction jobs and 35 permanent jobs. In other words, each one of these 35 permanent jobs cost over $30 million each.

The memo, written by Larry Summers, Ron Klain, Carol Browner. At the time, Summers was the Chairman of the National Economic Council, Klain was Vice President Biden’s Chief of Staff, and Browner was the White House Energy and Climate Change Advisor. In the memo, these high ranking officials explain three problems with the loan guarantee program. As Tabarrok explains:

The memo says that OMB and Treasury were concerned about three problems, “double dipping” (massive government subsidies from multiple sources), lack of “skin in the game” from private investors and  ”non-incremental investment,” the funding of projects which would occur even without the loan guarantee.

How much double dipping are we talking about? Summers, Klain, and Browner describe the Shepherds Flat wind project and note, according to them, that total government subsidies for the project are over $1.2 billion. This dwarfs the $100 million investment in the project Google was happy to tout. Here’s the Summers, Klain, and Browner explanation of the Shepherds Flat project:

The Shepherds Flat loan guarantee illustrates some of the economic and public policy issues raised by OMB and Treasury. Shepherds Flat is an 845-megawatt wind farm proposed for Oregon. This $1.9 billion project would consist of 338 GE wind turbines manufactured in South Carolina and Florida and, upon completion; it would represent the largest wind farm in the country.

The sponsor’s equity is about 11% of the project costs, and would generate an estimated return on equity of 30%.

Double dipping: The total government subsidies are about $1.2 billion.

Skin in the game: The government would provide a significant subsidy (65+%), while the sponsor would provide little skin in the game (equity about 10%).

Non-incremental investment: This project would likely move without the loan guarantee. The economics are favorable for wind investment given tax credits and state renewable energy standards. GE signaled through Hill staff that it considered going to the private market for financing out of frustration with the review process. The return on equity is high (30%) because of tax credits, grants, and selling power at above-market rates, which suggests that the alternative of private financing would not make the project financially non-viable.

Carbon reduction benefits: If this wind power displaced power generated from sources with the average California carbon intensity, it would result in about 18 million fewer tons of CO2 emissions through 2033. Carbon reductions would have to be valued at nearly $130 per ton CO2 for the climate benefits to equal the subsidies (more than 6 times the primary estimate used by the government in evaluating rules).

This is a serious indictment in and of itself, and reading this, one questions how the administration could in good conscience proceed in approving the project. No matter how you slice it, $1.2 billion in subsidies is a lot. As Tabarrok explains:

In my view, the Summers/Klain/Browner analysis was a damning indictment of the Shepherds Flat project. The taxpayers were expected to fund by far the largest share of the bills and also of the risk and in return they weren’t getting many benefits in terms of reduced pollution. In contrast, Caithness Energy and GE Energy Financial Services, the corporations behind the project, weren’t taking much risk but they stood to profit handsomely. I guess that is why they call it “green” energy.

In short, the Shepherds Flat project was corporate welfare masquerading under an environmental rainbow. [emphasis added]

Despite understanding that a loan guarantee for the Shepherds Flat project was completely unnecessary, the administration provided the loan guarantee anyway. No real surprise since the wind turbines come from GE, one of the administration’s favorite companies.

So what does $1.2 billion in government subsidies provide in terms of job creation? According to CNN Money, 400 construction jobs and 35 permanent jobs. In other words, each one of these full time jobs cost over $30 million each. That is a raw deal for Americans.

Tabarrok rightly concludes, “the real scandal is not what happens when everything goes wrong [such as Solyndra] but how these programs work when everything goes right.”

Read all of Tabarrok’s piece here.

“In light of the failure of Solyndra, which cost taxpayers nearly half a billion dollars, CAP is attempting to change the narrative and again launch an attack on one of the few sectors actually creating jobs in the Obama economy.  This report, which relies on questionable facts and a laughable premise is the latest salvo in the Obama Administration’s ongoing war on domestic energy and is a blatant attempt to impose a national energy tax on the American people.”

CAP Myth:  The President’s deficit reduction plan rightly eliminates $41 billion in tax loopholes for the oil and gas industry over the next decade.

IER Fact-Check #1: The Obama Administration is forgoing two and a half times as much….$100 billion per decade…in bonus bids because they have stopped leasing energy offshore.  Just today, Senator David Vitter of Louisiana and 3 other Senators sent a letter to Secretary Salazar pointing out that on his watch, offshore oil lease sales have fallen from $10 billion for the Treasury in 2008 to $0 this year.  If the Obama administration wants US jobs and investment, they would allow people to invest here.  Their venal obeisance to the wishes of the most extreme anti-energy groups is costing the US jobs and revenue.

IER Fact-Check #2: These “special interest loopholes” are actually longstanding tax provisions used by most other U.S. companies, including a dual capacity foreign tax credit preventing oil and natural gas firms – along with virtually every U.S. firm earning income abroad – from being taxed twice.   Although a central tenet of our tax system is that companies are taxed on net income after costs, the President’s plan would prohibit oil and gas companies from deducting intangible drilling costs, but allow banks to deduct the cost of potentially bad loans before they default and Hollywood studios to keep accelerated deductions for film production costs.  If the Administration were serious about tax reform, why target just one industry? 

CAP Myth: The big five oil companies have ample financial resources that dwarf the value of these tax breaks. These companies enjoy billions in cash reserves, made nearly $1 trillion in profits over the past decade, and at least one company (ExxonMobil) pays a lower effective tax rate than the average American family.

IER Fact Check #3: In a rushed effort to slander the industry, CAP rightly pulled the $1 trillion figure but erroneously attributed it to profits. The industry actuallyadds $1 trillion to the economy each year, including $470 billion in spending, wages, and dividends alone. 

IER Fact Check #4: Another inconvenient truth is that America’s energy producers are taxed at a much higher rate than they profit.  In 2010, industry paid 41 cents in taxes out of every dollar earned, compared to other companies in the S&P 500 that paid 26.5 cents.  Chevron and ExxonMobil paid effective tax rates of about 44 percent and 42 percent, respectively, between 2005 and 2009.  Though CAP claims that ExxonMobil’s effective tax rate in 2010 was 18 percent, lower than average household rate of 21 percent, CNN reports that Exxon actually paid 47% that year.  Busted. Industry earnings, on the other hand, average 8 cents for every dollar of sales in the first quarter of 2011.  

CAP Myth: The big five oil companies aren’t investing in job creation or clean energy.

IER Fact Check #5: The U.S. oil and gas industry, which supports more than 9 million jobs, spent $266 billion in 2010 on new and existing energy projects, and to enhance refinery and other downstream operations. Without energy taxes, however, the industry could do even more.  An API analysis found that by 2020, the oil and natural gas industry could create about 1.1 million new jobs, add $127 billion to government revenues, and increase energy production by about almost 1.5 billion barrels/year. 

Investors Defend the Green Gravy Train

A recent Reuters story explains that green investors are rushing to defend the process that showers them with taxpayer backstop for their loans:

U.S. renewable energy investors defended the government energy loan program at the center of the political firestorm ignited by the high-profile collapse of solar panel maker Solyndra, one of the program’s beneficiaries.

Partners at top private equity firms that have participated in the government’s loan guarantee program for alternative energy described the program’s review process for applicants as “robust” and even more in-depth than in the private sector.

“It’s probably the toughest due-diligence exercise that any of us had ever experienced,” Neil Auerbach, a managing partner at Hudson Clean Energy Partners, a private equity firm that invests in the sector, told the Retech renewable energy conference in Washington on Wednesday.

Auerbach said his experience with the loan guarantee program might reflect the Energy Department’s applying lessons it learned after approving earlier projects, such as Solyndra.

“What we might have seen over these 40 loan guarantee approvals is a program start with a prototype — the first one through the chute was Solyndra — then successive screw-tightening exercises that were going on,” said Auerbach, a former partner with Goldman Sachs.

Solopower, a solar company backed by Auerbach’s fund, received a $197 million loan guarantee this year to retrofit a solar manufacturing plant in Wilsonville, Oregon.

…

Ed Feo, a managing partner at USRG Renewable Finance, said he also found that the level of detail required for the federal program was more than he was used to. He said in his experience the agency conducted “rigorous” oversight.

…

Feo said the loan guarantee program should not be blamed for the fall of Solyndra but should judged on the basis of all its investments, not just those involving a single company.

“If you want to innovate and you want to facilitate innovation, you have to accept the fact sometimes things don’t work and there’s a cost associated with that,” Feo said.

Feo is simply wrong in the quotation bolded above, when he implies that—aww shucks—taxpayers will just have to sometimes eat half a billion dollars and tolerate FBI investigations if they want “innovation.” On the contrary, at one point this country was supposed to be a free market, in which the government left innovation—and more specifically, the determination of how energy would be produced and distributed—to the voluntary private sector.

Bogus Oversight

Besides their obvious self-serving bias in defending the government’s loan guarantees, the green investors quoted above are confusing bureaucracy with actual safeguards. By its very nature, government operations are inefficient and choked with red tape. Any small business owner recognizes the labyrinthine complexity of the tax code and labor laws. Yet these codes are riddled with carve-outs and privileges for special interests. That’s partly why the codes are so complicated.

It’s the same thing with “green” guarantees. The government can’t simply guarantee every loan application with “renewable” in the description; the Treasury would be bankrupt in a month. (Or rather, it would be officially bankrupt, as opposed to its current status as merely unofficially bankrupt.) So the government has to put up barriers, to make sure the gravy gets steered only to those people who really lobby for it.

Conclusion

Despite the defenses of those who are currently enjoying the program, the government’s loan guarantees for green projects are turning out to be more and more crooked. Currently 14 such grants are under investigation. Solyndra wasn’t a lone bad apple.

It would be nice to think that the bureaucratic hurdles for such loan guarantees dovetail perfectly with the requirements for a sensible business plan. But we know that must not be true: If it were, the investors wouldn’t need taxpayer backstops, they would go to the private capital markets for funding.

If the goal instead is to frankly subsidize bad business ventures, because of a non-financial concern for environmental objectives, then officials should at least have the decency to be frank with the American taxpayers that that’s what is going on here.

Crony Capitalism and the Failed Green Energy Dream

Washington—Today, the House Energy and Commerce Subcommittee on Oversight and Investigations conducted a hearing on the bankruptcy of Solyndra, the recipient of a $535 million federal loan guarantee and the poster child of President Obama’s green stimulus.  The Institute for Energy Research released the following video highlighting the questionable ties between Solyndra and the Obama administration.

Click the video or here to watch.

Unfortunately, as both the video and the House hearing shows, it may be a very long time before we finally get some answers.

In response to Solyndra executives pleading the fifth and the release of IER’s latest video, IER President Thomas Pyle issued the following statement:

“While the story of Solyndra is only now beginning to unfold, what we do know is the Obama Administration has much to answer for.  The American people have been led down the primrose path with the promise of green jobs and now the American taxpayer is even further in the red.

Government subsidies for so-called green energy are not creating jobs, not producing affordable energy, and wasting taxpayer money.  President Obama’s green dream is becoming a taxpayer and economic nightmare.”

The Solyndra loan program and the NAT GAS Act are both based on the idea that private investors are not making good enough decisions, and therefore the federal government needs to speed things up—either through direct subsidies or through tax subsidies. The proponents of these programs argue that subsidizing solar panels or natural gas truck, bus, and car conversions will stimulate the economy and create jobs. Sadly, the NAT GAS Act will create the same incentives that gave us Solyndra’s demise.

The Solyndra saga began when the Obama administration gave the company a $535 million loan through the Federal Financing Bank (a part of the Treasury Department). The White House argued that the loan would create jobs. As Vice President Biden said, “By investing in the infrastructure and technology of the future, we are not only creating jobs today, but laying the foundation for long-term growth in the 21st-century economy.”

The Department of Energy (DOE) has tried to justify the Solyndra loan by claiming that even though it was risky, they were trying to “leverage private sector capital.” As DOE spokesman stated, “What this program is intended to do is leverage private sector capital towards innovative clean energy technology that can help American manufacturing remain competitive, but might not otherwise receive project financing on the open market.”

The problem is that the government does a very bad job at creating jobs through these kinds of programs. According to the administration, the entire green energy loan guarantee program has only created 3,545 new jobs after spending about half of the $38.6 billion in loan guarantees. That works out to about $5 million per job.

Solyndra should be a cautionary tale about policymakers thinking they can create jobs by providing special help to politically-connected companies. These plans, however, are doomed because policymakers and bureaucrats do a poor job of picking winners and losers because it’s not their money. The Obama administration—or someone in the White House—obviously thought that Solyndra was a winner, but the company has turned out to be a terrible loser.

Despite Solyndra’s demise, some policymakers are supporting the same type of policies in other incarnations, such as the NAT GAS Act. The NAT GAS Act’s premise is surprisingly similar to the DOE loan guarantee program that gave money to Solyndra. Before the loan guarantee program, there were solar companies in the U.S. trying to figure out how to make electricity from the sun at economic rates. Today, before the NAT GAS Act has been made into law, there are companies converting trucks, cars, and buses to run on natural gas without the NAT GAS Act’s large tax subsidies.

The DOE’s loan guarantee program did not create a new solar industry. Instead, solar companies such as Solyndra have rapidly expanded—fueled by taxpayers’ dollars—even though it was uneconomic. Their uneconomic expansion led to Solyndra’s downfall; their product could only be sold for what it cost to make in the real market. We don’t know if the expansion of companies converting vehicles to run on natural gas will result in a meltdown as great as Solyndra, but we do know that the NAT GAS Act will lead to billions in uneconomic spending.

We know that the NAT GAS Act will lead to uneconomic spending because cost-effective technology does not need subsidies. Apple does not need subsidies to make money selling iPads. Microsoft doesn’t need subsidies to sell Windows, even though there are literally free operating systems. And the American TV company Vizio didn’t need subsidies to compete against Asian electronic giants like Sony, and Samsung. Companies that sell a cost-effective product or technology do not need special help from the U.S. taxpayer.

The NAT GAS Act is attractive to some because natural gas can replace some imported oil. This overlooks the obvious point that if we are concerned about importing oil, why not open up more than 2.5 percent[1] of offshore lands for oil and natural gas production and why not open up more than 6 percent of onshore lands?[2] The United States has large reserves of oil, so why not use them if we are concerned about importing oil?

Additionally, the companies advocating tax subsidies for natural gas vehicles argue that natural gas is a much more economic fuel than diesel or gasoline, and somehow that justifies a multi-billion dollar government subsidy program.  If it is cheaper, won’t people buy them?  Many times in the energy debate, if a long explanation about all the intended benefits of a particular proposed government policy or handout is needed, it’s a fair bet those doing all the fast talking are trying to outsmart over 300 million Americans making individual decisions based upon what they see makes the most sense….and they do it with their own money.  Because they decide in the free market—with their own money and without coercion—the winning technologies are those that win the trust of the consumer, rather than the favor of the politician.

The NAT GAS Act is based on the same flawed assumptions that undergird the loan guarantee program that gave us Solyndra. Instead of trying to outsmart private investors and consumers by convincing politicians, it would be far better if policymakers allow Americans to choose for themselves what to invest in and what sources of energy make the most sense. After all, if we’ve forgotten what the Founders intended for our nation, shouldn’t Solyndra remind us?

P.S. For a greater explication of the NAT GAS Act, see economist David Kreutzer’s testimony from the Ways and Means Committee hearing.

In its heyday, Enron set out to become the world’s leading renewable energy company, having entered the solar business in 1994 and wind business in 1997. Enron CEO Ken Lay believed that Enron, as a green company, was about the energy future; ExxonMobil and the other oil majors were about the energy past.

In 1999, Enron lobbyists persuaded Gov. George W. Bush and the Texas legislature to enact an electricity restructuring bill that included the nation’s stiffest renewable quota. Texas would become the leading wind state in the nation in fairly short order and lead America’s renewable-energy boom.

Business-wise and legislatively, Enron did more than any other U.S. company to promote the dream of a “green” energy economy.

Today, we have the sordid tale of bankrupt Solyndra, the California solar company which received a $535 million federal loan from the federal government. This loan was made despite Solyndra accumulating losses of $558 million in the five prior years. The company’s recent bankruptcy and layoff of 1,100 apparently caused President Obama to forego mentioning “green jobs” in his September 8^th Jobs for America speech.

Enron’s Solar Misdirection: 1994

But if politicians had paid attention to Enron years ago, they would have seen through Solyndra’s risky, government-dependent strategy. Solyndra is just one more company to promise a solar breakthrough and fail to achieve their claims.

Seventeen years ago, Enron announced a breakthrough via the New York Times of a proposed solar project that could generate electricity at a rate competitive with that from fossil fuels. “Solar Power, for Earthly Prices: Enron Plans to Make the Sun Affordable” reported a fixed rate from Enron of $0.055 per kilowatt hour for the life of the contract.

Enron’s solar price surprised even environmental pressure groups. “Even the most optimistic supporters of solar power have doubted that they would see commercially competitive production until the next century,” Times reporter Allen Myerson wrote. “The Worldwatch Institute, an environmental group in Washington, said earlier this year that solar cell electricity, now as low as 20 cents a kilowatt-hour, might reach 10 cents by 2000 and 4 cents by 2020.”

But while there was some skepticism, there was also optimism that mighty Enron was going to do what existing solar manufacturers had hitherto been unable to accomplish. The Times article also reports:

Size is key, according to Sigurd Wagner, a professor of electrical engineering at Princeton University.

“If a good group of people puts a plant of that scale in, it will have a real consequence on costs,” he said. “It’s not going to go down by just a little bit, but by a factor of two.”

To accomplish this feat, Enron was banking on government help at many levels. “Enron has asked the Government to buy or guarantee a market for its power, with annual increases of 3 percent, for 30 years,” explained Myerson. “It also depends on leasing Government land, receiving Federal tax benefits for renewable energy and financing construction with tax-free industrial development bonds.”

But the project never materialized. No announcement was made or autopsy performed. Evidently, the different governmental jurisdictions could not stomach what Enron was demanding. There was a lot of smoke amid Enron’s mirrors. Even today, the U.S. Energy Information Administration estimates the levelized cost of photovoltaic solar at above twenty cents per kWh, some four times what Enron was touting back in 1994.

Lessons

There is little excuse for the present situation of the Obama Administration with its solar loan guarantees souring.

Did not DOE Secretary Stephen Chu tell the New York Times that solar technology would have to improve fivefold to be competitive? Aren’t politically dependant companies, á la Enron, bad risks given that consumers bat last? Evidently, Obama’s Department of Energy has evidently shown far less prudence than Clinton’s Department of Energy did in solar matters.

Government trying to pick energy winners instead has picked energy losers—and picked the taxpayer’s pocket.

Daniel Simmons contributed to this post.

According to Time magazine[i], a new report has been released by the Brookings Institution and the Battelle Technology Partnership Practice that defines “green jobs” and counts them.[ii] According to the report, the “clean” or “green” economy is a sector of the economy that is low carbon and “that produces goods and services with an environmental benefit.”[iii] And, according to the report, the “clean economy” employs 2.7 million Americans. That number of employees is less than the IT industry in the United States, but more than the biosciences and slightly more than the fossil fuel industry according to the authors. It should be noted that the American Petroleum Institute in a 2009 study indicates that the oil and natural gas industry supported 9.2 million jobs in 2007, 2.1 million of those jobs were direct jobs.[iv]

Most (over 90 percent) of the “clean or green jobs” are in mature industry segments that cover activities including manufacturing and public services such as wastewater and mass transit, and they are clearly not new.  A smaller portion of the “clean economy” encompasses newer segments, including solar photovoltaic (PV), wind, fuel cell, smart grid, biofuel, and battery industries that the Administration is trying to promote.

Source: Sizing the Clean Economy by the Brookings Institute

Report Highlights

The largest segment of the “clean economy” is in the business of waste management and treatment (386,116 jobs), totaling 14 percent of “clean economy” jobs, with the U.S. Bureau of Reclamation being the largest employer followed by waste management and water operations of the cities of Los Angeles and New York. The second largest component is public mass transit (350,547 jobs), and the third largest component, conservation (314,983 jobs), again largely consists of employees from federal and state and local governments (e.g. U.S. Fish and Wildlife Service, U.S. Forestry Service, National Park Service).  As stated, these are not new jobs.  For example, the first water treatment plant in the United States was built almost 200 years ago.[v]

The authors state that the vast majority of “clean economy” jobs have little to do with energy or energy efficiency. For example, almost one-fifth of “clean economy” jobs involve agriculture and conservation. About forty percent of “clean economy” jobs benefit the environment through greenhouse gas reductions, the management of resources like air and water, and recycling. However, the overwhelming majority of these jobs reduce greenhouse gas emissions as a byproduct of their original goals, such as managing forests, producing food, harnessing water power and the like. The industries that support renewable energy such as solar, wind, biofuels, etc. only provide 5 percent of the jobs. Nuclear energy provides 3 percent of the jobs.

The largest numbers of renewable energy jobs, covering 75 percent of them, are in hydropower (55,467 jobs), wind (24,294 jobs), and PV (24,142 jobs), which together account for just over 100,000 of the 2.7 million jobs identified by the researchers.  Many of these jobs are with private firms including General Electric and First Solar. The smaller segments of the renewable energy category including businesses such as “smart grid,” batteries, fuel cells, and electric vehicles, comprise 55,000 “direct” jobs.

The “green (clean) economy” as defined by the authors also includes jobs in regulation and compliance (e.g. the Environmental Protection Agency), research and engineering (e.g. Oak Ridge National Laboratory), and green architectural services and products. For example, over 77,000 “green economy” jobs are in businesses that make green consumer products or have environmentally sustainable ingredients such as L’Oreal, Maybelline, and Johnson & Johnson.

Other findings from the report include:

• The “clean economy” grew at 3.4 percent between 2003 and 2010, slightly slower than the entire U.S. economy, which grew at 4.2 percent.
• The “clean economy” is more export- and manufacturing-focused than the U.S. economy as a whole. About 26 percent of “clean economy” jobs are in manufacturing, compared to 9 percent for the entire economy, and the value of exports, on a per-job basis, is twice that of a typical American job.
• “Green jobs” in this assessment tend to pay better than the average American job with median wages 13 percent higher than the average.
• On a regional basis, the South has the most “clean economy” jobs because of its strength in manufacturing and the West has the most “clean economy” jobs per capita.

Conclusion

“Green jobs” in the renewable energy industry supply less than 200,000 U.S. jobs and over a quarter of those jobs are in the hydroelectric industry. But, if we use the definition supplied by Brookings and Battelle that defines the “clean economy” as providing goods and services with an environmental benefit, then the job figure jumps to 2.7 million, which is still a modest 2 percent of U.S. jobs. The majority of the jobs that fit this definition, over 90 percent, are not in the renewable energy field and the largest segments are in waste management (garbage) and the public transportation fields, jobs that have been in existence for decades and even centuries.

The truth is that this is simply one assessment of what constitutes a “green job” and indeed, the definition used in this study—jobs providing goods and services with an environmental benefit—could be used in many ways to make the number of jobs larger or smaller.  For example, few would argue that the automobile, though vilified by some as an environmentally damaging invention, provided an environmental benefit over the tens of millions of beasts of burdens—and their waste—that characterized the only transportation form prior to the adoption of engine-powered vehicles as a replacement.  Likewise, the entire value chain of products that allow fertilizers to be manufactured could be considered beneficial to the environment since fertilizer is used to enhance the growth of plant life, which in turn sequesters carbon dioxide.   And therein lies the continuing difficulty of defining precisely what a “green” or “clean” job constitutes.[vi]

Therefore, it is quite likely that politics will continue to define what is “green” or “clean,” since these are semantic and political devices, rather than scientific or economic characterizations.  One thing is made clear by the new report, however: despite the enormous amounts of money supplied by subsidies and through the stimulus and the mandates provided through federal legislation and state programs and regulation, it does not look like the United States gained many jobs in the “clean or green economy.”  Moreover, as has been demonstrated in studies regarding green energy, it is quite often the case that politically-directed funding for certain energy forms in fact reduces opportunities for jobs elsewhere in the economy through the opportunity costs associated with command-and-control energy policies.   The Brookings/Battelle study did not analyze those opportunity costs.

President Obama hailed the appointment of Mr. Bryson as being key to helping the United States’ clean energy industry—and there is no doubt that he will be a staunch ally in that regard. Mr. Bryson, a former utility executive, was a co-founder of the Natural Resources Defense Council, an environmental advocacy group that has lobbied vigorously for regulations on carbon dioxide emisssions and for renewable energy subsidies. Since September 2010, Mr. Bryson has been chairman of BrightSource Energy Inc., a solar power plant developer and recent beneficiary of a $1.6 billion loan guarantee—funded by the U.S. government with stimulus money—to build a massive solar complex in the Mojave Desert.

It is also troubling to note that Mr. Bryson’s confirmation would make him the top official at an agency that includes the National Oceanic and Atmospheric Administration—the U.S. regulator responsible for oversight and protection of the U.S.’ oceans and atmosphere. A former member of the United Nations’ advisory group on climate change, Mr. Bryson notably referred to the Democratic climate change bill passed by the House in 2009—also known as Waxman-Markey—as being “moderate” in its approach, even though a study by the American Council for Capital Formation (ACCF) and the National Association of Manufacturers (NAM) found that implementing Waxman-Markey would result in economic losses up to $571 billion by 2030, and up to 2.4 million lost jobs. Furthermore, under the cap-and-trade program, gasoline prices were forecasted to increase 20 to 26 percent, residential electricity prices by 31 to 50 percent, residential natural gas prices by 56 to 74 percent, and coal prices to electric utilities increase a whopping 565 to 755 percent in 2030. And yet, for Mr. Bryson, this doesn’t push the envelope far enough.

Indeed, Mr. Bryson’s long history of environmental advocacy and his ties to the subsidy-dependent green industry seem to be principal reasons for his appointment as Commerce Secretary. “In the years ahead, a key to achieving our export goal will be promoting clean energy in America. It’s how we’ll reduce our dependence on foreign oil,” President Obama said in his nomination announcement. ”John understands this better than virtually anybody,” he went on, “Throughout a distinguished career in which he’s led nonprofits, government agencies and large companies, he’s been a fierce proponent of alternative energy.”

President Obama’s belief that clean energy investments will offset our dependence on foreign oil in the short-term is misplaced, given that oil is used predominantly as a transportation fuel and produces less than 1 percent of U.S. electricity. This scenario would only be feasible were many of the United States’ 250 million passenger vehicles to be changed over to electric models, and only if the United States switched from using coal to produce 45 percent of its electricity to mostly alternative energy sources. Ultimately, the wisdom of this goal is questionable given that generating electricity from wind and solar is substantially more expensive than burning coal—more than triple the cost, in the case of photovoltaic solar.

Lastly, the idea that massive subsidies for alternative energy will significantly benefit the U.S. economy is disingenuous, as promised “green jobs” continue not to materialize. In any event, alternative energy promotion should not be the focal point of Commerce’s mission, nor a factor in the selection of its top official. Mr. Bryson should be thoroughly vetted by Congress to ensure that his background and experience are appropriate for the position of our nation’s chief economic advocate, and as the top official in charge of its regulating its oceans and atmosphere.

In comments about the shadow hearing, various policymakers repeated myths about the alleged economic benefits of federal investment in “clean energy.” We have dealt with these fallacies before (see a compilation of studies here), but since this promises to be a major political issue, it’s worth picking apart the errors involved.

Three Strikes and Pelosi Should Be Out

According to the Greenwire article:

House Minority Leader Nancy Pelosi (D-Calif.)…will announce a Monday hearing of the Democratic Steering and Policy Committee on the job-creation benefits of “protecting the taxpayer and securing our energy future,” according to a copy of the announcement obtained by Greenwire. The hearing is expected to home in on the clean-energy funding that could be freed up by rolling back subsidies for major oil companies, a proposal outlined in President Obama’s State of the Union address.

“By investing in innovation, clean energy, and new technology, we can strengthen our future, put Americans back to work, preserve our national security, and ensure our country’s competitiveness in the global economy for generations to come,” Pelosi said in a statement on the hearing.

The three specific benefits alleged by Pelosi would not materialize because of federal spending on green jobs. Let’s analyze each claim in turn.

Pelosi Mistake #1: “Federal spending on green jobs will put Americans back to work.”

This is the central fallacy. As we have repeatedly pointed out, the federal government cannot create net jobs in the long run. In a market economy, wages and prices adjust so that everybody who wants a job ultimately gets one. Yes, the federal government can “create jobs” in one sector by pumping money into it, but only at the expense of destroying jobs somewhere else in the economy.

This is a crucial point so let’s say it in different words. To keep the numbers easy, suppose the economy has 100 million people in the workforce. (The official number is more like 154 million.) If the government sits back and watches the market do its thing, then during normal times about 96 million of those people will have a job doing something, and the other 4 million will be in transition between jobs.

Now if the government decides to “create,” say, 10 million jobs in constructing solar panels and related tasks—and these “new jobs” would not have otherwise existed—then it’s obvious that there are going to be fewer workers available for everything else.

Even if the new solar panel industry (which relies on government funding for its life support) is humming with 10 million direct and indirect jobs, the national unemployment rate won’t magically drop to zero. At any given snapshot in time, there will still be millions of them who are in transition between jobs, because they are moving to a new city, or they decided they wanted to pursue their dream in some other industry, or they had a fight with their boss. The point is, the reasons for the “normal” unemployment of 4 percent will still exist even in the presence of massive subsidies for certain sectors. So the jobs “created” by the federal spending, will simply mean that of the 96 million people originally doing jobs as dictated by market forces, 10 million of them will be working in slots designated by the government instead.

But Isn’t “Creating Jobs” a Good Idea During a Bad Recession?

In the section above we showed how silly it is to think that the government can create jobs on net, during normal economic times. On the contrary, if the government causes workers to flow into specific sectors (like solar panel manufacturing and electric car battery design), those workers must be coming from somewhere else in the economy. Jobs aren’t created on net, they are simply redistributed away from market-determined areas and into politically-determined ones.

Now this argument admittedly seems to break down when the unemployment rate is much higher than normal. In the midst of a terrible recession, can’t government spending “create jobs” for workers who are coming from the ranks of the unemployed? Doesn’t this allow for net job creation, as opposed to a mere reshuffling of workers among sectors?

Actually, even in the midst of a bad recession, it’s not clear that the government can create jobs just by throwing money at the problem. In terms of the underlying economics, the problem is that the unemployment rate is high for a reason. It’s not the case that businesses in 2007 decided to start laying off workers for kicks. No, the bursting of the housing bubble and the impact on other asset values showed that the economy was in an unsustainable configuration, and workers needed to be diverted into more appropriate sectors. In short, there had been too many workers sucked into real estate (and finance) and they needed to go elsewhere.

This isn’t some abstract theory. The federal government tried spending hundreds of billions of dollars to “create jobs” and lower the unemployment rate: it was the celebrated Obama stimulus package when he first came into office. And try as they might to excuse its failure, the stimulus proponents can’t avoid the fact that unemployment went up far more than they had anticipated—the economy shed more jobs in fact than they warned would happen if the government did nothing.

Our basic point remains: The government doesn’t promote genuine economic growth when it spends money to “create jobs.” The resources (including labor) flowing into the politically-favored sectors have to come from somewhere else in the economy. To try to boost total employment through federal spending, is like trying to raise the level in the deep end of a pool by taking buckets of water from the shallow end.

Pelosi Mistake #2: “Federal spending on green jobs will preserve national security.”

By this Pelosi presumably has in mind the fact that a large portion of oil comes from politically unstable regions of the world. The argument is that by switching away from oil, America can’t be held hostage to foreign governments.

We have dealt with this claim at length here. Put succinctly: Even dictators need money. Whether an autocratic regime or a Western-style democracy, whatever government ends up in charge of a country with large oil deposits, will take policies to export them. It does a government little good to be sitting on black gold but not sell it.

It’s true that geopolitical instability leads to more volatility in oil prices, and that is definitely a disadvantage. But the market can take these problems into account. People in the oil industry understand the world situation, and manufacturers of vehicles understand that oil prices might occasionally spike during political unrest. Even so, absent government intervention, the market for the foreseeable future would rely on fossil-based energy sources because they are simply the most economical and convenient, all things considered.

Pelosi Mistake #3: “Federal spending on green jobs will promote U.S. competitiveness.”

On the contrary, federal “green” policies—particularly the EPA’s intentions to regulate carbon emissions—will reduce U.S. competitiveness. Particular sectors of course can benefit from lavish federal subsidies, but the economy as a whole only suffers when legislators and regulators start picking winners and losers.

Conclusion

If Nancy Pelosi and other policymakers really want to help the economy, promote U.S. security, and enhance business competitiveness, they would reduce the role of the federal government in the U.S. economy. In particular, they could remove political obstacles to the development of domestic energy sources that can thrive without handouts from the taxpayer.