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February 11, 2011

Clean Energy, Clean Jobs - A Response to the Heritage Foundation

Earlier this week we touted a new report out from Political Economy Research Institute (PERI) and Ceres that evaluates job impacts under two Clean Air Act protections expected to be finalized in 2011:

"Based on recent estimates that the power sector will invest almost $200 billion total in capital improvements over the next five years, total employment created by these capital investments is estimated at 1.46 million jobs, or about 290,000 jobs on average in each of the next five years."

Well, the folks over at the Heritage Foundation had a bone to pick with this report and heavily criticized it. Now PERI's back with their own response, which they've sent to us for posting. This was written by James Heintz, PERI's Associate Director and Associate Research Professor:

A new report "New Jobs - Cleaner Air: Employment Effects under Planned Changes to EPA’s Air Pollution Rules" released on February 8th by Ceres and the Political Economy Research Institute (PERI) estimates the employment impacts over the period 2010 to 2015 of investments in pollution control, investments in new electricity generation capacity, and retirements of older coal plants that are expected to occur under planned changes to the EPA's air pollution standards. The report finds significant net employment creation associated with these investments.

A Heritage Foundation's critique of the Ceres/PERI report, which appeared as a recent blog post, attacks the findings and contends that (1) private investment in one sector of the economy must come at the expense of spending elsewhere - i.e. it 'crowds out' other expenditures; (2) the report fails to distinguish between jobs and 'job years' and (3) the analysis does not consider the negative consequences of compliance costs. It is helpful to take each of these issues in turn.

First, does spending by electric utilities on capital improvements that create jobs divert resources from other productive activities? If the economy were operating at full-tilt, with low rates of unemployment and no excess capacity, there could be something to this argument.


However, the current reality is significantly different. Unemployment remains at historically high levels and one glance at the data on the financial sector, such as that provided in the flow of funds accounts, shows that lending has not recovered. Mobilizing idle resources through new investments does create jobs, since the resources were not productively employed in the first place.

Moreover, private investment is not just about spending in the economy. Investments to update and modernize the capital stock of the electricity sector generates real supply-side benefits in terms of greater productivity and improved efficiency. Such improvements lower the costs of production and support future growth.

Instead of 'crowding out' spending in other parts of the economy, such productivity-improving investments actually generate income. Given these considerations, there is no reason to believe the assertion that spending on capital improvements in the electricity sector will reduce spending one-for-one elsewhere in the economy.

The second point is that the CERES/PERI report confuses jobs and job-years. This is either a misreading or a misrepresentation of the report . I do agree that the distinction is critical and have not been made in some of the discussions of the findings.

The report states that the investments that are expected to occur over the next five years, taking into account the impact of the proposed transport rule and utility MACT rule, are expected to generate 1.46 million job years of employment associated with the installation and construction of the capital improvements - in which a 'job year' represents a single job that last for one year.

These job-years will be spread out over the five year period, linked directly to when investments are made. As the report states, this would be "about 291,577 year-round jobs on average for each of those five years" (p.2 ).

The third point is that study does not take into account compliance costs and that it assumes higher compliance costs will always generate jobs. Again - this does not reflect the analysis performed in the report. The report estimates the employment effects of investments in new capacity and pollution abatement technologies that can be expected to occur in the electric sector until 2015, taking into account the proposed air pollution standards.

There have been claims that the new standards would stifle investment in the electricity sector, leading to job losses. The study found that, under the new standards, the electric sector will continue to make sizeable capital investments and remain a vibrant contributor to the U.S. economy as it has been over the past two decades since the 1990 amendments to the Clean Air Act  were passed under George H.W. Bush's administration.

Indeed, since the 1990 amendments to the Clean Air Act were enacted, price trends from the U.S. Energy Information Administration show that the price of electricity, adjusted for average inflation in the economy, fell steadily as the electricity sector made sizeable investments in new capacity and pollution control technologies.

Recently, real electricity prices have increased, particularly after 2004, but this increase was driven by price hikes in energy markets, not by air pollution standards. There is no reason to believe that investments to modernize the electric sector will impose substantial burdens on consumers and businesses.

Of course, the new standards do involve costs and will have negative consequences in terms of the retirement of older, coal-fired plants. The report acknowledges that this is the case, estimates the job losses from the retirements - including indirect jobs losses in the coal industry, transport industry, and related activities. Therefore, a consideration of the negative impact of compliance costs is a central aspect of the study as detailed on pages 12 and 13 of the report.

A constructive engagement over the impact of regulations to reduce harmful emissions is welcome. However, misrepresentation of the findings of this report, wherever they come from, only serve to undermine serious consideration of the issues.

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