The Real Economic Impacts of Renewable Energy

1. The Real Economic Impacts of Renewable Energy Amanda Weinstein Mark Partridge AEDE, Ohio State University Presented for Renewable Energy and Rural Employment University of Kentucky Workshop October 27, 2011 Email:weinstein.74@buckeyemail.osu.edu partridge.27@osu.edu Swank Program website: http://aede.osu.edu/programs/Swank

2. Overall • Need to realistically weigh the benefits and costs of pursuing green energy • The alternative energy industry has clear environmental benefits, but it will not be a big job creator • The energy industry in general has a small employment share • It is capital intensive • There are significant displacement effects associated with green jobs • For alternative energy to be competitive (and sustainable) compared to the highly productive fossil fuels industry, it will not be a big job creator as production costs and inputs need to be minimized • Picking winners regardless of the industry is not a good strategy for any government. All industries should be broadly supported

3. Motivation • Environment is one of the most important concerns for US and the world. • The US and Midwest are gradually shifting to alternative (clean) energy environments with many positive outcomes: • Energy Security: Acquire energy independence from Middle East oil supply and finite fossil fuel supplies worldwide (Oil sands and coal) • Environment: Acquire independence from fossil fuel and address possible global warming • The land requirements of renewable energy imply that rural areas may be most effected

4. Picking Winners • Using clean energy to increase job growth falls under various sectoral efforts to support economic development. That is, pick fast growing firms/sectors for a local economy. • It assumes that decision makers not only know the hot industries, but also the geographical location where they will thrive. E.g., Clusters fall under this rubric • Economists are very skeptical that politicians, development ‘experts’, or bureaucrats (or regional economists or financial market titans) are good at picking sectors. E.g., weren’t financial derivatives based on housing mortgages the smart pick? • Economists view: • Governments can’t pick winners • Losers know how to pick governments • The authors believe ‘communities’ should build an environment where: • The eventual ‘Winners’ will pick your community. • Strategically not a good idea to simply copy what others are doing without regard for own strengths and resource endowments • Some communities will lose this race; rural communities have less of a shot at becoming the next green energy hub

5. Employment Effects • Even if communities are not expecting to be the next green energy hub, they need to be realistic about the benefits and costs of renewable energy especially its employment effects • Job creation estimates are often overstated and ignore specific and significant aspects of switching to a renewable energy industry • The energy industry in general is capital intensive industry not labor intensive • The energy industry has a very small employment share (in part because it is currently so productive) • There are significant displacement effects associated with switching to renewable energy from the fossil fuels industry • Many jobs are simply relabeled (i.e. coal producers become wind producers)

6. US Example

9. Moral: Green/clean economy is simply too small to be an engine of growth. For jobs, we need a broad-based engine of growth across the entire economy. Generally problem with for most sector based strategies.

10. Coal Mining Employment—We are efficient at producing fossil fuels!

11. Fossil Fuels vs. Green Energy • Only, 6,800 coal miners in MT and WY produce coal that supplies 21% of U.S. electricity! • A key reason that we are ‘addicted’ to fossil fuels is that we are so remarkably productive at it. • Green energy needs to be at least ‘nearly’ as productive as coal to be sustainable. • We cut it slack if it is ‘clean’—i.e., properly pricing carbon. • But, the numbers of jobs should be thought of in the tens of thousands, not the millions. • We need a green-energy sector that employs few workers to be competitive, not one that employs ‘millions’ of workers. The latter is not sustainable.

12. Estimates of the number of jobs required to produce a kWh by energy source Source: Kammen, et al., 2004. http://www.unep.org/civil_society/GCSF9/pdfs/karmen-energy-jobs.pdf

13. Why Green/Clean Energy Cannot Employ Large Numbers. Competitiveness of Green Energy • To be sustainable green/clean energy has to be competitive on a cost basis with fossil fuel • It can be say 30-40% more expensive than traditional fossil fuel because of lower social costs. It can’t be many times more expensive. If so, alternative energy will not be sustainable. • A punch line is that green energy will not be some sort of a major jobs creator if it is to be competitive. • A national energy policy is not the same as good local economic development policy!

14. Energy production costs by energy source Note: The average levelized cost is the present value of all costs including building and operating the plants. Source: US Department of Energy, 2010. http://www.eia.doe.gov/oiaf/aeo/pdf/2016levelized_costs_aeo2010.pdf

15. U.S., MI, and OH Shift-Share Example from Electricity Generation

16. The Counterfactual: Effects of Replacing Coal with Wind • Cost Effects of Replacing 25 percent of coal with wind • Labor Effects of Replacing 25 percent of coal with wind

17. Total carbon emissions per kWh generated by energy source Note: Life cycle emissions rates includes the total aggregated emissions over the life cycle of the fuel to include extraction, production, distribution, and use. Source: Meier, 2002. http://cpsenergy.com/files/STP_Univ_Wisc_energy%20_comparison.pdf

18. Rural Example—SW Minnesota/NW Iowa • Many politicians argue alternative/green energy is especially good for rural economic development. • Rural economies would be more sensitive to the effects of any economic shock. • SW Minnesota and NW Iowa is a good case study. I will show that alternative energy has not been a game changer when looking at their broad economy. • Alternative energy is also land intensive which tends to be more abundant in rural areas

21. Voting with their feet: Are more people moving in than moving out is economists’ best signal of whether a place is prospering in terms of economic effects and quality of life.

22. The Ohio Department of Development is providing $12 million in incentives and the federal government will provide $50.7 million worth of tax credits. • For 80 jobs, this works out to a subsidy $784,000 per job that could have been spent on programs that have high job-producing results • The Governor also spoke of a Bio-refinery that will soon open in Ohio. • The Director of ODOD stated that they expect a new bio-refinery will break ground in the next couple of years and will create 40-80 jobs • Compare these job numbers to the 600,000 jobs lost since 2000

23. Estimates of tax-expenditure costs per green job created through government subsidies

24. Subsidies, Incentives, Tax Credits have Opportunity Costs! • The net result is economic activity is only modestly affected and may even decline in certain cases. • (see Goetz et al., 2009; Gabe and Kraybill, J. of Regional Science. 2002; Edmiston, 2004.) • It is also important to consider what these investments could have been spent on instead (i.e. education) • Dutch Disease - investment in the natural resource industry will decrease the competitiveness of other industries • Resource Curse – economies focusing on natural resources tend to have less economic growth • (see Papyrakis and Gerlagh, 2007; and James and Aadland, 2011 for recent regional work on the resource curse)

25. What should communities do if green/clean jobs are not the solution to economic woes? • This is a whole conference in itself, but….. • Better local government and regionalism • Entrepreneurship and treat all industries and firms the same. Not picking winners and losers because we don’t know the winners and losers • Economic development needs to be broad-based across all sectors. • Whatever will be the hot industries, knowledge workers and education will be the key.