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Tall Tales from Spain

SOURCE: AP/Dennis Cook

Rep. Doc Hastings (R-WA), above, and other conservatives are claiming to Congress that investments in renewable energy lead to higher prices and job losses, and they're basing these arguments on a paper released in Spain.

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Léalo en español

Spain, over the past several years, has pursued an ambitious renewable energy program designed to turn it around from dependence on foreign sources of energy. The country is now lauded as a global leader in alternative energy technologies such as wind, biogas, and, more recently, concentrated solar thermal. But you wouldn’t know any of this if you listened to conservatives in the United States who have latched onto a paper by a team of Spanish researchers.

The paper, by Professor Gabríel Calzada Álvarez and colleagues, was featured this past Monday at an event at the Heritage Foundation. It inaccurately claims there were job losses in Spain due to government investments in clean-energy solutions and then doubles down by mistakenly claiming that subsidizing renewable energy investments led to higher energy prices in the country. Both assertions are based on flawed analysis, yet once again conservatives took this message to Congress to make these misleading points, this time led by Rep. Doc Hastings (R-WA), ranking member of the House Committee on Natural Resources.

The purpose of this recent raft of intentional distortions of several studies? To scare Americans away from creating a healthy economy, eliminating our reliance on foreign oil, and solving the problem of global warming. It’s the same strategy behind other recent attempts to influence this debate. So let’s set the record straight before demonstrating the deep flaws in the report by Professor Álvarez.

First of all, investments to improve energy efficiency result in a large net gain in new jobs. Work on building retrofits, weatherization, mass transportation investments, and smart grid initiatives all feature prominently in U.S. government policies because they work. In the stimulus package enacted earlier this year energy-efficiency measures accounted for about 70 percent of the “green jobs” spending. And our report, “Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy,” demonstrated that such investments to improve efficiency and conserve energy have very high rates of return, paying for themselves in a relatively short period of time.

These jobs also create a large number of jobs in sectors of the economy that have been hit hard by the current crisis, such as manufacturing and construction. What’s more, the Obama administration has embraced a broad portfolio of clean-energy initiatives that will lead to more new net job creation as these policies take hold in the economy. Analysis of the advantages and disadvantages of this initiative needs to take into account the full breadth of that program in order to measure its potential impact on the economy. But job generation and lower energy prices over time due to investments in sources of alternative energy to diversify our energy sources and reduce our dependence on foreign oil are not in doubt.

Yet the Spanish study now being peddled around Washington by conservatives does not even attempt to offer an analysis of the full range of jobs under consideration in the United States. The study is limited only to an analysis of one restricted slice of the larger clean-energy portfolio in Spain: public investment in renewable energy projects. Their argument? Supporting renewable energy destroys jobs, hurts the economy, and wastes money by causing the loss of 2.2 jobs for every 1 created. They even offer the ominous suggestion that supporting renewable energy will cost lives due to inflated prices. “Raising energy costs kills,” they warn. Here’s how they reached their flawed conclusions.

Job destruction?  Not in the real world

The Álvarez report rests on a critical yet mistaken assumption—that public spending crowds out private spending. What does this mean? Put simply, it means that the report assumes that every $1 spent by the public sector represents $1 less spending by the private sector. Using this assumption the report “proves” that Spain’s investment in clean energy resulted in a net job loss because the authors assume that public spending completely crowds out private spending and that public spending creates fewer jobs on average than private spending—in this case, public spending on promoting energy investments.

But Álvarez and his colleagues are wrong. Public spending increases demand for real economic resources, including materials, equipment, and people’s labor. Public expenditures also require financial resources. The crowding-out argument assumes that when the public sector consumes more of these real and financial resources it necessarily diminishes the amount available to the private sector. In short, the “economic pie” is assumed to be a fixed entity. Take one piece out and it can’t be taken out again by someone else. When the government takes a bigger slice, it leaves less for the private economy. The report takes the amount of money that was spent to stimulate clean-energy independence in Spain, derives the number of jobs that were created as a result of this effort, generates a number of other jobs which could have been created with the same investment, and then reports the difference as a finding.

Yet even at the level of such simple reasoning the crowding out argument only holds in specific economic circumstances. One instance is when the economy’s real resources are being fully utilized, meaning that workers are fully employed and the existing productive capacity is being used to its fullest extent. The second is when the economy’s financial resources are similarly already being fully deployed. And the third is when public spending makes no contribution toward expanding the economy’s productive capacity, meaning that it is not succeeding in its purpose of increasing the overall size of the economic pie.

But this is not the world we live in and we doubt it represents the Spain analyzed in this study. In our current economic crisis, unemployment has reached its highest level in decades, gross domestic product is contracting, and financial institutions are providing almost no loans for private investment, preferring instead to hoard cash reserves and stick to safe assets. Under these circumstances the logic of crowding out falls apart. Investment in renewable energy will not take jobs away from the private sector but rather will provide jobs to the unemployed.

Moreover, crowding out will not necessarily occur when public investment supports the private sector. In this economy public investment in economic infrastructure raises private productivity. In other words, such spending actually increases the overall size of the economic pie.

This is where the Alverez study compounds its original mistake. The study, rather conveniently, does not count infrastructure improvements such as freight rail and mass transit systems into its assessment of clean-energy programs. There is a substantial body of evidence showing that public investment in the nation’s physical economic infrastructure improves private-sector performance by raising average productivity. Such investment provides three core benefits—increasing the energy efficiency of transportation, creating jobs, and contributing to private-sector growth. By assuming an overly simple picture of the economic pie such advantages are omitted from the picture of how public investment improves the private sector.

Moreover, public infrastructure does not necessarily create fewer jobs than private spending. It all depends on how the money is spent. Research suggests that private spending on fossil fuel-based energy generates fewer jobs than public spending on mass transit, building retrofits, or new wind power capacity. Of course, subsidies can be used inefficiently and poorly designed programs may create windfall gains for particular economic interests. But this is never a foregone conclusion—the challenge is to design good public policies that avoid this possibility.

It is especially worth stressing that almost all of the investment in renewable energy represents private investment. Tax credits and similar policies are used to leverage private resources and encourage greater investment.

Net job creation

The U.S. experience in job creation from initial public investment in renewable energy proves Álvarez and the Heritage Foundation completely wrong. Subsidies for renewable energy are nothing new. They have been in place for decades in the form of production tax credits and investment tax credits such as the Energy Tax Act of 1978 and the Energy Policy Act of 1992. According to the analysis contained in the Department of Energy’s “Annual Energy Outlook 2009,” the 1992 production tax credit for renewable energy has been instrumental in promoting the expansion of wind energy in the United States. Individual states have also adopted similar incentive programs in recent years.

The outcome of these policies is notable. Since 1998, U.S. capacity in wind power has grown by an average of more than 25 percent a year. It is now the fastest-growing energy sector inclusive of extractive industries such as coal and oil and now employs more people than the coal industry. As subsidies for wind power are a major focus of the Spanish study, it is useful to examine the impact of the U.S. program in more detail.

The renewable energy production tax credit, or PTC, for wind expires periodically and must be renewed. The “Annual Energy Outlook 2009” forecasts the increase in wind power capacity under two scenarios: if the current PTC is allowed to expire at the end of 2010 and if the existing PTC is extended into the future. According to the Department of Energy’s analysis, if the credit is allowed to expire wind capacity would increase by an estimated 3.6 gigawatts from 2010 to 2020; if the credit is extended, wind capacity would increase by 16.3 gigawatts over the same period—a difference of 12.7 gigawatts, which represents a 450-percent increase in additional capacity. Because the current PTC was already extended in the 2009 stimulus package to 2012 it will likely provide more certainty for investors leading to larger investments in wind energy.

That added capacity represents approximately $24 billion in new private investment over the decade, or about $2.4 billion in new capacity a year. Using the same methodology we employed in “Green Recovery” to estimate job creation from a variety of energy investments we can conclude that this level of investment would create 32,000 new jobs, which would be sustained over the 10-year period of the program.

Álvarez and his colleagues rightly stress in their report that the correct employment estimate is the net job creation figure. That is, we need to consider the number of jobs that would have been created if the same level of investment would have occurred elsewhere. Suppose that the $2.4 billion in additional wind capacity had been directed toward conventional fossil fuels instead. Our analysis demonstrates that each $1 million investment in coal would create 7.7 jobs and each $1 million investment in natural gas and petroleum would generate 5.4 jobs.

Therefore, a $2.4 billion investment in coal would yield 18,500 jobs and the same investment in natural gas and petroleum about 13,000 jobs. That is, 13,500 to 19,000 fewer jobs than the same investment in wind capacity. There is a net employment gain by the shift toward wind power.

Impacts on energy prices

What about electricity prices? The Álvarez report claims that subsidizing renewable energy will significantly bid up average energy prices. Again, this is incorrect. If we look at the period in which wind energy has expanded rapidly in the United States in response to the production tax credit for wind from 1998 to 2008 (using data from the U.S. Energy Information Administration) we see a different picture.

Over this period, electricity prices, adjusted for inflation, have increased by about 1 percent a year. It would be wrong however to blame this increase on wind and other renewable sources of energy. For starters, wind power still accounts for a small share of total electricity generation, and the price effects are modest. Also, fossil fuel prices generally increased faster than average electricity prices over this same period. From 1998 to 2008, natural gas prices, controlling for inflation, increased by about 4.2 percent a year and gasoline prices at an annual rate of 3.7 percent. Fossil fuel prices showed a larger increase than electricity prices, despite the growing share of renewable sources of energy in the electricity mix.

Moreover, the volatility in fossil fuel prices increase economic uncertainty and can discourage private investment. Diversifying our energy supply by bringing renewable resources online will help reduce economic uncertainty.

The Spanish researchers argue that investing in renewable energy is often more expensive than investing in conventional forms of energy generation. But this is only true if we do not pay attention to the true costs of greenhouse gas pollution and the potentially devastating impacts of global warming.

The Department of Energy estimates that capital costs of investing in wind capacity are $1,923 per kilowatt. The capital costs of conventional electricity production using coal, gas, and oil are lower. Yet the estimated capital costs of fossil fuel-based electricity generation with carbon capture-and-storage technologies range from $1,800 to $3,400 per kilowatt. In other words, wind power is competitive when compared to low-carbon fossil fuels.

The capital costs of other renewable technologies, such as solar power, remain high. The economic viability of these sources of energy will depend on the future rate of technological progress. Technology often evolves fastest when use increases. Therefore, a “low technology trap” may exist for the expansion of high-cost renewable sources of energy. Consider the following circular logic: investment in renewables is low because costs are high. Costs are high because technological progress has been slow. But progress is slow because investment remains low. Government policy may be necessary to break free from this cycle and put us on the same path to clean-energy independence pioneered by Spain.

Lessons learned

The Álvarez study does include some reasonable principles to follow when designing any sort of publicinvestment: insure government funds are used wisely, avoid unnecessary waste and windfall gains to individual firms, and be cognizant of the employment effects of different allocations of resources. The Obama administration’s support for renewable energy is entirely consistent with these principles, and has the additional benefits of advancing U.S. energy independence, restoring U.S. leadership in clean-technology development, creating good jobs, and reducing the threat of global warming.

But the larger lesson is this: Conservatives in desperation will turn to just about any study to warp U.S. progress toward clean-energy independence to power our economy. Conservatives’ deeply misguided advice to Americans in the midst of a debate over passing landmark legislation on climate change and improving our renewable energy portfolio is to not pursue a clean-energy strategy lest we suffer imagined disastrous consequences.

James Heintz is Associate Director and Associate Research Professor at the Political Economy Research Institute at the University of Massachusetts at Amherst. Andrew Light is a Senior Fellow at the Center for American Progress.

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