By: Michael Cleland
Much has been made in recent years of the potential for green tech and green energy to generate thousands of new high tech jobs to replace the lost jobs in traditional manufacturing. Most, or maybe all, of the claims behind these slogans are hard to sustain.
Starting with the basics
The job—the only real job—of the energy system is to deliver safe, reliable energy to the economy in the most cost-effective way possible. As it turns out, left to itself, the system also efficiently produces significant economic benefit through direct jobs and profits; indirect jobs and profits in associated manufacturing and services; and royalty and tax revenues to governments. When taxed is properly regulated, it can produce desirable environmental outcomes. But when government energy policy gets it backwards—when the ancillary objectives are put ahead of the primary role—the system ends up costing the economy rather than adding to it.
Traditionally, governments have got it backwards by subsidizing energy costs for energy-intensive resource processing and manufacturing. But, as studies have shown in Quebec among other places—and as Nancy Olewiler explains in her article for Let’s talk Energy last July—these sorts of subsidies are a net drain on the economy. Subsidies redirect energy production from its most productive return in alternative markets and reduce the overall benefit to the energy producing jurisdiction. As often as not, it is future generations who pay through government debt, although the bill may often land on some ratepayers or on essentially voiceless constituencies such as current taxpayers if carefully disguised and diffused throughout the economy.
Green tech manages the interesting feat of flipping the old model on its head, but without yet turning it right side up. Instead of subsidizing energy costs for consumers, the idea of green tech is to accept higher energy costs in order to subsidize supposedly clean energy production. For this to work, almost inevitably, governments have to resort to green jobs protectionism so that the subsidies do not leak from the subsidizing jurisdiction. Let’s look at these in turn.
An article published last spring entitled “Study of the Effects on Employment of Public Aid to Renewable Energy Sources” through the Universidad Rey Juan Carlos, looked at the Spanish experience with subsidizing renewable energy and concluded that the net effect for the Spanish economy was dire. Each so-called green job carried with it a net cost to the Spanish economy of 2.2 jobs lost for each one created, largely due to the higher cost of energy which flowed through the rest of the Spanish economy. This is pretty basic: higher input costs make an economy less competitive, especially in the short-run.
A new study entitled “Omitted Costs, Inflated Benefits: Renewable Energy Policy in Ontario” just released by Energy Probe finds much the same thing for Ontario, this time expressed as an ongoing annual ratepayer subsidy of $200,000 for each job created. The source of the higher costs is not hard to find. If power producers receive as much as ten times (or more) the normal rate for their production, someone has to pay. Someone also has to pay if the system has to shoulder costs for back-up power and new transmission in order to take on new, remote and intermittent power sources.
Keeping the jobs in a jurisdiction is difficult when competitors already have a leg up or where labour costs are much lower. The energy system in Canada and elsewhere in North America is highly efficient and low cost. It generates extremely high paying jobs—skilled operators, trades and professionals. However, it does not generate many of them—just over 350,000 jobs in direct employment are created for the whole energy sector nationwide (inclusive of gasoline retailing or about 2.5% of Canadian employment). You can have two out of three: more jobs, high paying jobs or competitive energy prices, but you cannot have all three without protecting domestic production and putting the extra costs on to tax payers or future generations. This is where protectionism comes in.
The cost of protectionism
The green jobs debate in several jurisdictions in the US and Canada inevitably includes voices who express a clear preference for locally produced power or related equipment over imports in order to grow green jobs—whether it has a real comparative advantage or not. A striking example is where “green” is carefully defined to exclude certain types of power production such as large hydro. The evidence, if fairly examined, will show that even large reservoir-based hydro can have less environmental impact per unit of energy produced than smaller scale projects. Not always, not inevitably, but if green is what we want (in the sense of low carbon), then we should be indifferent to the source, provided only that appropriate environmental regulations are applied to the production process.
Conveniently, however, for some who are promoting green tech, big hydro has acquired a bad name over several decades. By simply defining it out of the game, they are able to effectively hobble the competition with what are, in essence, quantitative restrictions (which are, if not actually illegal, then certainly in violation of the spirit of WTO and NAFTA rules) while cloaking themselves in virtue. Of course, who pays is the hapless consumer or, if political will is weak, the hapless taxpayer, or if weaker still, the next generation.
The cost of energy protectionism to the economy is not only the increased costs imposed on consumers. One of the great achievements of the United States and Canada in the energy sphere is the relatively seamless integration of our energy systems, which results in both efficiency and reliability. When what otherwise might be natural economic flows of energy are impeded by exclusionary rules, the system becomes more sclerotic. A classic case of this effect exists within the US itself, where different motive fuel requirements meet different smog reduction needs in different metropolitan areas make the gasoline market fragmented, less efficient and more costly to consumers.
Getting back to the basics
Governments legitimately want to drive the energy system to a cleaner, lower carbon future. Regrettably, most governments in North America got cold feet when it came time to create demand for lower carbon technologies through the creation of a carbon price and have instead substituted supply-side measures such as green jobs subsidies combined with green job protectionism. These add to consumer costs by stealth and compromise the functioning of the energy system. Compounding the harm, they do little to achieve their objective. As recent experience in the US and Ontario demonstrates , without adequate demand, supply-side subsidies have a very difficult time creating viable industries. The result, in any event, can easily be a net cost in jobs, not a gain.
We need to get back to basics. If a green energy economy is what we want, we need to re-open the energy and carbon pricing discussions and ensure that investors and consumers have the right incentives. Following that, there is arguably a case for selected government interventions such as funding for research and development for new technologies, and providing consumer information since both address legitimate market failures. Beyond that, both theory and evidence strongly indicate that governments pushing green tech risk achieving the worst of all worlds—one that is neither greener nor more fully employed.