Wednesday, November 3, 2010

Postscript to The Coming Good Boom: A Clean Energy Employment and Debt Reduction Act of 2013

With the tea-party and big-money fed Republican takeover of the House in the 2010 midterm elections, the far right in American politics will be able to frustrate any legislation increasing government involvement in the economy no matter how rational and market oriented. This means cap and trade proposals will be shelved and the fossil fuel industry will recapture its political dominion, at least for the time being. As the global economy recovers down the road, peak oil will kick in with a vengeance and bring forth upward spikes in energy prices, enriching petroleum oligarchs, sheiks, and dictators. This will be the harsh alternative reality to a more measured process of adjustment offered by cap and trade. About this the American electorate will not be pleased, and the present public grumpiness will look pale by comparison. Putting cap and trade in effect sooner rather than later would decapitate peak oil and its upward price surges. In two years time when the current political craziness abates, cooler heads will hopefully prevail and cap and trade can be brought back off the shelf in time to do some good. I do believe that such legislation carries with it so much potential for solving this country’s economic and fiscal problems, that it is bound to ultimately reappear on the legislative docket, especially if it is repackaged and simplified to place its real benefits in sharper focus and renamed something like the “Clean Energy Employment and Debt Reduction Act of 2013.” Let me explain the virtues of this approach with some simple ‘back of the envelope’ calculations.

We in the U.S. spent nearly $495 billion on imported petroleum in 2008. The U.S. Department of Energy projects that the prices of imported petroleum will rise in inflation adjusted terms by about 1 percent a year through 2035 while our consumption will decline by .3 percent a year. If we extend this projection another 15 years, by 2050 our spending on imported petroleum will rise to $664 billion annually, given continued reliance on fossil fuels as our primary energy source.

The essential macroeconomic effect of our import spending is to generate demand for goods, employment, and income in foreign countries, not in the U.S. The more we spend on imported oil, the greater the income earned by foreign oil producers, and the richer the Saudi Arabia’s of the world become. Such increases of foreign wealth will create some demand for U.S. products such as Cadillac Escalades and Boeing aircraft, but only a small share of our spending on imported oil will return to the U.S. shores through the sale of U.S. exports. Saudi Arabian acquisition of U.S. goods amounts to only about 25 percent of our spending on their oil.

If the emission caps of H.R. 2454 (the 2009 House-passed cap and trade bill) were implemented, carbon emissions would drop to 17 percent of 2005 levels by 2050. This will mean the virtual disappearance of the petroleum industry and its replacement by domestic clean energy. In short, cap and trade will create a new U.S.-based energy industry to replace petroleum, and this will mean a redirection of spending from energy imports to the domestic economy. The beneficiaries of this shift will be the owners and employees of businesses in wind and solar energy as well as energy conservation. Such gains from an expansion of clean energy will ripple throughout the total economy with incomes earned by wind generator mechanics and solar panel installers triggering new spending on restaurant meals, clothing, electronic gadgets and so on, lending a further stimulus to economic activity and employment. Cap and trade, in sum, will take American spending out of the hands of Arab oil sheiks and petroleum dictators and return it to our own citizens.

Predicting future employment is a perilous task in any circumstance, but we can nonetheless get some ideas about the order of its magnitude for the creation of a domestic clean energy industry. The first step is to establish roughly how much spending will be redirected from petroleum imports to our domestic economy by cap and trade. The total amount of projected spending on imported petroleum for the period 2012 to 2050 equals roughly $21 trillion. With carbon caps, this spending will shrink annually over time as the number of available carbon emission allowances diminish. Given fully implemented H.R. 2454 caps from 2016 on, the amount of allowances in that year will equal 5.4 billion tons of CO2 and will decline steadily to 1.3 tons in 2050. Caps will force a reduction in the consumption of domestically produced and imported petroleum over time, and we Americans will spend roughly $8.9 trillion less on imported petroleum through 2050 than we would without cap and trade.

Energy expenditures per household will increase very little if at all from cap and trade because of increases in energy efficiency and the realization of scale economies in clean energy production, and what we now spend on imported petroleum will be redirected to our domestic energy industry due to cap and trade. To compensate for some likely spending drains to imports of clean energy equipment and losses in exports to oil producing countries, we will assume that 75 percent of reduced U.S. petroleum imports will equal the upward shift in aggregate demand for the economy as a whole, rising to a permanent increase of $400 billion by 2050. As explained in Chapter 13, each $100 billion in additional annual clean energy spending creates approximately 2 million jobs in an economy suffering from significant unemployment. Beginning in 2016, the addition to jobs will equal 154,000 and by 2050 will rise to 8 million and continue at that level thereafter. Once implemented, cap and trade will be a job creating machine.

Besides generating employment, cap and trade will also produce significant amounts of revenue from government auctions of emission allowances. If emission allowance prices rise to $100 a metric ton of carbon dioxide equivalent emissions by 2030 and remain there (as explained in Chapter 13), the total potential revenues for 2012-2050 will add up to something like $8.3 trillion. If the government used all these revenues to reduce the federal debt, a drag on consumer and business incomes would occur, dampening employment increases from the creation of a new clean energy industry. The cap and trade bill (H.R. 2454) avoids this problem by returning most of the emission allowance revenues to the public through 2030.

The beauty of the cap and trade bill is this: it will create enduring additions to employment and a source of future government revenues that can permanently reduce the federal debt to the tune of up to 4 trillion dollars if all emission allowance auction collections after 2030 are devoted to this purpose. In short, we can let the employment creation machine run for the next twenty years by returning cap and trade revenues to the public, and after that devote revenues to debt retirement. We could even accelerate the employment recovery by increasing government spending on clean energy sector in the next two decades (as suggested in Chapter 13), financing it with bonds to be retired after 2030 from emission allowance revenues. With a near-full employment economy by 2030, the economic drag created by debt retirement will not likely be a problem and may even be welcome to push against the winds of economic overheating and inflation.

Predicting the distant future is a dangerous business—most who do so turn out to be wrong. Even if one assigned a 50 percent range of error to my 'back of the envelope calculations', doing what I suggest would still be worthwhile. The underlying logic of my argument here is incredibly simple—creating a domestic clean energy sector to replace imported petroleum can’t help but create jobs, and cap and trade can’t help but generate substantial government revenues, some of which can be applied to government debt reduction.

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