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How the President’s Energy Plans Could Affect the Economy

Obama’s proposed rules are likely to spur investment in clean energy, but that may not increase jobs in the long term.
February 3, 2011

The centerpiece of President Obama’s energy plan, announced in his State of the Union address, is a clean-energy standard that would require 80 percent of electricity used in the United States to come from clean sources by 2035, up from about 40 percent now. The plan also includes incentives for energy efficiency and support for research and development.

If the plan becomes law, it could provide something that business leaders and utilities have long been asking for: long-term certainty about energy policy. Government subsidies and incentives for clean energy tend to come in fits and starts—many must be renewed every year, making it difficult for companies to plan ahead. William Booher, executive VP of the industry group the Council on Competitiveness, says policy certainty is the “single biggest thing” that could help CEOs decide to invest in this technology. A mandate for clean energy by 2035 would be particularly useful to utilities, which are facing the prospect of replacing a generation of aging power plants and need to know what to replace them with.

Still, a carbon tax or an economy-wide cap on emissions would be more broadly helpful, says Gilbert Metcalf, a professor of economics at Tufts University. That kind of policy would apply not just to power generation but also to industry and transportation.

Obama’s plan is an alternative to the comprehensive climate and energy legislation that failed to pass the Senate last year. Its clean-energy standards would allow utilities to choose from a variety of energy sources, such as natural gas, nuclear, wind, and solar, as well as coal paired with technology that captures and stores polluting emissions. It’s unlikely that the plan will survive intact as an energy bill, but it will serve as a starting point if energy legislation is developed in Congress this year. The plan is similar to ones offered by Republicans in the past, and it has the support of many Democrats, but any bill based on it could be difficult to pass because key Republicans have signaled that they are skeptical.

President Obama has said that his plan is aimed at creating jobs in the clean-energy industry, and it probably will. But it may not increase employment overall, particularly in the long term. When green jobs are created, that means “brown jobs” such as those in the coal industry are lost, says Severin Borenstein, a professor in the Economic Analysis and Policy Group at the University of California, Berkeley. Expanding clean energy could bring a net increase in jobs in the short term, since clean energy sources require more labor than traditional ones, especially at first. (Borenstein notes, however, that the evidence for this is not solid.) But even then, the results for the economy would not be all positive: the mandate will also increase electricity prices, since clean energy is typically more expensive than power from conventional coal plants. “Higher energy prices are bad for the economy,” he says.

The size of the increase in electricity prices will depend on the details of the energy legislation. If utilities are able to use natural gas to meet the mandate, prices might not change much, says Kevin Leahy, managing director of climate policy at Duke Energy, a major utility. That’s because natural gas is becoming the cheapest option anyway for new power plants, since prices for this resource are currently low and strict pollution controls are increasing the cost of coal power (which emits about twice as much pollution as natural gas). Even without a clean-energy requirement, Leahy says, “it’s likely the industry will default to selecting natural-gas plants. There’s probably a very large new wave of gas builds coming on because of the completely new world that we’re in with the reserves of natural gas in this country.”

Any legislation, however, is likely to give only partial credit for natural gas, which is still a significant contributor of greenhouse gases to the atmosphere. Initial figures from the White House imply that if all the power from a utility comes from natural gas, the utility will get just half credit toward meeting the clean-energy mandate. To meet the 80 percent goal, utilities will need to draw on sources that will increase electricity costs more. In the most expensive scenario, the legislation would require utilities to use a certain amount of power from each source. That could prevent them from choosing the least costly option.

In the long term, it’s not likely that the policy will decrease unemployment. The real question, Borenstein says, isn’t whether the policy will result in more or fewer jobs, but whether it will create better jobs. “It may,” he says. “But making energy more expensive is going to make it more difficult to create other good jobs that rely on energy. Pursuing good environmental policy because it’s a good jobs policy is on pretty shaky ground. The best argument for pursuing a good environmental policy is the environmental argument.”

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