The promotion of the renewable energy industry is central to the Recovery Act and the Obama administration's broader economic recovery program, but it is unlikely to create enough jobs or have a large enough domestic multiplier effect to contribute significantly to the economic recovery. It reflects an ambition to transform the economy into a green energy leader of the 21st century and tackle climate change. But these investments are a questionable short- or medium-term generator of growth and jobs. When considering future public investments, the administration would be wise to focus on the backlog of other infrastructure projects that are more reliable drivers of the recovery.
It was unwise of the Obama administration and Congress to rely so heavily on the renewable energy sector to drive the recovery. Spending on renewables is slow to get out of the door, leaks to foreign companies, is an inadequate driver of jobs and growth, and may not create a strong exporting industry.
Slow to Get Out of the Door
Green energy projects in the United States are unusually slow to roll out because the industry is small and rife with political and market uncertainty. The Obama administration and Congress dedicated $90 billion, or 30% of the investments made in the Recovery Act, to building a clean energy industry. Twenty-three billion of this was allocated to renewable energy like solar, wind and biomass (see chart 1).
But investors are hesitant to meet government commitments because of the uncertainty over future public support like research funding, demand subsidies, and tax breaks. Many green energy companies are also reluctant to invest because of market uncertainty over long-run demand for renewable energy. These uncertainties have made renewable energy projects slow to get out of the door. The Department of Energy, responsible for doling out $35 billion of the stimulus for clean energy projects, has only paid out 15.5% of its funds, far below other major government agencies (see chart 2). The Council of Economic Advisors (CEA) estimates that of the $94.8 billion appropriated for clean energy only $19.9 billion have been outlaid. The amount that companies have actually spent is probably far less.
Leaks to Foreign Companies
Of the funding that has gone to renewable energy projects, a significant amount has leaked to more competitive foreign firms. Matt Rogers, senior advisor to the Energy Secretary Steven Chu, has said that 80% of $2.3 billion in renewable energy manufacturing tax credits was probably granted to foreign firms, but insisted that these firms were growing jobs in America. However, absent a strong "Buy Domestic" provision tied to clean energy investments, it is impossible to guarantee that clean energy stimulus is not leaked abroad. American renewable energy companies are simply not competitive against companies that have been heavily subsidized in foreign countries for years. Recently, Rutgers University, a public university in New Jersey, installed a major solar power project built by Yingli Green Energy Holding Co., China’s second-largest solar-panel maker. If we continue to invest in clean energy, without a requirement that products be domestically sourced, we have to recognize that we are funding job creation programs in Germany, Spain, Japan and China.
Inadequate Driver of Jobs and Growth
Because some of the clean energy stimulus has leaked abroad, it has probably not had the job creation impact that the administration estimates. Obama's economic advisors have used economic models to estimate that the $20 billion of the stimulus for clean energy created 190,700 jobs, or 9,600 jobs created per billion in spending. The estimates from the CEA disagree with the job creation estimates from the Department of Energy (DOE). According to the DOE, 4,100 jobs were created per billion in spending, far less than the CEA's estimate. Some discrepancy can be attributed to the "multiplier effect" incorporated into the CEA model. (The "multiplier," or the economic impact for every dollar invested, results in more jobs created per dollar of spending.) But the discrepancy between the DOE's estimate and the CEA's estimate implies a job creation multiplier of 2.3x, far greater than any public or private estimate of an investment multiplier. Given that some of the investment in clean energy stimulus is leaking abroad, this multiplier is probably far too high. Put simply, there are good reasons to be skeptical of the White House job creation estimates for clean energy investments.
May Not Create a Strong Exporting Industry
Many argue that more spending on renewable energy will make the United States a leading exporter of these products. But across the Pacific, China and Japan have also heavily subsidized their renewable energy sectors with the aim of building strong export industries, contributing more to global capacity.
In addition, as a result of fiscal consolidation and budget cuts, countries like Germany, Spain, Italy and France have reduced demand subsidies (feed-in tariffs) for renewable energy. With less demand, international prices for renewable energy products will fall, making European companies fight even harder for market share and making it even more difficult for the infant industry in the United States to compete for foreign market share. The U.S. would be wise not to join this subsidy race at a time when other countries are reducing their commitments. If we increase our subsidies when other countries are pulling back, U.S. stimulus may provide even greater support to foreign renewable energy companies and job creation abroad.
If the administration finds itself in a position to deliver more fiscal stimulus to the economy it should not double down on renewable energy investments. It should focus on increasing energy efficiency, improve the electric grid, and expand nuclear and natural gas capacity. It should also invest in the backlog of other basic infrastructure needs such as freight rail, inland waterways, and traditional highway expansion that are more reliable short- to medium-run sources of jobs and growth.