1. Meeting the UK Government’s targets to reduce CO2 emissions by relying upon green energy will be very expensive. To mobilise support for this spending, government bodies and lobby groups have been making increasingly extravagant claims about its supposed economic benefits.
The usual formula is to claim that a proposal or policy will “create” some number of jobs and, perhaps, stimulate the future development of competitive industries.
2. The first observation is that job creation has no merit as a basis for judging policy. Total income, or value-added, or welfare is what matters, not the number of jobs. If this were not the case, why not employ 50% more workers to produce the same output and reduce all wages by one-third?
Employing more people involves costs including loss of leisure or alternative output, travelling to work, extra consumption, etc. This is only worthwhile if the extra output produced by the workers is valued more
highly than these costs.
3. A second observation is that there are no sound economic arguments to support an assertion that green energy policies will increase the total level of employment in the medium or longer term when we hold macroeconomic conditions constant. Yes, more people may be employed in manufacturing wind turbines and constructing wind farms, but this neglects the diversion of investment from the rest of the economy.
We must look to macroeconomic and labour market policies to influence the level and composition of employment.
4. Careful investigation of the impact of green energy policies on the labour market shows a very different picture from that depicted by enthusiasts and lobbyists. The key lies in the fact that green energy is highly capital-intensive. As an illustration, the target for generating electricity from renewable energy sources will involve a capital cost that is 9-10 times the amount required to meet the same demand by relying upon conventional power plants. There is not even a substantial saving in operating costs because the limited reduction in fuel consumption is largely offset by higher operating and maintenance costs.
5. Naturally, spending £120 billion - mostly on offshore wind farms - rather than £13 billion on conventional power plants will increase demand for labour in construction, turbine manufacture and related sectors, provided we ignore the diversion of funds from other spending to finance renewable energy projects. About 35% of total investment is translated, directly or indirectly, into wages and salaries. This is similar to other business investment, but the equivalent share for other forms of infrastructure or government services is nearly 70%.
6. If green energy projects are entirely financed by diverting money from other forms of business investment, the immediate impact will be approximately neutral but both productive capacity and employment incomes will be lower in the medium or longer run. In practice, however, a significant part of the cost falls on the taxpayer, through a variety of disguised subsidies, with the consequence that spending on public services and capital projects will be lower. This will reduce either employment or employment incomes in the short and long run.
7. It is argued that green energy policies will promote innovation and the development of new industries. Almost every country in the world wants to claim the same benefit, so the numbers do not add up. Total employment in manufacturing wind turbines, solar cells, etc is small when compared with employment in the manufacture of conventional equipment for power generation and transmission. Some small countries
– Denmark or Israel – have gained an initial advantage but this is rapidly disappearing as factors such as skills, transport costs, local demand and existing patterns of specialisation reassert themselves. For the longer term, there is little doubt that the primary beneficiary will be China. That is already apparent from the way the market is developing.
8. The focus on capital spending in the short and medium term gives a very partial view. The wholesale prices of electricity and other sources of energy must rise by 100% or more to cover the much higher capital and operating costs of renewable energy. Since other countries are not following the same route, the burden of adjustment will fall heavily upon workers in sectors producing traded goods and services. In sectors accounting for about 40% of employment in manufacturing and related industries, the prospective increase in energy costs amounts to more than 10% of current wages and salaries.
9. Manufacturing activities account for little more than 10% of total employment in the UK and they do not set the general level of wages, so the response to this change is likely to be contraction and relocation of production rather than a reduction in wages. In terms of the labour market, the gains for a small number of actual or potential employees in businesses specialising in renewable energy has to be weighed against the dismal prospects for a much larger group of workers producing tradable goods in the rest of the manufacturing sector.
10. A further consideration is that the Bank of England is required to set monetary policy to meet an inflation target. Policies to promote renewable energy will add 0.6-0.7 percentage points per annum to core inflation from now to 2020. To meet the inflation target, non-energy core inflation must be lower than would have been the case without these policies, requiring tighter monetary policies, which will cause a significant loss of GDP over this period.
11. The cumulative impact of current policies will amount to a loss of 2-3% of potential GDP for a period of 20 years or more. In the next 5-8 years a part of this cost may take the form of higher unemployment, because that is an important element of the mechanism by which tighter monetary policies lower the core rate of inflation. After 2020 the main effects will fall on incomes rather than employment.
12. The merits of policies to promote a switch to renewable energy should be assessed by considering the average cost of reducing CO2 emissions in this way. This average cost exceeds £250 per tonne for the shift from conventional to renewable electricity generation without considering the macroeconomic consequences.
13. The decision to sacrifice at least 2% of GDP to reduce the UK’s emission of CO2 by about 23 million metric tons per year, less than 4% of total emissions of greenhouse gases in 2008, is a choice that must ultimately be made by the public. They will have to bear the costs via lower real disposable incomes and higher prices. Claims by politicians and lobbyists that green energy policies will create a few thousand jobs are not supported by the evidence. More importantly, they are irrelevant when considering the choice that has to be made. Sadly, the claims seem intended to divert attention from the consequences of setting arbitrary and poorly-considered targets for renewable energy.