Assessing the Green Stimulus Provisions of the 2009 Fiscal Stimulus Law

by Reihan Salam

Jim Tankersley of the Washington Post summarizes a new report by Joseph Aldy, an assistant professor of public policy at the Harvard Kennedy School and one of the architects of President Obama’s climate and energy policy, and I found the contrast between the vivid title of Tankersley’s post (“Solyndra stunk. The green stimulus didn’t.”) and the substance of Aldy’s analysis, which Tankersley conveys as follows:

[Aldy] cites administration calculations that the provisions yielded about 720,000 jobs and leveraged billions of dollars of investment in renewable power. That’s particularly true in the wind industry, which boosted its generation capacity nationwide by 60 percent from 2008 to 2010. That essentially speeded up Energy Department projections for wind installation by 20 years. “Wind was basically dead without the Recovery Act,” Aldy said in an interview.

Emissions are a trickier story. On one hand, Aldy credits all that new wind generation – and solar installations driven by grants and tax credits – with at least a 2 percent reduction in power-plant emissions. He also contends the effects would have been multiplied if Congress had approved a bill to limit emissions, such as the cap-and-trade bill the House passed in summer 2009.

On the other hand, Aldy concludes that the marginal cost to taxpayers of the stimulus-driven emissions reduction “could be significantly higher than the marginal benefits,” based on what the government calls the “social cost of carbon” – the dollar value on the damage from carbon dioxide emissions. [Emphasis added]

It would have been instructive to contrast the economic and environmental impact of this increase in wind production with that of the expansion of the use of natural gas in electrical generation, driven by the sharp decrease in the price of accessing domestic natural gas deposits. In August, David Rotman of MIT Technology Review offered a preliminary account:

The United States is saving about 400 ­million metric tons of ­carbon ­emissions annually in the recent switch to natural gas from coal. That’s roughly twice as much progress 
as the European Union has made in complying with the Kyoto Protocol through 
policy efforts.   

Rotman goes on to observe that natural gas “will not come close to delivering the huge reductions in greenhouse-gas emissions that most scientists contend are needed by midcentury to ward off the worst effects of climate change,” but of course the same is true of wind power. The economic impact has been equally impressive, if not more so, as Roger Altman recounts:

In 2012, U.S. natural gas output reached 65 billion cubic feet per day, which is 25 percent higher than it was five years ago and an all-time record. Shale gas accounted for much of this increase. Meanwhile, U.S. oil output has soared. It is estimated that in 2012 alone, the production of oil and other liquid hydrocarbons, such as biofuels, rose by seven percent, to 10.9 million barrels per day. This marks the largest single-year increase since 1951.

Moving forward, the U.S. Department of Energy forecasts that American liquid hydrocarbon production will rise another 500,000 barrels in 2013, and the International Energy Agency projects that the United States will surpass Saudi Arabia as the world’s largest oil producer by about 2017. Overall, this energy boom could add three percent to U.S. GDP over the next decade, in addition to as many as three million direct and indirect jobs, almost all of which will pay high wages. The United States could cut its oil imports by one-third, improving its balance-of-payments deficit. Also, the higher natural gas output will reduce the average consumer’s utility bill by almost $1,000 per year, representing a further stimulus to the U.S. economy. And the American public’s hunger for economic recovery and jobs has softened opposition to this energy revolution.

To be sure, Altman is talking about U.S. liquid hydrocarbon production. Recently, the Congressional Research Service offered a detailed and cautiously optimistic look at the impact of natural gas production on the broader economy going forward:

The expansion of natural gas as a fuel for electricity generation is expected to have important macroeconomic effects, even though direct job creation is not likely to be great. The reason for this is based on the cost structure of electric power generation, where fuel costs account for approximately 40% of total production costs. If the cost savings relative to natural gas use materialize, and if they are passed on to consumers in the form of lower electricity rates, household disposable income would increase. This increase could be used by households to finance the purchase of a wide variety of consumer goods. Commercial natural gas consumers could reap higher profits, or contain growth in the cost of goods sold, due to lower electricity costs. Industrial demand could experience similar benefits; however, the effects are likely to be less important as the percentage of total costs accounted for by electricity costs falls. The exception is the petrochemicals industry, where natural gas costs are a large part of total costs.

Might the resources that had been directed towards wind production been better deployed elsewhere, e.g., in facilitating the continued exploitation of natural gas as a bridge to heavier reliance on nuclear power? Jeffrey Leonard, a champion of renewable energy, offered a realistic accounting of wind power’s potential and its limitations in the Washington Monthly:

As an investor in clean and green energy, I will confess that some of our companies have benefited from increased sales of equipment and services thanks to federal incentives to step up investment activity in solar and wind power in recent years. The primary jumpstart was the new tax credits that were built into the Energy Act of 2005 and renewed, haltingly, on an annual basis by Congress since then. I find myself concluding, however, that even subsidies for the truly green renewable sources can lead to perverse energy outcomes. For example, the entrance of the green renewable industry into the energy subsidy race over the past few years has in many places created the energy equivalent of suburban sprawl—a patchwork of wind and solar farms being deployed helter-skelter across the landscape. Thus, in some instances, wind projects have been launched without due attention to the additional infrastructure expenses that will be necessary to build new transmission lines, leaving new wind facilities stranded or underutilized. Texas, for example, has found that it must create at least $3 billion worth of transmission lines to get electricity from its wind projects to its cities, and concluded, ironically, that in some instances transmission line corridors must incorporate plans for new coal-fired power plants to justify the investment.

So we can waste money and distort the market by subsidizing all of these forms of energy. Or we can just call it quits on the waste. Disarm completely. Kill all the subsidies—yours and mine.

Leonard also explains that the expansion of natural gas-fueled electrical plants will allow wind power to expand its niche even in the absence of subsidies, as these plants “are virtually the only economical sources of electricity that can be powered up and powered down to support lulls in other sources of power.”

To Aldy’s great credit, he makes the important observation that programs that required a great deal of discretion, like the Energy Department’s controversial loan guarantee program, produced far worse outcomes than programs that involved minimal discretion, e.g.:

Contrast that with the big success of the green stimulus: a grant program that partially subsidized any new renewable power project that met its specifications. It helped fund nearly 5,000 projects and about 10,000 megawatts of renewable electricity. Because the program gave the government no discretion in handing out grants, it kept politically connected firms from influencing the results.

Leonard goes one further step in this direction by calling for an end to energy subsidies.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.