Renewable Energy Cannot Drive the Recovery

policy paper | July 27, 2010

    Samuel Sherraden

The promotion of the green energy industry is central to the Recovery Act and the Obama administration's broader economic recovery program, but it is unlikely to grow the economy or create enough jobs. 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. Green energy, while important to the economy and environment in the long-run, cannot be relied on now.

Here is why: 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 dedicated $90 billion, or 30% of the investments made in the Recovery Act, to building a clean energy industry. $26 billion of this was allocated to renewable energy like solar, wind and biomass. But investors are cautious 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. Ironically, by pinning its hope on a green recovery and devoting so much of the stimulus package to renewable energy, the Obama Administration may have jeopardized subsidies and created additional uncertainty in the future. These uncertainties have made renewable energy projects slow to roll out. 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 1). 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.

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, 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 clean energy companies are simply not competitive against companies that have been nurtured in heavily subsidized 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‚Äôs 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.

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.

President Obama and his advisors argue that more spending on renewable energy will make the United States a leading exporter of these products. But, exporting may be more difficult than the President or his advisers think, and not just because other countries have more developed industries. 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. 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. The U.S. would be wise not to join this subsidy race, particularly at a time when other countries are reducing their commitments. If we increase our subsidies when other countries are pulling back, U.S. stimulus will be providing even greater support to foreign renewable energy companies and job creation abroad.

It was unwise of the Obama administration to rely so heavily on renewable energy sector to drive our recovery. Spending on renewable is slow to get out of the door, leaks to foreign companies, is an inadequate driver of jobs and growth, and will probably not create a strong exporting industry. If the administration finds itself in a position to deliver more fiscal stimulus to the economy it should emphasize basic infrastructure programs that we know will deliver jobs and growth, not double down on green energy investments with little return.


  • Photo of Samuel Sherraden

    Samuel Sherraden