Green Economy
Think Again: The Green Economy

By Matthew E. Kahn
Foreign Policy
May/June 2009

Going green has finally gone mainstream, and politicians from London
to Seoul are spending billions on clean technologies they say will
create jobs. But unless we are all willing to risk a little more
pain, the green revolution could founder before it ever really starts.

"Going Green Will End the Recession."

No way. Vowing to pump $150 billion into green technology over the
next decade, U.S. President Barack Obama has made big promises about
his environmental agenda. “It will also help us transform our
industries and steer our country out of this economic crisis by
generating 5 million new green jobs that pay well and can’t be
outsourced,” he said in November.

British Prime Minister Gordon Brown has similarly called for an
international “Green New Deal” to create a “low-carbon recovery.”
The United Nations wants a full 1 percent of global GDP to go to
environmental initiatives. Rich countries such as Canada, Japan, and
South Korea are obliging, spending billions to promote ecofriendly
projects and green businesses.

Even the U.S. Congress is considering a range of measures to reduce
greenhouse gases—from regulatory mandates, such as raising vehicle
fuel economy or requiring electric utilities to produce more of
their power from renewable sources, to carbon taxes and a
cap-and-trade system for electric utilities.

Many of these ideas are very much worth pursuing for environmental
reasons. But it’s doubtful they offer a double dividend of helping
to jump-start the economy. For one thing, the global financial
crisis is fundamentally about different issues: the popping of
housing and credit bubbles from St. Petersburg to San Francisco, the
associated implosion of a highly leveraged international banking
sector, and the resulting fallout on real economies. These pressing
problems won’t be solved by switching to hydrogen-powered cars or
installing solar panels on every roof.

Second, let’s be honest: Anti-carbon regulations will simultaneously
create and destroy jobs. Take the United States: Given the country’s
current reliance on cheap, coal-fired power plants, carbon caps will
translate into higher electricity prices. (How much higher remains
an open question.) Older manufacturing firms—especially in
energy-intensive industries such as petroleum and coal products,
paper, cement, and primary metals—will face higher costs of doing
business, and this may lead them to shut down or seek international
locations where electricity prices are lower and carbon regulation
is less stringent.

In the long run, a little creative destruction will likely be a good
thing. The same regulations that might kill jobs in smokestack
industries will act to stimulate a host of new manufacturing
opportunities, ranging from energy-efficient household appliances to
solar panels to energy-efficient vehicles. Even former U.S. Vice
President Dick Cheney might consider buying a fuel-efficient vehicle
if gas prices rose enough.

But don’t count on clean technology to pull us out of the doldrums.
The green revolution won’t happen overnight.
“Governments Should Promote Alternative Energy.”

It depends how. Governments have a dreadful record when it comes to
picking winners. Consider the U.S. Energy Policy Act of 2005, which
required that gasoline sold in the United States be mixed with
increasing amounts of renewable fuel. As intended, this regulatory
mandate created large demand for ethanol made from corn (which was
already heavily subsidized). Corn Belt senators were thrilled, but
it made environmentalists and economists queasy—because corn-based
ethanol may actually create more carbon over its life cycle than
conventional gasoline. Now that oil prices have collapsed,
subsidizing this fuel source makes little economic sense. With newly
built ethanol plants already rusting across the Midwest, U.S.
taxpayers are left propping up an industry that could never survive
on its own.

Ethanol is hardly a special case. Take the historical track record
of Japan’s powerful Ministry of Economy, Trade, and Industry, which
was set up to aid particular economic sectors. Economists Richard
Beason and David Weinstein found that this supposed engine of
Japanese success had actually been financing losers and that
government aid did nothing to increase productivity between 1955 and

Why are governments so bad at this game? Because the future is hard
to predict. Better to avoid top-down mandates (i.e., Soviet
five-year plans) and instead encourage individual experimentation. A
decentralized approach would let firms and households identify the
most efficient ways to reduce their carbon footprints. Instead of
handing out subsidies for technologies that may or may not succeed,
governments should level the playing field by forcing polluters to
pay the true social costs of their consumption of dirty fuels. When
my local power plant fires up its boilers, it should pay for the
greenhouse gases it emits as well as the cost of the coal. A carbon
tax or a cap-and-trade program would do the trick.

“China’s Out-Greening the United States.”

Not on your life. Some pundits, such as New York Times columnist
Nicholas Kristof, have suggested that China, with its foray into
hydrogen fuel cells and tough new fuel-economy standards, threatens
to leapfrog the United States in going green.

We should be so lucky. The unfortunate reality is that China has
extremely high air and water pollution levels. Yes, the average
Chinese person’s greenhouse gas emissions are much lower than the
average American’s, but this gap is closing fast, as private vehicle
ownership and electricity consumption are rising sharply in China.
In 2001, there were 1.5 million vehicles in Beijing. By August 2008,
the city’s vehicle count had grown to 3.3 million. If the Chinese
began consuming like Americans, resource pressures would go up
dramatically. Geographer and historian Jared Diamond of the
University of California, Los Angeles, warns: “Oil consumption would
increase by 106 percent, for instance, and world metal consumption
by 94 percent. If India as well as China were to catch up, world
consumption rates would triple.”

When it comes to producing clean, renewable power, the Middle
Kingdom is falling ever further behind. With its ample coal
supplies, China can meet its soaring electricity demand only by
opening more coal-fired power plants—approximately three or four per
month. Even with the best available technology, each megawatt-hour
of power created by a coal-fired power plant creates a minimum of
1,600 pounds of carbon dioxide. In total, China is now pumping more
than 6 billion tons of carbon dioxide into the Earth’s atmosphere
each year, to say nothing of the sulfur dioxide and particulates
that pose a major public health threat. It’s not too great an
exaggeration to say that convincing the Chinese government to change
this equation ranks among the greatest challenges facing humanity.
Indeed, it would be a mistake to view the global competition to
master green technology as a zero-sum game. Perhaps the best hope
for taming China’s belching coal plants is for rich countries,
including the United States, to master a specific carbon
sequestration technology—such as injecting carbon dioxide safely
underground or beneath the ocean floor—and then give the blueprints
to the Chinese. If China grows greener, the world will benefit.

“Europe Has Shown That Green Is a Job Creator.”

Not yet, though an optimist can certainly find success stories.
Denmark, for example, has gotten a PR windfall from its status as
the world’s leading exporter of wind-turbine technology. Spain has
offered generous subsidies to renewable electricity producers.
Germany has poured billions of euros into solar power (though
critics of the subsidies point out that the price of silicon has
skyrocketed as a result, pushing up the cost of solar power in
sunnier parts of the world).

Setting aside the inherent problems with governments picking
winners, the world recession may tell us whether these “successes”
are here to stay. Last year, amid soaring energy costs, Germany and
Spain cut back on their solar subsidies; now, many producers are
struggling to survive on their own. An optimist would argue that
such infant industries need special protection from government while
they are young but will learn by doing and develop into more
competitive businesses that become cost effective in the global
marketplace. But with credit for capital-intensive projects
increasingly hard to come by, this theory is being painfully tested.

No matter what, such government subsidies are costly. Denmark may be
a clear success, but how many green failures have there been in
Europe? Repackaging an old-fashioned industrial subsidy as a “green
jobs” stimulus may be not so much an environmental plan as a
politically correct way for governments to transfer resources to a
favored sector. European carmakers have been asking for such a
handout, ostensibly to help them build more fuel-efficient vehicles.
Cynics question their sincerity.

Let’s also not forget that governments face a budget constraint. To
pay for large strategic subsidies, someone’s taxes will eventually
have to be increased. Higher taxes distort consumption and
investment decisions. Households respond to lower after-tax wages by
working less, and companies respond to higher corporate income taxes
by investing in fewer new projects. The net effect is a less robust

“Green Cities Are Overhyped.”

Actually, no. By the year 2030, 60 percent of the world’s population
will be living in cities. These urbanites will be more productive,
healthier, and happier if they are living in clean, livable cities.
This is where the jobs of the future will be.

In the 19th century, Karl Marx and Friedrich Engels bemoaned that
capitalism gave us such nasty places as Manchester, England. Today,
it’s green cities—with their clean air, parks and trails, and
transit-oriented development—that are winning the capitalist game.
Attracting and retaining skilled workers is the key to long-run
growth—just ask the chamber of commerce in gritty Detroit, where
there are homes for sale today for just $13,000. Meanwhile, once
sooty Pittsburgh, New York, and London have reinvented themselves as
high-end places where the footloose and educated want to live and work.

Today, all over the world, cities with high quality of life and high
environmental quality feature higher housing prices and less
out-migration of skilled workers than nearby cities with a lower
quality of life. Stockholm is a good example. The Swedish capital
enjoys physical beauty and perhaps as no accident has established
itself with a synergistic combination of universities, cultural
centers, and financial headquarters. Across Europe, high gasoline
taxes and the absence of urban fringe land for development have
encouraged compact development around historical city centers and
the reliance on high-quality, fast public transit.

In China, home to some of the most polluted cities in the world,
market forces are revealing the demand for clean air. Beijing’s
ambient air pollution levels, for instance, are more than four times
worse than in Los Angeles. But within the sprawling city, there are
areas with high air pollution levels and other areas with much
cleaner air. My own research has documented that home prices for
standardized housing units are significantly lower in areas of the
city with polluted air and little green space. So, even in a country
where economic growth seems to trump all, the skilled are voicing a
preference for green.

“‘Green-Collar Jobs’ Is Just a Marketing Slogan.”

Yes. But what is being sold? Take this multiple-choice test:
Who is a green-collar worker?

A. A trucker who delivers gas to a gas station without ever
suffering a spill

B. A scientist doing research on improving hybrid battery

C. A home weatherizer who makes house calls helping families
increase their energy efficiency

No wonder estimates of the employment impact of Obama’s energy plan
vary so widely. Defining a “green” job is tricky. The trucker could
have caused a disaster by making a careless mistake. His extra
effort will not be written up in the newspaper, but such little
decisions help to protect us from fires and pollution. The scientist
has a shot at devising a great new technology that could both foster
economic growth and decarbonize the economy. Finally, many
households and firms are unaware of how much money they are wasting
on electricity and heating bills. A team of home weatherizers could
cost-effectively plug these holes, creating jobs, lowering energy
bills, and reducing greenhouse gas production in the process.
But what if these three workers approached the government for a
subsidy and the president could only choose one? Which is the
greenest job of the three? The president would be forced to take a
stand. Does he prioritize a) protecting public health, b) betting on
the next generation of green technology, or c) minimizing wasteful
energy consumption?

“Stopping Climate Change Will Boost Economic Growth.”

Unproven. An optimist would hope that the carbon tax incentives or
cap-and-trade policies needed to stop climate change would
accelerate the development of the hydrogen economy, offering the
win-win of cheap, green power. And, of course, we have our children
to worry about. Nicholas Stern of the London School of Economics,
who has forcefully argued that the benefits of devoting significant
resources to stopping climate change exceed the costs, is asking us
to sacrifice now (perhaps up to 15 percent of current consumption)
so that future generations will suffer less.

This may well be a good trade-off. But it is unlikely to stimulate
growth. Carbon mitigation investments will not be costless, and
other valuable investments will be displaced by the resources we
devote to stopping climate change.

Meanwhile, the arithmetic of global warming is only getting more
daunting. Imagine if the American Dream went global, if 8 billion
people each owned a vehicle of average fuel efficiency and drove it
10,000 miles a year, a typical amount. This driving alone would
create more than 44 billion tons of carbon dioxide annually. But
leading scientists say we must reduce annual carbon dioxide
emissions to around 7 billion tons annually to protect ourselves
against climate change.

How can we get there from here? Today, politicians can point to
specific efforts such as questionable subsidies or a “green jobs”
program and claim they are taking action. And though most economists
and environmentalists agree on the incentives—such as carbon
taxes—needed to truly green the economy, politicians, especially
those hailing from carbon-intensive areas, are slow to embrace them,
as are voters increasingly concerned with pocketbook issues.
With the right policies, we can build a green economy and stabilize
the climate. A good first step might be to stop telling ourselves
that half measures will work and that the transition will be easy
and painless: just a few subsidies here, some technological wizardry
there, and presto, green jobs. This may be the most inconvenient
truth of all.

Matthew E. Kahn is professor of economics at the University of
California, Los Angeles, and author of Green Cities: Urban Growth
and the Environment.


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