Analysis from the Peterson Institute: Why CBO's report on climate legislation will significantly underestimate employment gains

Last week I posted a blog on the Congressional Budget Office’s (CBO) recent report on employment impacts of climate legislation. Among other things, I discussed some of the flaws with the existing models CBO relied upon to estimate job losses.

Trevor Houser, of the Peterson Institute, provides a nice complementary piece to my analysis, describing in more detail how the models work (and don’t work) to capture employment changes in the electricity sector. In particular, the models are well designed to capture losses in fossil fuel extraction that result from higher energy prices in electricity. However, they don’t capture efficiency gains: energy price increases automatically translate into a decline in output and production, regardless of where consumers and firms spend their energy savings. The models also don’t capture employment gains in clean energy production because they have very aggregated representations of the capital stock that supports electricity production. As such, they won’t account for the huge shift in capital investment that will occur as fossil-fuel plants come to an end of their useful lifetime, with new low-carbon generation  replacing them, as well as expanding to meet new demand for energy (lower than under business as usual but still growing). Importantly, due to current economic conditions, workers are available to support this shift, providing a helpful boost to ending the recession. And experts agree: two Nobel Prize winners and other prominent economists expect that passing legislation will generate economic growth.

Trevor also noted that the models don’t sufficiently account for gains in competitiveness that will result from more efficient industrial processes and technological innovation. (An extended discussion and source materials supporting this conclusion are available in my blog).

On the plus side, however, two of the three models CBO used do capture employment gains in the service sector, where a cap on carbon is expected to result in a net expansion of production and jobs. This is because the service sector is less carbon-intensive, and more labor intensive, than rest of the economy.

Indeed, after adding up the different employment changes CBO projects, I found that the service sector was a critical driver in CBO’s calculations: after removing service sector losses projected in the third model, CBO’s overall (very small) economy-wide losses became essentially zero. Changes went from -.25% in 2015, and -.27% in 2025, to -.03% and +.01%, respectively. Further removing losses in non-fossil fuel sectors, as well as electricity sector losses projected by one of the models, puts the numbers at +.16% and +.22%, respectively (a full description of my methodology and more details are available in the original blog).

Of course, these estimates significantly understate job creation potential in a clean energy economy. Opportunities big and small for efficiency and innovation permeate the entire economy (lots of examples and supporting documentation also available in the original blog). A price on carbon pollution, as well as provisions in climate legislation, will do a lot to advance both, catapulting our economy into what is sure to be the next great engine of growth.