(with Luciano Lavecchia)

Mr Lavecchia is a fellow and Dr. Stagnaro the research and studies director at Istituto Bruno Leoni. This post follows the release of their recent analysis for Italy showing that for every ‘green’ job created by government, 4.8 ‘gray’ jobs are lost in the private sector.

Tradeoffs: if you chose this, you can’t chose that. In economics this is called opportunity cost, which is the next-best alternative to what is actually chosen.

The proverb in popular culture for this is “you can’t have the cake and eat it, too.” The Italian translation is “you can’t have a full barrel and a drunk wife.”

Apparently, politicians are less familiar with such a everyday-life concept. To some extent, they are right: they can get a full barrel and a drunk wife at the same time, provided that taxpayers and/or future generations will pay for it. Yet, even politicians are subject to constraints. That is particularly true in a period of crisis like now: shrinking public budgets and a slowing economy force even the politicians to make choices.

EU Retrenchment

This brings us to the crisis of climate politics in Europe where most EU countries are considering cuts to the green subsidies.

The Socialist government in Spain dwarfed its support to solar power, causing a collapse in investments and thousands people to lose their jobs. In Germany, the conservative chancellor Angela Merkel proposed a similar reduction and is facing a huge Parliamentary opposition.

Italy decided as well to pare green incentives. How is that possible? After all, virtually every official EU document claims that the “green deal” will make us not just more sustainable, but also economically better off.

We will not deal with the environmental side of the issue in this post, leaving it to the wise words of Dr Gwyn Prins, for example, and perhaps a future post.

Uneconomic RES

But what about the claim that renewable energy sources (RES) are good for the economy?

There is no spaghetti on this plate. If green sources are really cheaper than fossil fuels, there is no need to subsidize them, because households and businesses would have a built-in economic incentive to rely on RES, rather than on supposedly dirty, more expensive, energies.

Yet people are not investing in RES without government incentives. So either people are stupid when it comes to energy, or RES are more expensive. If RES are more expensive, then they need subsidies to increase their share of energy consumption. If more costly energies are subsidized, energy cost will likewise increase, and energy-intensive products or processes will either become more costly, or less competitive – or both. So, the whole macroeconomic outcome of this is that society will become poorer.

Sometimes a different, more subtle, argument is made: RES may turn out to be a social cost, but they are good to create employment. The argument goes like this: we are in a time of crisis. Lack of GDP growth is a big problem, but raising unemployment is a much bigger problem. So, there may be a tradeoff between getting sooner a higher rate of growth, and finding a job for people who may have problems to make it until the end of the month.

Under this approach, a comparatively slower, later growth rate is an acceptable price to pay to keep people employed, for the sake of social peace. We will not discuss this point of view, either, although we regard it as economically insane. But taking it seriously for the sake of argument, the implication is that resources spent in RES will generate more jobs, all else being equal, than the same resources invested in other sectors of the economy.

Green Jobs Studies

Let’s look at the evidence.

Recent studies on Spain, Germany, and Denmark suggest that, in fact, RES subsidies destroy, not create, jobs – a remarkable result, since these three countries are widely regarded as the most successful models in Europe. The U.S. Congressional Budget Office found similar results.

We performed a similar study on Italy. Our estimates on the opportunity cost of green jobs show that, on average, every single green job comes at the expenses of 4.8 “grey” jobs.

If we are correct, pro-RES policies should be carefully assessed, especially in Italy, a country with strong debt, weak GDP growth and an history of environmentalism which caused, of all the crazy things we could do, the shutdown of four nuclear power plants after a referendum in 1987. (Whatever you think about nuclear power, since most of its cost is embodies in the initial investment, the most crazy thing you can do is to shut down them before their technical life is expired: by doing so you get all the financial and possibly environmental pain and no gain at all.)

While the idea that subsidies to RES will indeed create some jobs is for free, the question is at what price. In fact, the creation of green jobs leads to the destruction of job opportunities in other industries, because of the misallocation of resources, forcibly taken out from society and politically allocated in favor of RES.

In our country, green energies are subsidized through a premium that every electricity consumer pays on her electricity bill (about 4.3% of the average bill), which contributes to make Italy’s electricity bills among the most expensive in Europe. Particularly, big industrial consumers pay the most expensive electricity bills in Europe (some 25% above the EU average in 2008).

In order to assess the net balance of jobs created vs. job destroyed, we have estimated the number of green jobs that would be created by the subsidies that have already been granted or committed. We have assumed that, by 2020, Italy will reach its “maximum potential” for wind and photovoltaic (PV) power, following the position paper issued by the Italian government in 2007. Moreover, we have collected the available estimates on the currently existing green jobs, even though we believe they are biased upwards (especially the optimistic ones).

We have concluded that, in different scenarios, 50,000 to 112,000 jobs will be created (Figure 1 and Figure 2), the most of —at least 60% – will be installers or other temporary jobs. Particularly these ones will depend on the flow of new investments and disappear whenever a photovoltaic panel, or a wind tower, is operative.

Figure 1 – Jobs (two scenarios) and subsidies to the wind power industry.

Figure 2 – Jobs (two scenarios) and subsidies to the PV power industry.

We have estimated that the cost of such jobs will peak at around €6bn per year in 2020, not far from the figure expected by Italy’s energy regulator (€7bn), even though the economic crisis could indeed reduce the total amount.

Finally, we have computed the entire amount of public capital that is committed for the creation of those jobs, and calculated the average stock of public capital per worker in the green sector—a measure of how much labor- intensive is an economic sector. The stock of capital per worker, depending on the scenario, is of about 566,000 to 1,260,000 euro. If that is compared with the average stock of capital per worker in the entire economy and in the industrial sector, a ratio is found of 3.5 to 7.7 and 5.0 to 11.2 (see Figure 3), respectively. Hence, on average a green job is equivalent to 4.8 jobs in the entire economy, or 6.9 jobs in the industrial sector.

Figure 3 – Average stock of capital per worker in the RES with respect with the average stock of capital in the industry.

Some argued that indeed the stock of capital employed in the energy production business should be used instead. While we understand the ratio behind, we disagree for three main reasons: 1) it is very unlikely, due to the stochastic nature of RES, that the new installed capacity will “crowd-out” the more “traditional” energy production systems; 2) the feed-in tariffs and green certificates which are used for sustaining the RES are indeed funded from, or passed onto, all citizens from all over the economy and particularly the most energy intensive subjects (the industrial sector); 3) we have tried to assess whether subsidizing RES is per-se an efficient way to create new jobs, thus every sector could be used as benchmark.

Conclusion

Our research is not contra RES per se: we are just underlying that, if the green economy is intended to create jobs, it is a very inefficient tool.

The same amount of subsidies could produce 4.8 jobs instead of just one “green” job if spent elsewhere in the economy, leaving the market free to do its job (something which is far from being understood by the Italian Leviathan).

We argue the robustness of our results for two reasons: on the one hand we use existing estimates of green jobs, some of which are grossly overstated; on the other hand, even if the subsidies actually given to the green energies will were to be just half as much as we assume (a ridiculously low hypothesis), one green job would still be equivalent to 2.4 conventional jobs.

Our figures, then, seem to confirm what is intuitive: the green economy is capital-intensive, thus it may be very profitable for some. But it looks pretty much as a zero- or negative-sum than a positive-sum game at a social level.