What will the climate change bill do to your job?
Next Thursday, just in time for the July 4 holiday weekend, America’s unemployment rate is forecast to rise from 9.4 percent to 9.6 percent, well above rates in other industrialized countries.
Yet today the House of Representatives is rushing to pass the American Clean Energy and Security Act of 2009, even though the bill was incomplete yesterday and congressmen have not yet had the opportunity to analyze it. The bill would send America’s unemployment rate even higher.
The 1,200-page bill, cosponsored by Henry Waxman, Chairman of the House Energy and Commerce Committee, and Edward Markey, Chairman of the House Energy and Environment Subcommittee, would increase the price of energy by setting allowances for greenhouse gas emissions and mandating new standards for energy production and use. The bill would raise $846.6 billion over 10 years while adding $821.2 billion to federal spending.
The bill requires that greenhouse gas emissions in 2012 do not exceed 97 percent of 2005 emissions, declining to 17 percent of 2005 emissions by 2050. Meeting these standards now is technologically impossible without radically reducing our standards of living, but Congress is hoping that technology will magically appear as needed.
The mechanism for this is a “cap-and-trade” program under which allowances to emit greenhouse gases would be issued by the Environmental Protection Agency at a steadily declining rate through 2050. When emissions exceed a firm’s allowance, or cap, it would have to purchase allowances from the government or other firms, a tax under another name, driving up costs that would be passed on to consumers.
Electric utilities have been given free allowances to encourage them to support the bill. Oil and gas would be particularly hard hit, because they are responsible for 35 percent of emissions yet are allocated only three percent of the free allowances.
Just as the increases in oil prices in the 1970s brought about an increase in unemployment, the energy provisions in the Waxman-Markey bill could usher in years, perhaps decades, of lower economic growth and higher unemployment than would be the case otherwise.
The effects of the oil price increases between 1972 and 1988 have been extensively analyzed by economists Steven Davis of the University of Chicago and John Haltiwanger of the University of Maryland. Although their research deals with the effects of oil price increases, it is also applicable to increases in the price of energy, which would be the effect of Waxman-Markey.
Davis and Haltiwanger find that oil price increases resulted in more jobs lost than jobs gained in almost every industry sector of the economy. The largest oil shock, in 1973, caused an estimated eight percent decline in manufacturing employment over the following two years.
Oil price increases have larger effects on economic activity than oil price declines, Davis and Haltiwanger calculate, a finding shared by other economic studies. In other words, when energy prices increase firms lay off workers, but when prices decline the workers are not hired back as fast.
Davis and Haltiwanger also find that higher energy prices are more likely to suppress employment than monetary shocks. Many politicians fret over the harmful effects of recent American monetary policy, but overlook the even greater danger to employment from the Waxman-Markey bill.
Supporters of the bill claim that the new regulations will create jobs, because people will have to be employed to produce the new technology. But the funds for the new expenditures have to come from somewhere, and money spent on new products is money that cannot be spent on other activities, such buying clothes or food, or anything else that Americans would otherwise buy. This would drive down employment in those industries.
In fact, not only does the bill penalize American firms through higher costs, it gives firms a financial incentive to move abroad through “offsets,” activities that supposedly lower carbon emissions elsewhere. Since Congress knows that firms cannot meet the standards in the bill, legislators are allowing firms to meet 30 percent of their 2012 greenhouse gas reduction obligations, increasing to 60 percent by 2050, by buying offsets. Half of these offsets can take place abroad.
The offset provisions allow firms to shift economic activity abroad to countries with laxer emissions standards, further damaging U.S. job creation. A plant’s emissions might exceed its U.S. allowances, yet its technology might produce lower emissions than the norm in a developing country, allowing the relocation to count as an offset.
The American unemployment rate now exceeds those in France (8.9 percent) and Germany (7.7 percent). With unemployment climbing even without the Waxman-Markey bill, the question for Congress is the following: how high do you want the rate to go?