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Beware of politicians bearing "Green" gifts

By Kenneth P. Green and Ben Eisen
web posted May 2, 2011

During the current Canadian federal election campaign, politicians have presented a number of plans to create jobs and strengthen the economy. One frequently discussed strategy for improving economic performance is spending more on "green energy" development. Many office seekers have argued that additional spending in this area will bolster the economy by creating thousands of "green jobs." Unfortunately, these expectations clash with economic theory and are not borne out by empirical evidence. Many European countries have been spending freely on green energy development for years, in the hope of generating green jobs.  Their efforts have largely failed. Experiments with large-scale subsidization of renewable energy in Europe have led to net job losses, higher energy prices, and widespread corruption.

Economic theory suggests that the notion that governments can create jobs through subsidies and direct spending in the renewable energy sector is fallacious. That's because governments can't actually "create" jobs. All they can do is shift jobs in the economy around, draining capital out of some industries through taxes, destroying jobs there, and spending the money to employ people in jobs in other areas of the economy. Economic theory also suggests that because markets allocate resources more efficiently than central planners, the shifted capital will be put to less productive use in subsidized industries.

Economists have long objected to optimistic projections about the impact of green job plans on these theoretical grounds. Sceptics now also have a large body of empirical evidence showing green jobs plans tend to fail in the real world. Several European countries began ambitious green energy spending projects many years ago; the results of those experiments are now coming in, and they demonstrate centrally planned efforts at green job creation just don't work. Their results offer valuable lessons for Canadians.

Hailed as a leader in green energy investment, Spain's example is illustrative. Recent evidence shows that the country's ambitious green jobs strategy has failed. While government spending and subsidies did lead to the "creation" of jobs in the renewable energy sector, the capital required to create them was spent inefficiently. One study shows that Spain spent over $750, 000 for every green job generated since 2000, including subsidies of over $1,000,000 per job in the wind power industry. Such inefficiency led to the destruction of more jobs in other parts of the economy than were created in the green energy sector.

These costs do not appear to be unique to Spain's approach but are largely inherent in schemes to promote renewable energy sources. Research from Italy suggests government spending on green jobs also destroyed more jobs than it created. A recent analysis of green energy spending in the United Kingdom shows a similar pattern –for every job that governments created in the renewable energy sector, more than three jobs were destroyed elsewhere.  

In addition to draining capital out of other sectors, European green jobs initiatives have created several other economic problems. Germans have seen the price of household energy increase 7.5 percent as a result of government spending on wind and solar power. Danes, who spent heavily on green energy, now have the highest electricity prices in the European Union. In Spain and Italy, corruption now runs rampant through the renewable energy sector as unscrupulous actors try to game the system and take advantage of government largesse.

With these miserable results, it is unsurprising that several European countries are significantly cutting government spending on failed green job schemes. Spain has slashed subsidies for new solar plants. Denmark, facing complaints about high energy prices, has decided to stop building onshore wind turbines. Germany is significantly cutting subsidies for solar panel installation.  These countries have learned the hard way that governments can't plan and spend their way to green prosperity. Canada should avoid making the same mistakes.

Economic theory and the experience of European countries suggest government efforts to strengthen the economy by "creating" green jobs are based on an economic fallacy. Italy, Spain, Germany, the United Kingdom, Denmark and the Netherlands have tried and failed to accomplish positive outcomes with renewable energy. Contrary to election promises we hear from politicians, Canadian planners are no more omniscient than those who tried these programs in Europe, and are unlikely to produce better results. ESR

Kenneth P. Green is a Resident Scholar at the American Enterprise Institute and Ben Eisen is a Policy Analyst at the Frontier Centre for Public Policy. They are co-authors of a study on the European experience with green jobs, available at www.fcpp.org.

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