No, The New Climate Deal With China Won’t Hurt The Economy — It May Actually Help

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Mere hours after President Obama inked an historic climate deal with the Chinese on Wednesday, Republicans were already warning of dire economic consequences. But according to a prominent Washington D.C. economist, not only are they wrong, but the truth could well be the opposite of GOP prognostications: the deal could act as a modest boost for the United State’s still-limping economy.

That could come as a surprise to a “particularly distressed” Senator Mitch McConnell (R-KY) — the incoming Senate Majority Leader — who said in a statement that the plan was “unrealistic,” and that it will “increase the squeeze on middle-class families” while ensuring “higher utility rates and far fewer jobs.” House Speaker John Boehner (R-OH) concurred: “It is the latest example of the president’s crusade against affordable, reliable energy that is already hurting jobs and squeezing middle-class families.” House Majority Leader Kevin McCarthy (R-CA) and Sen. James Inhofe (R-IA) piled on as well, saying the deal will “increase the cost of living and further reduce the number of American jobs” and “diminish” economic opportunity.

The key to why they’re wrong, explained Dean Baker, the co-founder of the Center for Economic and Policy Research, is that six years after the Great Recession, the U.S. economy still isn’t running at anything near full capacity. People that could be working remain unemployed, factories that could be operating are still idle, and so on. “We’re somewhere around four to five percent below the economy’s potential,” Baker said. In that context, “anything that spurs additional demand will create jobs. So if we have a regulation that says you have to do X, Y and Z to reduce emissions, then that will be a net job creator.”

The deal Obama struck takes the current U.S. commitment to cut its greenhouse gas (GHG) emissions 17 percent below their 2005 level by 2020, and extends it to a 26-to-28 percent reduction from that same baseline by 2025. While the nuts and bolts are still being worked out, the mechanism for these reductions will likely be further moves in Obama’s strategy of unilateral executive actions, particularly extending the targets for the Environmental Protection Agency’s (EPA) recent rulemaking to cut emissions from the nation’s power plants.

No matter what, the U.S. economy will continue building new energy capacity between now and 2025 as the economy continues to grow and new needs arise. Thanks to EPA’s rule, more of that capacity will be renewable than if we weren’t making a push to combat climate change. But we’ll also be building new renewable capacity to replace already-operating fossil fuel capacity, and thus reduce emissions. In an economy that was running at full capacity — where everyone was already working and all the factories were already working — that would mean “pulling money out of people’s pockets to employ more people in the energy sector” Baker explained. “That’s a tougher call. Does it mean more jobs or less jobs? You can’t a priori say which way it will go.”

But in our economy, building that extra renewable capacity and installing all those energy saving efficiencies will employ resources that otherwise wouldn’t be put to use. “In a context where we’re below full employment, it’s a pure positive,” Baker said. Furthermore, the construction sector still has one of the highest rates of unemployment of any in the country, and “people in construction absolutely have the skills to put in solar panels and to add insulation to homes” — all the steps that would be needed to fulfill the menu of options EPA gives the states to meet their emission reduction targets.

Another thing that helps: renewable energy tends to be more labor-intensive than traditional fossil fuels, meaning it creates more jobs per unit of energy generated. Work by the Economic Policy Institute has also shown those green jobs tend to be more accessible to workers without a college education, and that states with more green jobs had an easier time weathering the 2008 recession.

As Baker previously told ThinkProgress, EPA’s power plant rule as it stands is unlikely to raise electricity rates or harm jobs, because markets are innovative and dynamic, because of the remarkable drops in cost renewables like wind and solar have already enjoyed vis-a-vis traditional fossil fuels like coal, and because of all the second-order benefits to things like worker health that come with reducing coal emissions. “It’s just very hard to see a story for how costs would skyrocket or what would cause that,” Baker said. The new target from the 2025 deal with China would ostensibly require a faster annual rate of emission reductions: on the scale of 2.8 percent per year from 2020 to 2025, versus 1.2 percent per year to meet the earlier 2020 goal. But emissions have actually dropped considerably faster than 1.2 percent annually in four of the last five years, and Baker thinks we’ll be far closer to 2.8 percent, if not higher, by the time 2020 rolls around.

“If we’re literally going at 1.2 in 2020 and then we’re immediately jumping to 2.8, that would be a big deal,” Baker explained. “But we’ll almost certainly be going faster than 1.2 in 2020, given our recent past and what looks to be in line down the road. I don’t see that as being a big jump. So in other words we’ll probably be closer to 2.8 in 2019 or 2020.”

“If you envision we’re going to have cuts beyond 2020, then it’s a plausible pace for continuing those cuts.”