Lots of the bloodletting we’ve seen in the labor market has probably been permanent, not just cyclical. Many employers have taken Rahm Emanuel’s famed advice — never waste a crisis — to heart, and have used this recession as an excuse to make layoffs that they would have eventually done anyway. Some economists refer to this as the “cleansing effect” of recessions. …

Over all, the share of unemployed workers whose previous job has been permanently lost tends to rise during recessions, and the share of the unemployed who are just on temporary layoff falls.

This is shown in a Bureau of Labor Statistics chart (displayed in Rampell’s post), showing that most of the gains in unemployment over the past two years is not due to increases in temporary layoffs, which initially may thought to be the primary cause within a recession:

Source: Bureau of Labor Statistics and New York Times

This trend is much more pronounced in this recession than in past recessions. A recent Congresional Budget Office report states:

Third, the movement of unemployed workers into new jobs will probably be more difficult in this recovery than in past ones. Recessions often accelerate the demise or shrinkage of less efficient and less profitable firms, espe- cially those in declining industries and sectors. Thus, the share of unemployed workers whose previous job is per- manently lost tends to rise during recessions; the rise has been especially pronounced during the past two years. At the same time, workers on temporary layoff represent a smaller percentage of the unemployed than they did in past recessions.

As a result, gains in employment after this recession will probably rely more than usual on the creation of new jobs, possibly in new firms that are located in different places and require workers with different skills than those needed in the jobs that have disappeared. For workers who have lost jobs because of a permanent layoff, the pro- cess of acquiring new skills can take time. (In contrast, it is easier for workers who have been laid off temporarily to return to their jobs because the employers already know the workers and the workers already have the right skills and are familiar with the work practices at the job.) For workers who need to move to different geographic regions to find new jobs, the sharp declines in home prices during this recession, combined with the high loan-to-value ratios on many mortgages before the down- turn, will hinder relocation. With a significant share of homeowners now owing more on their mortgages than their homes are worth, many people may not be able to sell their house for enough money to enable them to buy one in a new area.

What should we make out of all of this? If we look to the past, it is obvious that we have gone through major economic transitions before. While they are no doubt difficult in the short run, in the long run they facilitate a much stronger economy with greater opportunities for economic growth. For example, the United States has experienced a long and steady decline in rural employment, especially on farms. Even within the past 30 years, much has changed. Rural poverty rates remain higher than urban poverty rates, and the majority of farmers do not farm as their primary occupation. The percent of Americans living in rural areas decreased from 20-percent in 1980 to 16-percent today.

Despite this drastic change in what appeared to be the fundamental fabric of America, life continued. The world did not come crashing down and the middle class continued to expand. According to the U.S. Census Bureau, in 1970, the mean household for the middle fifth of households was $42,996 (2008 Dollars). In 2008, it was $50,132. Similarly, the average individual income in 1970 was $15,721 (2008 Dollars). In 2008, it was $26,964. Despite what seemed like a disaster at the time, economic growth continued to occur for all types of people throughout the United States. The same will continue into the future. No doubt policies will be different, types of jobs will change, and greater demands will be placed on workers, but life will go on, and for the better.

Note: This post is mirrored in the Chicago Policy Review blog, for whom I also write.

The pump-storage technology allows the transformation of low-altitude water into high-altitude water using off-peak electricity, and then the production of electricity at peak periods releasing water through turbines like in any hydroelectric plant. Because of large energy losses in the transformation of electricity into water and then of water into electricity (the cycle efficiency is of the order of 80%), this process is not generically good at saving energy but it can be profitable on economic grounds, both by decreasing production costs and by increasing consumers’ surplus.

The article goes into much greater depth, and is a great read overall. The only problem is finding sites suitable for such storage. Wind farms are often cited on vast fields with relatively little variability in terrain, thus little room to build the reservoires necessary. But with high capacity lines delivering the power elsewhere, it seems like this is a promising option. As long as you keep enough cold water in the river to keep plenty of trout in the river of course. I’d rather not have to give up my fly fishing.

Lars Josefsson, chairman of Combat Climate Change, a group including BP, General Electric, Unilever and more than 60 other large companies, said business was ready to act but would not do so without a clear regulatory framework.

“The necessary investments will only be made when you have a binding treaty and legislation,” he said in an interview.

“Of the money required to implement a deal, the vast majority – about 80 per cent – will come from the private sector. That can only come when there is a stable legal framework.”

This boils down to the too-often-used yet still-quite-useful game theory example of the prisoner’s dilemma. The original game itself involves two accomplices, in separate isolated holding cells, being questioned by the police. They can either confess to their crime or hold out. If both of them hold out, they both get only one year in prison. However, if one holds out and the other confesses, the one who confesses gets set free and the one who holds out gets 10 years. If both confess, they both get 4 years in prison. Clearly, both prisoners are overall better off holding out together, but because they are rational actors, they both inevitably decide to confess (lots of analysis to prove this, but trust me, it’s true).

This theoretical model is useful in understanding the incentives that the private sector faces in choosing to invest in green technologies other other such “green jobs” initiatives. Right now there is immense regulatory uncertainty and no clear long-term incentives. Because of this, when taking into account companies’ duties to their shareholders, they will often take the route that maximizes profits with as little risk as possible. They are incentivised to “confess,” even though society as a whole would be better off if they invested in green tech (“hold out”). In order to make the socially optimal (and potentially lucrative) option of “holding out” (aka making less carbon intense investments) possibility, there needs to be a binding regulatory framework to eliminate uncertainty. While many businesses, such as Exxon Mobil, support a carbon tax as the best way to do this, in many ways frameworks created by Waxman-Markey or similar legislation is better than none.

I decided that the consumer should have $50,000, and the price of each good should be $1. Thus the budget constraint is:

$50,000 = E + G

Plotting the budget constraint, and then setting all of the optimal conditions yields the following graph, with Energy on the X axis and all other goods on the Y axis.

Budget constraint and Cobb-Douglas Utility Function, with optimal point

Now let’s say that the price of energy goes from $1 to $2, due to a cap-and-dividend system. That would cause the consumer to consume less energy, and of course be worse off as a result.

After 2x rise in energy prices: Budget constraint and Cobb-Douglas Utility Function, with optimal point

However, what would happen if we took the amount of money collected from the consumer, $5000, and gave it back to her in the form of a dividend. The person’s budget constraint would move outward, and their consumption would shift accordingly, as the following graph shows:

After 2x rise in energy prices with dividend: Budget constraint and Cobb-Douglas Utility Function, with optimal point

This shows that the person is better off than if the dividend did not happen. Furthermore, even though the person is being compensated for the increased energy prices, she still consumes much less energy overall. Thus, contrary to some opinions, just because a person receives a dividend under a cap-and-dividend program does not mean that the person will not have an overall decrease in energy demand.

This basic model does rest upon many assumptions, the chief of which is that the consumer’s utility for energy and all other goods can be modeled with a basic Cobb-Douglas utility function. Chances are this is not the case, and no doubt energy is somewhat inelastic. However, many aspects of this analysis still hold true — and would perhaps hold even more so under an inelastic model.

A recent report by the American University’s Investigative Reporting Workshop outlines the situation quite nicely:

The reliance on foreign companies for development of wind energy appears to be at least partially tied to the U.S. government’s resistance to subsidize a home-grown wind energy industry until now. With so few U.S. companies in the business, the door was open for foreign companies to walk away with the bulk of the grants. European companies, in particular, are well positioned to collect stimulus benefits for clean energy.

…

While the U.S. has dithered with temporary tax incentives for producers, European governments have awarded permanent tax breaks and large subsidies to wind energy companies and poured vast sums into research and technology.

Even as billions in stimulus dollars for clean energy are starting to flow, Congress is still hammering out an agreement to mandate that up to 20 percent of the nation’s energy come from renewable sources by 2020 (a Senate proposal currently calls for 15 percent.) Denmark, by comparison, has already achieved that goal – and in the process became the most dominant wind turbine manufacturer in the world.

This is an interesting dilemma. On the one hand, we want the most efficient allocation of resource, and trust (for the most part) the market to allocate capital to the firms and technologies that have the greatest possible potential. On the other hand, we face world-wide competition within the renewable energy industry, with domestic firms up against foreign firms supported by governments with far greater involvement in the renewable energy market than ours. Economically, our approach is more efficient. However, it has not been effective at spurring growth akin to what Europe has seen within the alternative energy sector.

Facing the realities of a globalized energy industry, where almost every governments offers subsidies, tariffs, or energy standards that distort the market, we cannot pretend that our domestic firms are able to compete on the same scale without government support. An optimal solution? No. But perhaps necessary? Yes.

Energy Flows, by Whitesides and Crabtree, Don't Forget Long-Term Fundamental Research in Energy (Science 9 February 2007: 796-798)

Energy Flow, 2008, in Quadrillion BTUs. From the Energy Information Administration's Annual Energy Review 2008

The two most interesting conclusions for me are the vast amount of energy lost within the US energy mix and how little energy within the country comes from renewable resources. Important in discussion of the first item is that not all methods of producing and distributing energy have the same room for efficiency improvements. You can’t pick out the largest slice of the pie and say we need to concentrate there alone — perhaps that area already is highly efficient, and a smaller chunk of the pie with higher gains from marginal efficiency improvements would ultimately yield a greater decrease in net energy demand. Secondly, in response to how little comes from renewables, both of these diagrams are for total energy use within the country, not just for transportation or electricity generation. Currently electricity generation and transportation needs are relatively separate, in that not many energy sources provide services to both. In the future this inevitably will change, as we come to drive more plug-in cars (or cars powered by natural gas), but in the meantime, we must be cautious in order not to conflate the two.

*: Don’t Forget Long-Term Fundamental Research in Energy
Whitesides and Crabtree
Science 9 February 2007: 796-798
DOI: 10.1126/science.1140362

Unfortunately, relatively little research has been done on the watershed restoration sector of the economy. Important questions remain unanswered. What does the public think about watershed restoration? Who funds most current restoration projects? What policy changes are needed to expand the restoration economy? Wildlands CPR undertook an ambitious yearlong research project to help provide some answers, culminating in the publication of six reports:

1. Perceptions of Watershed Restoration;
2. Economic Benefits of Watershed Restoration;
3. Characteristics of Watershed Restoration Funding;
4. Innovative Financial Mechanisms to Fund Watershed Restoration;
5. Business and Regulatory Environments of Watershed Restoration; and
6. Possibilities of Forming an Ecological Restoration Trade Association.

These reports are an important first step in building up knowledge about various aspects of the watershed restoration economy. This executive summary discusses the findings of each of the six reports, and concludes with a summary of the most important recommendations.

What is Watershed Restoration?

Ecological restoration activists, scientists, and practitioners debate about what actually constitutes proper restoration. The Society for Ecological Restoration’s definition is:

Ecological restoration is the process of assisting the recovery of an ecosystem that has been degraded, damaged, or destroyed.

This leaves much room for interpretation and goes beyond watersheds to include all ecological restoration. For our research, we deemed a project or activity restoration-related if it seemed to fit the spirit of the Society for Ecological Restoration’s definition, especially as applied to watersheds. Some management activities are controversially labeled as restoration, and we purposefully avoided these contentious issues. We deemed a project watershed-related if the project was designed to affect the terrestrial and aquatic components that impact large or small watersheds.  This could include, for example, projects to restore free-flowing rivers through dam removal; projects to reduce stream sedimentation through road removal; in-stream restoration activities; mining reclamation that would reduce or prevent acid  mine-drainage; etc.  We did not include projects that dealt exclusively with forest stand manipulation to address forest structure or fuel hazard reduction, as these projects do not typically consider watershed benefits as their primary purpose.

In addition, urban resource management and watershed restoration may be integrally related.  For example, Maryland has a program that taxes household sewer connections in order to pay for sewage treatment plant upgrades. While this project in and of itself may not be watershed restoration, the project is part of a much larger watershed-level effort to restore the Chesapeake Bay. One major component of the restoration program in the Chesapeake is pollution prevention, to ensure that the water entering the bay is as clean as possible. Thus we deemed the Maryland subprogram as a watershed restoration activity because its ultimate purpose was to enhance the watershed.

Public Perceptions of Watershed Restoration

Understanding public perceptions of watershed restoration is critically important to ensure public support for restoration activities. The public elects officials who have political sway in implementing projects. They vote on bond measures and other restoration funding mechanisms. They also can vociferously oppose projects. We conducted research into how the public perceives watershed restoration activities in order to better address these issues, reaching the following conclusions:

• Among Americans’ environmental concerns, clean drinking water is at the top of the list. Accordingly, they are also concerned about healthy lakes, rivers, and streams;
• While almost 70% of Americans support watershed restoration, an even greater number — 90% — are concerned about healthy lakes, rivers, and streams; and
• People are primarily concerned about their local environments and are most motivated to support local watershed restoration efforts.

Economic Benefits of Watershed Restoration

People often misunderstand watershed restoration as an activity with no product. This misunderstanding is predictable given the complex economic nature of restoration activities. Therefore, it is critical to understand both how watershed restoration fits within an economic framework and the general economic benefits arising from restoration. Our research found the following:

• Watershed restoration is subject to market factors that make its goods and services difficult to trade in traditional economic markets. This usually results in the government acting as the primary provider of watershed restoration. The demand comes from society as a whole, since restored watersheds are a public good;
• Measured by damage caused, willingness to pay, political referenda, averted expenditures, travel costs incurred, and changes in housing values, researchers consistently conclude that watershed restoration has significant economic benefits; and
• Watershed restoration projects have other economic benefits as well, directly and indirectly employing many people and potentially contributing to the long-term viability and growth of communities.

Characteristics of Watershed Restoration Funding

Because so few traditional markets exist for the products that arise from healthy watersheds, local, state, and federal governments fund the majority of restoration efforts. However, little research exists on how these governments go about funding this work. By understanding funding mechanisms and trends in their use, the public can become better informed about how to increase funding for restoration activities. Our research concluded:

• State and local governments usually provide the majority of funds for major watershed restoration projects, although the federal government does significantly contribute;
• A large variety of funding mechanisms provided by different levels of government typically fund large-scale and consistently viable restoration projects; and
• A heavy reliance on issuing debt (e.g. bonds) to pay for restoration activities may change how governments fund watershed restoration in the future.

Innovative Financial Mechanisms to Fund Watershed Restoration

The watershed restoration sector of the economy needs more funding sources. Even though various levels of government already fund—directly or indirectly—the majority of restoration work, these financial and regulatory mechanisms do not achieve the level of restoration that the country needs for a more sustainable natural environment and for a sustained, long-term restoration sector of the economy. We investigated possible financial recommendations and reached the following findings:

• Funding mechanisms differ according to whether liable parties exist that have caused or continue to cause the environmental damage that requires restoration;
• A variety of innovative and promising funding options exist, including mitigation banking, taxes on damaging activities, tax increment financing, special governmental districts, resort taxes, and surcharges on retail goods; and
• Future national climate change legislation has the potential to fund watershed restoration activities. While the science and economics behind whether carbon offsets can fund watershed restoration is uncertain, the potential does exist to fund restoration through adaptation and mitigation monies.

Business and Regulatory Environments of Watershed Restoration

The watershed restoration economy would not exist without the private businesses that implement restoration work. Without robust growth and revenue generating opportunities, expanding and mainstreaming the restoration economy is unlikely. Therefore, it is prudent to analyze what the business environment of watershed restoration is like, what helps and hinders it, and what precipitates long-term economic viability within the sector. This analysis yielded the following results:

• Preliminary evidence shows that watershed restoration firms who engage in federal contracts tend to be small businesses that employ less than ten people and have annual revenues of less than one million dollars. The majority of the firms principally engage in construction activities, but many forestry, consultative, and administrative firms exist as well;
• The permitting process for restoration projects can be duplicative and time consuming, but permitting is required to ensure good work;
• Some practitioners are concerned about liability for their restoration treatments, fearing that they could face lawsuits if their work fails for unforeseen and unintended reasons 10 or 20 years in the future.

Possibilities of Forming an Ecological Restoration Trade Association

Changes in public policy greatly affect the ecological restoration industry. Many other industries that are similarly dependent on the government for their existence have formed themselves into trade associations to influence public policy to their advantage. In doing so, they leverage the respect, influence, and resources of their entire industry to help shape their own future. We researched the possibility of forming an ecological restoration trade association, concluding that:

• The primary goal of a restoration trade association would likely be to conduct lobbying and outreach in order to expand market opportunity, influence regulation, and maximize profits for shareholders;
• A trade association would be best equipped to alleviate the significant gap of knowledge that still exists on the ecological restoration sector of the economy; and
• Restoration firms must perceive that the benefits of joining a trade association would outweigh the time and money it costs them.

Recommendations

These research findings on the various aspects of the restoration sector of the economy yielded many recommendations. The following five items are among the most important:

• Environmental activists should develop talking points and formalize a public relations campaign to better inform the public about the connection between restoring watersheds and clean drinking water;
• To ensure financial stability, the restoration sector of the economy needs multiple new funding sources that should be at local, state, and national levels and consist of multiple different mechanisms;
• Government agencies should consider implementing streamlined and coordinated watershed restoration permitting processes;
• Government agencies should enact a wider variety of permit shields for properly designed watershed restoration projects; and
• Businesses that engage in ecological restoration should form an industry trade association that lobbies all levels of government for business-friendly restoration policy, researches industry activities, and undertakes critical public outreach.

… the subsidy remains extravagantly generous, even after having been significantly reduced in recent years. It currently stands at a range of 34-43 €cent/kWh, depending on the kind of installation involved. At current exchange rates, that equates to $0.50-0.635/kWh. A recent study comparing levelized power costs for a variety of power technologies puts the cost of unsubsidized solar power between $0.26-.32 for the crystalline silicon photovoltaic cells that most German solar firms produce, based on an average capacity factor above 20%. After adjusting for Germany’s much poorer solar intensity, the cost of solar power might rise to as much as $0.40/kWh, still well below the level of the FIT.

His blog post goes into quite a bit more detail, and summarizes the situation as follows:

At the end of the day, German politicians appear to have spent billions of Euros of German consumers’ and businesses’ money to build a solar industry that has thrived on the installation of high-costs solar panels in one of the least suitable countries for solar power imaginable, and that may not be able to compete internationally without drastic restructuring. This initiative has also failed dismally as climate policy, purchasing less than 5% of the emissions reductions that could have been bought had this money been spent on other, more cost-effective power technologies or on energy efficiency.

I think the lesson of the German FIT-subsidized solar industry is government should create policy it order to solve a specific problem. Upon creating the policy, they should create metrics through which the success of the policy is judged. When the policy is successful, it should be fazed out. In regards to the German solar industry, you have to ask yourself what was the intent of the original policy? To spur growth within an emerging sector of the economy? To decrease Germany’s dependence on nuclear power (which it is planning on phasing out)? To decrease the country’s carbon footprint? It seems like in this case it was meant to do a whole variety of things at once, which while obviously successful at first, now seems to causing complacency and waste. This reminds me of Harvard Economist Robert Stavins’ contentious claim that you cannot take a shower and eat at the same time — in other words, one piece of policy should address one problem and not try to be all things to all people. He was arguing against the Waxman Markey Bill trying to address both climate change issues and energy issues at the same time. While I still think that there may be a way, it is interesting to draw lessons from Germany’s experience with the FIT-subsidized solar industry.

… the current emissions reductions proposals … will not be sufficient to achieve the goal of stabilizing CO2 levels between 350 and 450 ppm by the end of this century. Instead, in this scenario CO2 emissions are so high that atmospheric CO2 levels continue to rise throughout the century and reach approximately 730 ppm by 2100. While this is an improvement over the 900 ppm future of the BAU [business as usual] scenario it falls far short of the goal of stabilizing CO2 levels.

This means that even if Waxman-Markey passes the Senate, China decreases CO2 intensity by 20-percent, and the EU decreases carbon dioxide emissions by 80-percent (from 1990 baseline) by 2050, among all other current proposals, the earth will still warm much more than desired.

Does this mean we should abandon proposals to decrease carbon-dioxide emissions? Absolutely not.

What it means is that we must be realists in understanding what reducing emissions can achieve. If we are serious about addressing the effects of climate change — and it is the effects that matter, not the greenhouse gas emissions in and of themselves — we must aggressively pursue adaptation and mitigation strategies, in addition to fleshing out the feasibility of geoengineering. We must target these efforts at those people and ecosystems who are impacted the most.

Being a realist about global warming does not mean denying whether it is occurring (it most definitely is) or if it is anthropogenic (the science is sound that humans are at fault). Nor does it mean that you throw up your hands in despair and give up. Rather, being a global warming realist means you know what policy can and can’t achieve, you recognize the economic and physical constraints of energy sources, and still work towards a more sustainable future.