Brainstorm on Politics and Economics of the EU

After the beginning of the Great Recession in 2008, the hope for new international agreements on fighting climate change has eclipsed. Even the Kyoto protocol extension at the end of 2012 lacks of significant binding constraints on Greenhouse Gases (GHGs) reduction applied by several leading economic players as US and China. Two questions keep urging an answer by European politicians: how much competitiveness are we willing to give away under this circumstance? Shall we give up on environmental subsidies to fix the current public debt issues?

The answers to these questions have a common point: it depends on how environmental policy affects growth. An occasional observer is likely to be puzzled by the variety of stances around. On the one hand, industry lobbyists claim that any more stringent environmental legislation would thwart the positive effects of the upcoming economic recovery. If people are unemployed and underpaid, who can afford the expensive new environmental friendly products? Why shall we sacrifice economic performance while the rest of the world is doing nothing? On the other hand, environmentalists argue that we need to push forward environmental regulation and public environmental investment to catch the fruits of green jobs, the modern way of fostering job creation.

From an (macro-)economic perspective, the green jobs story is quite complicated and it is absolutely not convincing. The problem is that the effect of new green technologies and regulation on employment is not direct and it is not easy to analyse. A new energy-efficient production technology is green but it is also a technology and, as such, the adoption of this piece of innovation could force the firm to lay-off some workers (the technological unemployment ghost is back!). The green technology adopter is now more efficient and costs (energy costs) are lower, so it is more competitive. No, wait a minute. It is true only if the technology reduces material or energy use, not if it is an end-of-pipe measure to prevent pollutants to be released into the air. If all firms are obliged to install a pollution filter, the firm cannot even show-off about how environmental-friendly it is. Especially in the case of pollution regulation, new technologies are needed and someone should produce them. Ah, finally a good news. Manufacturers of machinery, equipment and vehicles (also construction materials) would boost innovation to provide brand new green products to make all other firms and households more environmental friendly. A great business, firms could expand their production and employment in these sectors. At this point I have no idea whether the negative points listed so far offset the positive ones or not. Anyway, the story is not over. We live in the era of globalisation, not necessarily these technologies are manufactured by domestic firms and finally we should not forget the extra-costs imposed on firms have to pass the test of the international competition.

What a mess. Shall we rely on green jobs to have a bright future? Two final considerations:

  • Beware what Greenpeace or representatives of firms say, only trust scientific studies. The literature sprung from the Porter’s Hypothesis has mixed results and they are limited to the firm level, not looking at what happens at the aggregate. This is an interesting empirical paper which analyses the effect of the US Clean Air act on millions of firms for several decades (still, it omits the aggregate implications). Additionally, I recommend this study by the OECD to dig a bit into the complexity of the topic.
  • We do not want environmental regulation to create employment, we want it to reduce the pressure on the environment and hopefully prevent future catastrophes. Let’s not forget it.


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