Economic Development: The Missing Link in a National Clean Energy Policy

There was a certain irony in the U.S. decision to hold the recent G20 meeting in Pittsburgh, Penn., to show off the former steel town’s success at creating green jobs. Pittsburgh transformed itself from a polluted and declining industrial metropolis into a clean and booming green one by crafting deliberate economic development policies to support the growth of clean energy industries. The irony is that the United States—unlike most other G20 members—still needs a comprehensive national clean energy economic development policy.

Explanations for the absence of a comprehensive national economic development policy in the U.S. abound—the primacy of the doctrine of free trade, which says that the market will overcome any economic challenges and maximize opportunities; the predominance of geopolitics over economic policy as the priority of U.S. policy makers; the devout belief that if economic problems arise, the U.S. can innovate its way out of them; and maybe even the undue influence of interest groups that benefit from the absence of a national economic development policy.

But there is no doubt that the transition to a clean energy economy would be hastened by a national economic development policy that ensures the creation of a new generation of high-quality green jobs. As George Sterzinger, executive director of the Renewable Energy Policy Project (REPP), has explained in several reports on renewable energy component manufacturing, the number of green jobs that could be created in the U.S. if federal policy encouraged the domestic manufacture of renewable energy components could surpass the number of jobs that are expected in renewable energy construction, installation, operation and maintenance. In the absence of such a policy, the majority of clean energy manufacturing jobs will likely go overseas, a problem that has dogged the U.S. manufacturing sector for decades.

A national economic development policy could also help address environmental dangers like climate change by enlisting support to ensure that new clean energy policies yield positive economic impacts. As Sterzinger explains, “The success or failure in capturing [economic development and job] opportunities translates into either support or opposition for the basic energy policies.” For example, if residents of Nevada see that a large-scale solar project in their state is using workers from Texas and manufactured parts from China, and is not creating local employment, then they will be less likely to support similar projects in the future. Additionally, if an economic development policy were designed to address the financial challenges that are being faced by clean energy companies trying to bring new technologies to the market, then technological breakthroughs to reduce GHG emissions would likely increase as well, making it easier to tackle the climate change crisis.

The American Recovery and Reinvestment Act (ARRA) could be considered a step toward a national economic development policy to promote a clean energy economy. ARRA prioritized investments in programs that would grow the green economy, like smart grid investments and funding for the development of high-speed rail, thereby codifying the Obama administration’s commitment to green economic growth. It also included prevailing wage provisions to ensure that newly created jobs pay well, and a domestic content provision to help keep jobs created by ARRA programs in the United States. But ARRA was merely a short-term approach designed to lift the U.S. economy out of recession. What would it look like if the U.S. had a long-term national economic development policy to grow the clean energy economy?

Achieving National Goals and Addressing Market Failures

There are a variety of approaches one could take in developing the framework for a national economic development policy. One would be to design the policy around certain national goals. As Susan Helper, an economics professor at Case Western Reserve University, has written, “there are many precedents for setting (and reaching) national goals in U.S. history. The United States has undertaken programs for such purposes as connecting the nation (building canals, the transcontinental railway, the interstate highway system, and the Internet), military preparedness (investing in such industries as aerospace, computers and semiconductors) and exploration (putting people on the moon).”

The goals of a national clean energy economic development policy might include reducing GHG emissions and the use of fossil fuels. They might also include fostering a strong manufacturing base, because, as Helper writes, “manufacturers can make the equipment necessary for producing energy from renewable sources such as wind, solar and biomass. Second, they can provide equipment and expertise to increase the efficiency with which we produce and consume manufactured goods.”

Another approach to designing a national economic development policy would be to study the known market failures associated with moving toward a clean energy economy and to develop policies that help businesses, investors and workers remedy these failures. Bob Baugh, executive director of the AFL-CIO’s Industrial Union Council, would like to see a policy that addresses the U.S. trade deficit, which was over $700 billion in 2007. Leo Hindery, chair of the Smart Globalization Initiative at the New America Foundation, wants an economic policy that addresses income inequality and the high rate of unemployment. Ellen Pao, a partner at the venture capital firm Kleiner Perkins Caufield & Byers, wants a policy that helps clean-tech companies overcome the financing challenges they face bringing new technologies to commercial scale:

“A lot of what clean energy companies are doing is replacing existing sources of energy. If you’re trying to compete with gasoline through biofuels or electricity with solar and wind, you need to get to a scale to compete with these commodity products. To do that generally you need to produce at a very high volume to get the economies of scale required to compete. That often means building a very big facility – an energy generation plant, a huge field of solar panels, a large wind farm. And that generally takes hundreds of millions of dollars, and it’s often difficult for new technologies to get that level of funding where the technology has not necessarily been proven to work at these large scales.”

Other market failures that a national economic development policy might address include the over-valuation of the dollar, the inability of the U.S. to compete in global clean energy markets, and the variations in energy policies from city to city and state to state. However, the most oft-raised market failure that could be addressed by a national economic policy is the exodus of U.S. manufacturing jobs to other countries.

Clyde Prestowitz, president of the Economic Strategy Institute and a former Reagan administration trade and investment counselor, described the need for a U.S. policy that ensures a domestic manufacturing sector:

“It is mathematically impossible to come anywhere near balancing the trade deficit without manufacturing. Our exports of services are not big enough and will not be able to become big enough to roughly balance imports; therefore it’s got to be done with manufacturing. Beyond that, manufacturing is the sector of the economy that has the highest productivity gain, that supports most of the research and development, and in which the biggest economies of scale are operative. Those are all essential elements of a healthy, high-value, growing, high-wage economy.”

Brian Sager, co-founder of Nanosolar, a solar power technology company, explained the need for an economic development policy that promotes domestic manufacturing as inextricably linked to the potential for clean energy innovations:

“If we don’t have clean energy manufacturing in the U.S., we’ll lose our competitive advantage in the long term. Building a solar plant can’t be outsourced—you have to build it where the power is needed. And when you have your manufacturing engineers near your R&D engineers, that’s the key to innovation. Physical proximity is extremely important. The innovation cycle is slowed down when these people are thousands of miles away from each other.”

An economic development policy aimed at the manufacturing sector is often called an industrial policy.

National Clean Energy Economic Development Policy Proposals

Academics, businesspeople, labor leaders, investors and economic development professionals throughout the United States have published a diversity of proposals (see reading list below) that might be included in a national clean energy economic development policy.

Most proposals for a national clean energy economic development policy start with the need for federal policies that increase demand for clean energy. These might include putting a price on carbon (through a carbon tax or “cap and trade” program), adopting a national renewable energy standard, implementing national building and appliance energy efficiency standards, or encouraging small-scale renewable energy projects through a national feed-in tariff.

George Sterzinger of REPP has argued that a cap on carbon emissions would be a necessary part of this national economic development policy, but it would not be sufficient. “A critical challenge in any effort to stabilize carbon emissions must be to develop as many carbon-free (or reduced carbon) technologies as possible through a carefully managed portfolio of incentives that extend from research and commercialization to widespread commercial deployment,” Sterzinger said. Such incentives are described in more detail below.

National energy policies should not only send a strong signal that the U.S. economy is set to embrace cleaner technologies, they should also be long term. Sager of Nanosolar believes current U.S. clean energy policies have created a difficult environment for businesses: “One thing we’ve been lacking in the U.S. is stable policy. In Germany, feed-in tariffs have been very stable. In the U.S. there is a lack of harmony from year to year, so there’s inherently a higher level of risk. The warranty for a solar panel is 25 years; that’s the kind of time frame we’re talking about. I understand there are practical limitations, but we need policies that are closer to (two or more) decades or longer for people who are doing calculations about the value of a particular project.”

Many experts believe the federal government should offer incentives to persuade clean energy companies to set up facilities in the United States, a practice that is commonplace in other parts of the world. “Many countries offer financial investment incentives,” said Prestowitz of the Economic Strategy Institute. “For example, Intel recently announced it’s going to put a big manufacturing facility in China. Part of the deal in China is that the Chinese are going to actually put up, I think, $2 or $3 billion of the $6 billion needed and will provide a tax holiday for a number of years. Everybody has these investment incentives, but in the U.S. we don’t.”

Prestowitz believes that the United States cannot afford to sit on the sidelines of this game: “The issue of investment incentives is very important. I think we should try to negotiate some international discipline on investment subsidies (as we’ve already done on trade subsidies). I also think we should have a war chest and use our war chest to match the incentives that are being offered by others to move their production facilities elsewhere in the world.”

These investments could come in a variety of forms. They would not only induce companies to establish facilities in the U.S.; they might also encourage companies that are not involved in clean energy projects to begin clean energy ventures, and help clean energy companies overcome financing challenges. The incentives might include production tax credits, investment tax credits, credit guarantees, and clean energy bonds.

Sager argues that an important federal investment incentive would be a federally guaranteed loan for clean energy projects where new technology is being used. Helper suggests a “tooling tax credit,” which would offset part of the cost of the tooling and equipment investment required to convert an existing U.S. auto facility to the production of hybrid and advanced diesel vehicles and components. A recent paper by the Center for American Progress recommended that these investments be directed by a “green bank,” a publicly funded but independent financial institution focused on clean-energy financing.

To qualify for any of these investment incentives, a company could be required to pay a certain level of wages, create a certain number of jobs, or require that a percentage of the components that go into its products be produced locally or domestically.

A local content requirement is often described as essential to a clean energy economic development policy designed to support a domestic clean energy manufacturing industry. Without a local content requirement—also called a “Buy American” policy—most clean energy manufacturing would likely locate overseas.

“First and foremost, we actually have to put a serious buy American/domestic content policy in place,” said Bob Baugh of the AFL-CIO. It matters where you make things. In the case of wind turbines and solar, 70 to 80 percent of the cost itself is in the product, not the installation. That means you have to have a strategy and a policy that says you’ll do it here.”

Leo Hindery of the New America Foundation also emphasizes the need for a buy American policy, but argues that it could begin with federal government purchases: “We need a buy American policy that mirrors China’s,” Hindery said. “Of the G20 nations, 19 of them have a formal buy domestic program for their federal governments. We uniquely do not. We have a GDP in this country of about $14 billion. Twenty percent of that comes from federal purchases. We should simply say that the federal government will buy domestically produced goods and services if they’re available. If they’re not available, then you’re allowed to buy them overseas.”

Other policy recommendations to promote clean energy domestic manufacturing include programs to help U.S. manufacturers become more productive—and thus competitive, and programs to help reconcile supply chain challenges. Helper of Case Western Reserve University argues that Manufacturing Extension Partnership (MEP) centers should be given additional funds to help small and medium-sized manufacturers become more productive. She cites a 1999 study by Roland Jarmin showing that productivity at firms that received assistance from an MEP center rose in the range of 3.4 to 16 percent more between 1987 and 1992 compared to productivity at firms that received no assistance.

Helper also proposes a pilot program of three “industry councils,” organized around supply chains in wind energy, solar power and fuel-efficient autos. The councils would be similar in structure and purpose to a consortium that formed in the 1980s to help the U.S. semiconductor industry regain global competitiveness. The consortium, called Sematech, received $500 million from the Reagan administration.

Helper envisions the tasks of the supply chain industry councils as identifying obstacles to innovation and productivity growth in their industry, proposing ways to remove them, and creating social networks that allow firms to learn from each other. The councils would also coordinate roadmaps for developing new production technology, agreements on standards, and discussions on areas where problem-solving efforts should be focused. Council members would include representatives from government, academia, unions, bankers, and community groups, and the members and beneficiaries could be required to commit to having productivity and wages at least 130 percent of their industry average within three years.

“We have found that firms can benefit greatly from tight linkages to other local firms and surrounding institutions,” Helper said. “However, such linkages do not typically just ‘happen.’ They need to be actively encouraged by public policy.”

Another suggested approach to growing clean energy manufacturing is to focus on public transit. For example, ARRA included $8 billion for high-speed rail corridors and intercity passenger rail service, but no policy exists to encourage – much less ensure – that any of the rail cars associated with an expansion of the rail industry will be manufactured in the United States. In an interview with the Infrastructurist website, former Massachusetts Governor Michael Dukakis suggested giving U.S. automakers a $5 billion contract to manufacture transit equipment. He said, “If we’re going to commit ourselves to this kind of spending on rail, it seems to me that one of the things that the administration should be doing is taking a serious look at how you revive train and transit manufacturing. Maybe you do it in joint ventures with foreign firms. But why shouldn’t we be getting a chunk of these jobs if we’re going to be spending this money?”

In a recent article in The American Prospect, Jonathan Michael Feldman argued that with the right policies in place, public transit could help reindustrialize America. “A comprehensive policy to encourage domestic production of mass-transit goods would include not only increasing the share of local content, but also increasing public investment in mass-transit research and development, supporting rail infrastructure, and encouraging a research-and-production consortium,” Feldman wrote.

Some experts who are skeptical that a national economic development policy promoting the clean energy economy is likely to be developed anytime soon still have an abundance of ideas about how small amounts of federal government intervention could help bring regional economic development policies to fruition. Dan Luria of the Michigan Manufacturing Technology Center is one of the skeptics: “An alternative [to a national economic development policy] would be for the federal government to make it possible for some states to work together. For example, the federal government could let seven or eight Great Lakes states create a high-speed rail system with a hub in Chicago. Even if it weren’t national in scope, the federal government would run interference. Then those states could have domestic or regional content provisions. A lot of regions want to do the same stuff, so the federal government is going to have to help with this—not just back multiple regions doing the same thing.”

State collaboration would be an improvement over the current situation, in which states compete against each other to attract clean energy companies.

Local Examples Abound, But the Next Step is a Comprehensive National Policy

There are examples of small-scale clean energy economic development policies being implemented in the United States, including one that is ensuring that at least a few U.S. companies are producing the lithium-ion batteries that will power the electric cars of the future. This policy came into place when labor unions, businesses and policy makers realized that all lithium-ion battery production was taking place in Japan, China and Korea, and that no large-volume lithium-ion battery manufacturers were in the United States.

To make sure the U.S. would not be dependent on other countries for this critical clean automobile technology, the United Auto Workers worked with U.S. Sen. Debbie Stabenow, D-Mich., to authorize federal loan guarantees for the construction of U.S. manufacturing facilities to produce advanced vehicle batteries and battery systems. Two years later, $2 billion for this program was included in ARRA, and grants have been dispersed to companies in Michigan, Indiana, Florida and elsewhere. These grants are expected to create 19,000 high-paying jobs in Michigan alone. Meanwhile, U.S. battery and advanced materials companies formed the National Alliance for Advanced Transportation Battery Cell Manufacture to help make the U.S. the worldwide leader in transportation power.

As Congress debates comprehensive clean energy and climate legislation, and the issue of green jobs becomes increasingly important, perhaps it’s time for a comprehensive U.S. economic development policy to promote the clean energy economy. From lithium-ion battery producers to wind turbine component manufacturers, the industries of the clean energy future need clear direction—and support—from the U.S. government if they are going to be able to compete and thrive in a low-carbon global economy.

Further Reading

Brodd, Ralph J. Factors Affecting U.S. Production Decisions: Why Are There No Volume Lithium-Ion Battery Manufacturers in the United States. National Institute of Standards and Technology. December 2006.

Davis, Sam. U.S. Consortium to Tackle Lithium-Ion Battery Development for Transportation. Power Electronics Technology. December 22, 2008.

Engardio, Pete. Can the Future Be Built in America? BusinessWeek. September 10, 2009.

Feldman, Jonathan Michael. From Mass Transit to New Manufacturing. The American Prospect. April 2009.

Helper, Susan. Creating a Wind Energy Supply Chain: Some Fast Thoughts. June 8, 2009.

Helper, Susan. Renewing U.S. Manufacturing: Promoting a High-Road Strategy. EPI Briefing Paper. February 13, 2008.

Helper, Susan, Josh Whitford, Gerald A. McDermott, Gary Herrigel, and Erica Fuchs. Establishing Innovation Councils for Advanced Manufacturing (Draft for Discussion). August 20, 2009.

Hindery, Leo Jr., Leo W. Gerard and Donald Riegle. ‘Buy American’ – why not? Los Angeles Times. September 1, 2009.

Jarmin, Roland S. Evaluating the impact of manufacturing extension on productivity growth. Journal of Policy Analysis and Management. Vol. 18, Issue 1, pp. 99-119. 1999.

Kuttner, Robert. Will Barack Obama Commit Industrial Policy? The Huffington Post. December 21, 2008.

McCormack, Richard (editor). Manufacturing A Better Future. Alliance for American Manufacturing. 2009.

Nidumolu, Ram, C.K. Prahalad, and M.R. Rangaswami. Why Sustainability Is Now the Key Driver of Innovation. Harvard Business Review. September 2009.

Podesta, John D., Kate Gordon, Bracken Hendricks, and Benjamin Goldstein. The Clean-Energy Investment Agenda: A Comprehensive Approach to Building the Low-Carbon Economy. Center for American Progress. September 2009.

Reed, Jebediah. Talking Trains with Michael Dukakis. The Infrastructurist. May 21, 2009.

Sterzinger, George. Energizing Prosperity: Renewable Energy and Re-Industrialization. EPI Discussion Paper. March 3, 2008.

Trbovich, Marco. Obama’s Industrial Challenge. The Huffington Post. December 4, 2008.