Monday, July 25, 2011

Renewable energy and economic growth ... abroad: The economic lessons that U.S. lawmakers still don't understand

Ironically, two of the more important headlines earlier this month referred to events that are unlikely to happen. Various ratings agencies announced that they might lower their credit ratings for the U.S. to the level of Zambia if the government does not manage to raise the debt ceiling.  And House Republicans launched a number of unsuccessful bids to repeal parts of the 2007 Energy Independence and Security Act that require light bulbs to be more energy efficient.  The two news items seem unrelated at first.  But at second glance, they are linked in ways that may teach us a valuable lesson about economic recovery in the U.S. and around the world.

And we are in desperate need of new ideas and, if things do not turn around soon, the U.S. could permanently fall from the ranks of the world's leading economies.  Of course, the U.S. were not the only country targeted by ratings agencies this week.  Financial markets in Italy are in trouble, Greece has just managed to secure another E.U. bailout, and Ireland and Portugal have seen their credit ratings lowered to junk status by Moody's.

But at least two countries seem to be somewhat unaffected by the recent financial crisis.  One is China, which is the largest foreign holder of U.S. Treasury debt and now owns well over a trillion dollars of our country's debt.  The other is Germany which has financed much of the bailout efforts for struggling EU partners.

The two countries owe their unusual success in this difficult global economy to very different sets of political and societal circumstances.  But they have one thing in common: According to a United Nations report on renewable energy investments released this month, both Germany and China handily outspent the U.S. on renewable energies last year.  Investments on technologies, such as wind farms and solar panels, totaled over $90 billion combined in China and Germany in 2010, compared to about $29 billion in the U.S.

China's predominance is not too surprising, given the sheer size of the country.  Germany out-investing the U.S. by almost 40 percent with a population that is about a fourth of that of the U.S., however, warrants a second look.  According to the 2011 U.N. report, Germany had higher growth rates than any other country for small-scale capacity building in areas, such as solar photovoltaic devices.  In other words, the German federal government managed to promote grassroots investment in renewable energies, such as solar panels on private residences, through a mix of regulations and incentives provided to ordinary citizens.  Every new residential home that is currently being built in Germany, for example, is required by law to satisfy a certain portion of its energy needs from on-site renewable energy sources.

And the economic trickle-up effects of these policies are being felt by most citizens as Germany has created more energy independence, spurred innovation, and shielded itself from the shrinking or stagnating economies that have plagued countries around the world.  As a result, there has been widespread political buy-in among the German electorate for the government’s legislative management of these investments.  And as the U.N report concluded, policy-makers support solar and other renewable energies since they create manufacturing and installation jobs, and voters like the idea of reducing their monthly energy bill and making a profit on their very own power plant.  And that does not even take into account the environmental benefits of these measures. 

The idea of promoting innovation and economic growth through environmental regulations and incentives, of course, is not new.  In the U.S., we have heard similar proposals from commentators at various ends of the political spectrum, including columnist Tom Friedman and presidential hopeful Mitt Romney.  But given the severity of the economic situation in the U.S., it is surprising how little political consensus we have managed to achieve on similar political proposals.  So while the recent efforts to kill Bush era requirements for more energy-efficient light bulbs may just be political posturing, they are also indicative of blind spots for the economic potential of sustainable technologies in the U.S. that our economic competitors in Europe and Asia are rapidly capitalizing on.