Minimum wage increases are a hot-button issue in many states. As such, minimum wage increases are politically challenging to implement. To avoid the knock-down/drag-out fights associated with minimum wage increase, several states—including Oregon and Washington—have introduced minimum wage indexing. With indexing, the minimum wage increases automatically each year based on some measure of inflation. As a result, Oregon and Washington have some of the highest minimum wage rates in the country.

Now that Oregon’s economy is in a tailspin, with record unemployment and business closures, the legislature is considering HB 3053 that would halt increases in the minimum wage during an economic downturn.

A study by Eric Fruits for the Employment Policies Institute measures the effect of minimum wage indexing on employment and wages in Oregon and Washington.  The study finds that minimum wage indexing imposes employment costs with no measurable income benefits. In particular:

• Higher minimum wages in Oregon and Washington are associated with reduced employment.
• Younger members of the labor force—age 25 and younger—are more likely to be adversely affected by increases in the minimum wage and minimum wage indexing. The figure above shows that Oregon and Washington would have significantly lower unemployment if the state minimum wage rates were equal to the lower Federal rate.
• Higher minimum wages have no statistically significant impact on wages of Oregon and Washington hourly wage earners.

If passed, Oregon SB 80 would establish a greenhouse gas cap-and-trade scheme for the State of Oregon. The Oregon Senate Committee on Environment and Natural Resources will have a public hearing on SB 80 on Thursday April 9, 2009 at 3:00 P.M. in Hearing Room C.

The following is the written testimony submitted by Eric Fruits regarding the costs of Oregon SB 80.

In September 2008, I co-authored a comprehensive analysis of the economic and fiscal impacts on Oregon of meeting the ambitious greenhouse gas reduction goals outlined in the proposed amendments to SB 80. In February 2009, I submitted testimony on the economic and fiscal impacts associated with the cap-and-trade scheme introduced in SB 80. I have attached my past testimony and the report I co-authored.

This letter summarizes my earlier testimony and presents new evidence of the substantial costs associated with trying to meet Oregon’s aggressive greenhouse gas emissions reduction goals.

• Oregon’s economic output would be $48.3 billion lower; 90,000 fewer people would be employed; and state and local government revenues would be $4.4 billion lower (Pozdena & Fruits, 2008).
• Subsequent independent research supports our findings: a 1 percent decline in carbon dioxide emissions is associated with a 0.74 percent decline in GDP (Annicchiarico, et al., 2009).
• Recent research calculates that for every “green” job created via subsidies and tax breaks, 2.2 jobs elsewhere in the economy are destroyed (Álvarez, 2009).

There is no avoiding the substantial costs of SB 80. Households, businesses, and the public sector will have steeper power bills and will pay more to engage in nearly every activity.

Today, businesses are shrinking, closing shop, or exiting the state. Oregon now has its highest unemployment in 25 years and one of the worst unemployment rates in the country. Higher energy prices under SB 80 will worsen an already dire economic situation.

It is now evident that hopes of creating new “green” jobs funded with tax credits and subsidies paid by existing Oregon businesses and consumers is a losing proposition where more jobs are lost than created. Projections of increased employment under SB 80 are built on unrealistic assumptions and flawed models that produce counterintuitive results that have been refuted by real world observations.

Sources cited:

Álvarez, G. C. (2009). Study of the effects on employment of public aid to renewable energy sources. King Juan Carlos University, Madrid, Spain.

Annicchiarico, B., Bennato, A. R., and Costa, A. (2009). Economic growth and carbon dioxide emissions in Italy, 1861-2003. MPRA Paper No. 12817.

Fruits, E. and Pozdena, R. J. (2008). Oregon Greenhouse Gas Reduction Policies: The Economic and Fiscal Impact Challenges. Cascade Policy Institute. Portland, OR.

USA Today ran a front page story on the the impacts of early stimulus projects. While the story focused on the businesses and families that hope to benefit from the stimulus spending, there was one dissenting skeptic:

Eric Fruits of Economics International in Portland, Ore., warns that stimulus spending may not revive the economy in the long run. “Borrowed money has to be repaid. A job today may come at the cost of someone not having a job in two or three years,” the economist says.

According to a report by consulting firm McKinsey & Co., the world can keep global warming in check if nations spend trillions of dollars on energy efficiency, clean power and forestry projects over the next 20+ years.

In addition to typical annual capital investments, the report concludes that beginning in 2011, additional investments of $475 billion a year would be required to keep global temperatures 2 degrees Celsius below pre-Industrial temperatures. By 2026, the cost would rise to $1.2 trillion a year.

The net present value today of the additional expenditures between 2011 and 2030 would be approximately $7.3 trillion. That is bigger than China’s economy today and equivalent to the economies of Japan and India combined.

Citation:
Dinkel, J., Enkvist, P.-A., Nauclér, T., and Pestiaux, J. (2009). Pathways to a low-carbon economy: Version 2 of the global greenhouse gas abatement cost curve. McKinsey & Company.

Research by Eric Fruits and Randall Pozdena found that economic output, energy use, and carbon dioxide emissions have been tightly cointegrated historically. They calculated that a 1 percent decline in carbon dioxide emissions would be associated with a 0.71 percent decline in gross domestic product (GDP), a widely used measure of national income.

A recent working paper using a time series covering more than 140 years found almost exactly the same relationship. The authors conclude that changes in carbon dioxide emissions and changes in GDP are cointegrated. They calculate that over the long run, a 1 percent decline in carbon dioxide emissions would be associated with a 0.74 percent decline in GDP.

Citation:
Annicchiarico, B., Bennato, A. R., and Costa, A. (2009). Economic growth and carbon dioxide emissions in Italy, 1861-2003. MPRA Paper No. 12817.

Eric Fruits has an op-ed in the Oregonian on the economic and fiscal costs associated with Oregon’s proposed policies to halt climate change.

Oregon is a leader in climate change legislation. The state has adopted one of the most ambitious greenhouse gas emissions reduction goals in the world. Although Oregon is big in leadership status, it is small in size. Even if all Oregonians dropped their energy consumption to zero–or doubled it–the Earth’s climate would never know it. Thus, policies to substantially reduce greenhouse gas emissions in the state run the risk of being virtually “all pain, no gain.”

There is no getting around it: both carbon taxes and cap-and-trade programs raise energy prices. If either program is put into effect, households, businesses, and the public sector will have steeper power bills and will pay more to drive their vehicles. Meeting the goals would mean Oregon’s economic growth would be cut almost in half. In turn, state and local governments would collect $4.4 billion less in revenues.

Numerous businesses are shrinking, closing shop, or exiting the state, leaving Oregon with almost double digit unemployment. Higher energy prices under a carbon tax or cap-and-trade program will only make things worse.

Eric Fruits presented at the first Cascade Policy Institute Legislative Leadership Forum for the 2009 legislative session.  The topic was Oregon’s Greenhouse Gas Reduction Policies: Projected Economic and Fiscal Impacts (PDF). Some highlights from the presentation:

• Oregon has one of the world’s most ambitious greenhouse gas reduction goals: A 40 percent reduction per person by 2020.
• There is a strong relationship between economic activity and carbon emissions: A 1% decrease in carbon emissions is associated with 0.71% lower GDP.
• Technological advances cannot fully mitigate the costs of a 40 percent reduction in GHG emissions. Replacing capital is expensive and take years.  Households and firms would have to face years of significantly higher energy prices before investments in more energy efficient technologies replace existing technologies.
• Meeting Oregon’s greenhouse gas reduction goals will slow the state’s economic growth:
  • Output would be $48.3 billion lower because of the State’s GHG emissions targets,
  • 90,000 fewer people would be employed,
  • State and local government revenues would be $4.4 billion lower.

Citation:

Fruits, E. and Pozdena, R. J. (2008). Oregon Greenhouse Gas Reduction Policies: The Economic and Fiscal Impact Challenges. Cascade Policy Institute.

In the upcoming 2009 session, the Oregon Legislature will consider plans to meet the state’s mandated greenhouse gas reduction goals. The goals were enacted in hopes that reducing the state’s greenhouse gas emissions would help halt global warming. Participation in the Western Climate Initiative’s proposed cap-and-trade program will be a cornerstone of the policies in front of the Legislature.

The Portland Tribune reports that Oregon’s business interests are recognizes that the state’s ambitious emissions goals will come at an economic cost. NW Natural president and Oregon Global Warming Commission member, Gregg Kantor, describes his concerns.

We need to protect workers of businesses in Oregon. You don’t want to create another reason to ship jobs offshore.

Mr. Kantor’s concerns are buttressed by a white paper written by Eric Fruits and Randall Pozdena.

The paper notes that the notion of capping emissions and providing market signals through a cap-and-trade scheme is not conceptually unreasonable or without precedent. However, the cap-and-trade mechanism has a history of implementation difficulties. The difficulties are due to the vulnerability of the caps and permit allocations to political influence and the tendency of permit values to be highly volatile. In the Oregon context, in which the portfolio of politically-acceptable, alternative energy sources is constrained, and the non-carbon technology options undeveloped, these problems may be aggravated.  The studies key findings include the following.

1. Economic output, energy use and carbon dioxide emissions have been tightly cointegrated historically, and energy strongly “causes” economic vitality. This is true both in studies over time and across countries. Of the OECD countries that display lower than average energy use relative to their economies, all have embraced nuclear power–a source that historically has been “off-the-table” in Oregon.
2. The cost to the Oregon economy of meeting the state’s emissions goals are large. Oregon’s economic growth to 2020 would be approximately cut in half, and gross output per capita would be reduced by 20 percent relative to the baseline case.
3. State and local revenues would be reduced by about 13 percent, relative to the baseline case.
4. Energy consumption and technology choices are strongly embedded in long-lived capital. This raises
   theoretical and practical obstacles to the economic development and adoption of low-carbon technology. In addition, because of the existing carbon intensity of the production of capital goods, too-rapid turnover of existing capital may actually accelerate atmospheric carbon accumulation.

Citation:

Fruits, E. and Pozdena, R. J. (2008). Oregon Greenhouse Gas Reduction Policies: The Economic and Fiscal Impact Challenges. Cascade Policy Institute.

Eric Fruits recently was appointed to serve on a Fiscal Advisory Committee convened by Oregon’s Department of Environmental Quality.  The Committee was charged with evaluating the economic impacts of DEQ’s proposal for requiring emission controls at the PGE Boardman coal-fired power plant.  DEQ’s proposal is in response to the federal requirement for Best Available Retrofit Technology (BART), which is a mandatory requirement under the Regional Haze Rule.

Among the options considered, DEQ’s proposed action would provide the largest environmental benefit. However, DEQ’s proposed action would also produce the large electricity rate increases.

A recent LNG terminal building boom has, in turn, produced a natural gas pipeline building boom.  Terminals bring in shipments of liquefied natural gas (LNG).  Through a regasification process, the LNG is changed back into gaseous natural gas.  Pipelines transmit the natural gas (in gas, not liquid, form) from terminals to end users and to other pipelines.

In some places, property owners and other stakeholders have expressed concern that a proposed pipeline would reduce the values of nearby properties.  Pipeline operators note that natural gas pipelines typically do not change the general use of the land. Certain building structures and landscaping, however, cannot be built on the pipeline right of way.  Some argue that a pipeline introduces a safety or environment risk, and that such risks reduce property values.  On the other hand, a pipeline can provide a positive amenity, such as a greenbelt or buffer that may increase property values.

Eric Fruits recently completed an econometric study of the relationship between residential property values and proximity to a natural gas pipeline.  The analysis indicates that neither the announcement of a proposed pipeline nor the completion of the pipeline had any measurable effect on property values.