CREATING AN INNOVATION AGENDA TO GENERATE SUSTAINABLE GROWTH, ENERGY EFFICIENCY AND JOBS IN EUROPE

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1 CREATING AN INNOVATION AGENDA TO GENERATE SUSTAINABLE GROWTH, ENERGY EFFICIENCY AND JOBS IN EUROPE BERT COLIJN AND BART VAN ARK NEUJOBS DELIVERABLE NO. 3.9 A discussion brief focusing on: Abstract The impact of innovation in resource-efficient energy use on economic growth and productivity The relationship between energy efficiency and employment The role of government in strengthening energy efficiency The results presented and analysed in this policy brief stem from NEUJOBS Workpackage 3: Implications of innovation for organization of production and the employment structure in light of socio-ecological transition. NEUJOBS Working Documents are intended to give an indication of work being conducted within the NEUJOBS research project and to stimulate reactions from other experts in the field. Texts published in this series are ultimately destined for academic publishing. The views expressed in this paper are those of the author and do not necessarily represent any institution with which he is affiliated. See the back page for more information about the NEUJOBS project. Available for free downloading from the NEUJOBS website ( Colijn & van Ark / The Conference Board 2014

2 TABLE OF CONTENTS Introduction... 1 The impact of innovation in resource-efficient energy use on economic growth and productivity... 2 The relationship between energy efficiency and employment... 3 The role of government in strengthening energy efficiency... 4 Conclusions for policy makers... 4

3 CREATING AN INNOVATION AGENDA TO GENERATE SUSTAINABLE GROWTH, ENERGY EFFICIENCY AND JOBS IN EUROPE BERT COLIJN AND BART VAN ARK NEUJOBS DELIVERABLE NO. 3.9/JANUARY 2014 Introduction The recently agreed new European climate goals are generally considered less ambitious than its previous targets for Even though the European Commission has formulated more strict targets for CO2 emissions, the green energy targets are less ambitious than before. Issues that have no doubt played a role in the background to this have been the struggling economy, record-high unemployment and a rising gap in energy costs with major trade partners like the United States. This agreement therefore seems to send a clear message about a more balanced phase in the socio-ecological transition in which policy makers do not want to leave economic recovery and a recovery of jobs out of the equation. So far, however, there has been surprisingly little discussion about how energy and environmental policies affect Europe s progress (or lack of it) in innovation, productivity or, importantly, the future of the labour market. As Europe gradually moves towards greater resource efficiency, the implications for the economy as a whole are not clear. Aggregate productivity growth has been very slow for years, and the labour market in Europe is currently in dire straits. It is therefore important to understand how the trend towards a more durable economy will impact the labour market in times of record high unemployment. Aside from its direct effects on job growth, switching to more sustainable energy policies can also have an impact on Europe s economic growth and competitiveness in general, thereby affecting employment indirectly. As the economic and financial crisis (hopefully) abates in the near future, the Europe 2020 agenda will become more important again. The strategy for smart, inclusive and sustainable growth will regain its priority status. The role of energy is of major importance here, but one also needs to look at other growth sources, such as the role of Information and Communication Technology (ICT). The third work package in the NEUJOBS project has focused on the relationship between technological progress and innovation with regard to energy use and ICT, economic growth and employment. The research aims to provide insights into a) the relationship between those variables and b) how the variables might relate to the evolution of the socio-ecological transition in the European economy in the years ahead. On December 11, 2013, the findings from this work package were discussed with a group of stakeholders and researchers in an informal roundtable setting. The event, which was held at the offices of the Conference Board in Brussels, involved eleven 1

4 2 COLIJN & VAN ARK participants, including a Belgian trade union representative and an official from a pan- European business organization. This policy brief has benefited from the input of the stakeholders. The impact of innovation in resource-efficient energy use on economic growth and productivity Innovation has played a vital role in energy production and use over the past decades. The development of renewable energy sources and smarter use of energy inputs have both seen huge strides being made. This raises the question: How important will energy innovation become as a source of technological improvement and innovation in general? Could it become as important as ICT, for example? The latter has resulted in widespread use of technology well beyond its own industry and led to economy-wide improvements in productivity. If innovation in energy production and use could do the same, this would dramatically increase the chances of a successful socio-ecological transition. In four out of six major European economies examined by Colijn and Van Ark (2013) 1, the trend in energy productivity since 1995 has been positive. In the UK, Germany, Netherlands and Finland the ratio between economic output and energy input has increased, which means that less energy is needed for the output created. However, two other countries, Spain and Italy, have seen declines in energy productivity, which is part and parcel of a broader trend towards stalling growth in labour productivity. The overall increasing trend in energy productivity means that lower energy use does not necessarily translate in slower output growth and that the trend is towards less energy inputs per unit of output produced. When looking at the contributions from the various inputs (labour, capital, energy, materials, services) to economic growth, it appears that energy has the lowest impact on growth compared to all other factors of production. This means that a decline in energy use will have a relatively small impact on economic growth. Yet in addition to the direct impact of energy on output, the indirect impact is just as important as we find a weak positive relationship between energy use and total factor productivity (TFP) growth. This means energy efficiency gains are contributing positively to GDP growth. Moreover, materials use has a larger impact on output than energy, which is of concern when focusing on other physical resource input efficiencies besides energy. The efficiency gains from investment in energy saving technology are confirmed by Ketteni et al. (2013) 2. They find that new energy inputs have increased technical efficiency levels. However, the study also points at relatively high adjustment costs, especially for renewable energy sources. These effects will dampen the productivity gains, which is why a policy focus on reducing adjustment costs of energy innovations can be important. 1 Colijn. B. and B. van Ark, Energy Productivity and Economic Growth in Six European Countries, NEUJOBS working paper, forthcoming. 2 Ketteni, E., T. Manumeas and P. Pashardes, NEUJOBS working paper, December 2012.

5 INNOVATION AGENDA TO GENERATE SUSTAINABLE GROWTH, ENERGY EFFICIENCY & JOBS IN EUROPE 3 The positive relationship between energy use and innovation is also confirmed in a paper by Hao and Van Ark (2013) 3 which looks at the relationship between energy use and intangible investment. The study shows a negative relationship between energy intensity of production (the inverse of energy productivity) on the one hand and R&D investment, software investment and ICT tangible investment on the other. These indicators can be seen as proxies for investment in the knowledge economy, which can therefore be interpreted as having a positive impact on the process of socio-ecological transition. Taken together, the research shows that there are positive spillover effects from energy efficiency gains to GDP and productivity growth, and points towards innovation being a key link between progress in sustainability and economic growth. The relationship between energy efficiency and employment The next topic to consider is how energy use is impacting on employment growth. More specifically, what are the effects of change in energy use on the demand for labour, for example at industry level? And what shifts is it causing in skill demand? Ketteni et al. (2013) look at the relationship between energy and other inputs into the economy. At an aggregate level they find complementarity between energy use and the growth of labour, both skilled and unskilled. This means that reductions in energy use are usually met by reductions in employment, making the direct effect of declines in energy demand on employment negative. From a labour market perspective this means that the socio-ecological transition can have a negative impact on the availability of jobs in Europe, which is an observation that raises concern given the current employment situation and the sluggish job market outlook for the years ahead. Another interesting observation from the Ketteni et al. paper is that energy use is a substitute to materials. Hence when energy use decreases, material use potentially increases. Hence, when looking at creating a more resource efficient society, there are also substitution effects a shift in use occurs from one resource to the other, decreasing the aggregate resource efficiency gains. In terms of the impact of innovation of the distribution of jobs, a paper by Massari et al. (2013) 4 describes the impact of ICT on polarization in the labour market. They find that ICT has resulted in a hollowing out of jobs in the middle range of the skill spectrum. This is because of the demand for service tasks that can be found in the lower tail of the wage distribution and the demand for abstract tasks found at the higher end of the spectrum. Offshoring of middle skilled tasks is one of the reasons why the share of income of the middle class in advanced societies has declined. Ketteni et al. come to a parallel conclusion that the mismatch between skill demand and skill supply can be attributed to the adoption of ICT capital as well because it is a substitute for unskilled labour and a complement to high-skilled labour. Trends in ICT adoption are therefore 3 Hao, J.X. and B. van Ark, Intangible Investment and the Intensity of Energy Use, NEUJOBS working paper, October Massari, R., P. Naticchioni and G. Ragusa, Unconditional and Conditional Wage Polarization in Europe, NEUJOBS working paper, March 2013.

6 4 COLIJN & VAN ARK important in order to gage the trend in skill demand on a macro level in the European economy. An important question is whether the hollowing out of middle-range skill levels and middle class income can also be related to the socio-ecological transition. Colijn (2013) finds that currently most green jobs are created in specialized sectors, mostly concerned with development of techniques, buildings and products related to energy and environmental innovation. This suggests that resulting job creation could currently still be among the predominantly high-skilled and to some degree the medium-skilled and therefore only have a weak polarizing effect on the labour market. Even though it is too early to say, it seems that the effect that ICT adoption has on the labour market cannot be extrapolated to the effects from energy and environmental innovations. The role of government in strengthening energy efficiency A paper by Bukowski and Kowal (2013) 5 explores how government policy influences the way socio-ecological transition affects the economy. The authors use a dynamic stochastic general equilibrium (DSGE) model, in which they have included green tax reforms. The results are encouraging under certain conditions. An introduction of a carbon tax, for example, can be beneficial for both the economy and the environment, as private sector investment in energy efficiency projects will increase. However, positive effects of a carbon tax are dependent on the way the government uses the revenue. For example, when increased revenues are used to lower taxes elsewhere, like VAT, fiscal multipliers appear that most likely will have a positive impact on the labour market. On the other hand, the positive impact on the economy will be much lower when the increased revenues are spent on transfers. Revenues could also be spent on financing research and development or infrastructure, which would yield even higher economic returns. Interestingly, when the revenues would be reinvested into green subsidies, the economic returns would be smaller, but it would result in more incentives for reductions in carbon emissions. Clearly, government policy can have a significant effect on carbon emissions. Whether or not it will have a positive effect on economic growth depends on the way the scheme is set up. Conclusions for policy makers Taken as a whole, the research considered here concludes that the direct impact of energy reductions on employment is negative and therefore limits the recovery of the labour market. However, the spillover effects of energy efficiency gains through technology are positive for the economy and will therefore also have a positive impact on job creation. All in all, it is fair to say that in the longer term energy innovation will have a positive impact on jobs. Moreover, regardless of possible job losses in the short term, innovation will definitely result in shifts in job demand in terms of occupation 5 Bukowski and Kowal, On the endogenous directed technological change in a multi-sector DSGE model: the case of energy and emission efficiency, NEUJOBS working paper, forthcoming.

7 INNOVATION AGENDA TO GENERATE SUSTAINABLE GROWTH, ENERGY EFFICIENCY & JOBS IN EUROPE 5 and skills. The transition towards a knowledge-intensive economy is likely to be especially important for sustainable growth in the longer term. In the short run, the effects are likely to be more negative than positive on job growth. This has implications for policy making, as the current focus is likely going to be more balanced towards job creation than the more structural greening of the economy. Policy makers are facing a tough decision there, as a balance has to be struck between the short- and long-term goals that need to be obtained. Regardless of the ambiguity of the effect of more efficient energy use on job creation, it does seem clear that the socio-ecological transition will have an impact on the types of employment in Europe. It is well possible that shifts between occupations and sectors will occur, which the policy maker can play a role in in terms of facilitation of retraining and accommodating those that will be left out. Finally, research on carbon tax reforms suggests that there are ways to incentivize the socio-ecological transition, while also stimulating the economy. Increased carbon taxes could result in higher economic growth when the revenues are used to lower other taxes, resulting in fiscal multipliers that can have a positive impact on the labour market as well. The way in which the taxation is set up, especially from the revenue investment side is therefore crucial in this regard. The downside to this would be the lost competitiveness of European businesses, paying a premium on their energy while other advanced economies, mainly the United States, are already running ahead in terms of energy costs at the moment. The balance to strike between the socio-ecological and economic interests is therefore currently very difficult, making policy making as challenging as ever.

8 ABOUT NEUJOBS Creating and adapting jobs in Europe in the context of a socio-ecological transition NEUJOBS is a research project financed by the European Commission under the 7th Framework Programme. Its objective is to analyse likely future developments in the European labour market(s), in view of four major transitions that will impact employment - particularly certain sectors of the labour force and the economy - and European societies in general. What are these transitions? The first is the socioecological transition: a comprehensive change in the patterns of social organisation and culture, production and consumption that will drive humanity beyond the current industrial model towards a more sustainable future. The second is the societal transition, produced by a combination of population ageing, low fertility rates, changing family structures, urbanisation and growing female employment. The third transition concerns new territorial dynamics and the balance between agglomeration and dispersion forces. The fourth is a skills (upgrading) transition and its likely consequences for employment and (in)equality. Research Areas NEUJOBS consists of 23 work packages organised in six groups: o Group 1 provides a conceptualisation of the socio-ecological transition that constitutes the basis for the other work-packages. o Group 2 considers in detail the main drivers for change and the resulting relevant policies. Regarding the drivers we analyse the discourse on job quality, educational needs, changes in the organisation of production and in the employment structure. Regarding relevant policies, research in this group assesses the impact of changes in family composition, the effect of labour relations and the issue of financing transition in an era of budget constraints. The regional dimension is taken into account, also in relation to migration flows. o Group 3 models economic and employment development on the basis of the inputs provided in the previous work packages. o Group 4 examines possible employment trends in key sectors of the economy in the light of the transition processes: energy, health care and goods/services for the ageing population, care services, housing and transport. o Group 5 focuses on impact groups, namely those vital for employment growth in the EU: women, the elderly, immigrants and Roma. o Group 6 is composed of transversal work packages: implications NEUJOBS findings for EU policy-making, dissemination, management and coordination. For more information, visit: Project coordinator: Miroslav Beblavý (Miroslav.Beblavy@ext.ceps.eu)