Climate change as a burning issue has an obsessive presence in global roundtable talks, where developing countries are strongly advised to bid adieu to fossil fuel and embrace green energy, ASAP. Besides conveniently overlooking historical emissions and current ambitions, such prescriptions carry sizeable risks of unintended consequences, such as far-reaching disruptions in labour markets and communities.
Climate change as a burning issue has an obsessive presence in global roundtable talks, where developing countries are strongly advised to bid adieu to fossil fuel and embrace green energy, ASAP. Besides conveniently overlooking historical emissions and current ambitions, such prescriptions carry sizeable risks of unintended consequences, such as far-reaching disruptions in labour markets and communities.
In the textbook world of Homo economicus, job losses in the fossil fuel sector due to an energy transition would be compensated by job creation in green energy, realized through frictionless reallocation of capital and labour. While it is often argued that the overall impact on employment would be positive, what needs discussion is the time it would take for labour markets to re-equilibrate to the pre-transition employment rate, if they do at all. The heterogeneity of the labour force employed in old and new energy sectors is also ignored. As the green transition bears a stark resemblance to the dynamics of trade liberalization, research on the experiences of Brazil and the US is pertinent.
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In the textbook world of Homo economicus, job losses in the fossil fuel sector due to an energy transition would be compensated by job creation in green energy, realized through frictionless reallocation of capital and labour. While it is often argued that the overall impact on employment would be positive, what needs discussion is the time it would take for labour markets to re-equilibrate to the pre-transition employment rate, if they do at all. The heterogeneity of the labour force employed in old and new energy sectors is also ignored. As the green transition bears a stark resemblance to the dynamics of trade liberalization, research on the experiences of Brazil and the US is pertinent.
Findings from the extensive work of Rafael Dix-Carneiro on Brazil’s experience following tariff liberalization in the 1980s are noteworthy. According to his research, long-term impacts on regions specialized in newly-liberalized products have been serious: a prolonged wage depression, decline in formal employment and a rise in informal jobs. This is attributed to slow and incomplete inter-regional and -sectoral mobility of labour and capital, significantly downsizing the welfare gains of trade.
Workers encounter substantial costs of switching sectors, as sector-specific experience is not fully transferable, and these costs were found higher for female, less educated and older workers.
Along similar lines, the work of Pierce, Schott and Acemoglu highlights how manufacturing employment in the US underwent a sharp decline after it conferred permanent normal trade relations (PNTR) status on China in 2000, reducing tariff-related uncertainties for Chinese exports to the US. For many years, many displaced workers could neither find new jobs in other sectors nor migrate elsewhere. The labour market disruption had social outcomes, such as an alarming rise in “deaths of despair" due to drug overdose, suicide and liver diseases. Frictions of the labour market have proved to be real and substantial.
Take the case of the decline in coal mining in the US over four decades. Recent research by Gordon Hanson of Harvard Kennedy School hints at what could be the perils of a sudden green transition. The US encountered two coal shocks, one in 1980 when oil prices fell from their 1970s highs and caused a significant reduction in coal demand, and another in 2010s when natural gas and renewable energy increasingly supplanted coal in generating electricity. Consequently, a contraction in coal mining led to declines in regional employment and wage rates persisting for more than 20 years as local labour markets recuperated at a glacial speed. As the younger and more educated lot out-migrated, a regional demographic shift occurred towards a disproportionately old, sick and poor population dependent on government transfers.
In a paper published by the Peterson Institute in August 2021, Jean Pisani-Ferry warns of labour market frictions in Europe in the transition to carbon neutrality. Presciently, he observes that there is no guarantee that the transition will benefit economic growth.
The experiences of the US and Brazil demonstrate how policies akin to a green transition had strong and persistent spillover effects. In that vein, it becomes imperative to pre-empt the all-round ramifications of a green transition to avert major disruptions to labour markets and communities. Compared to the above examples, a full-fledged green transition would induce even bigger shocks, springing from rapidly evolving technology, geopolitics, markets and societies. The findings above must not be viewed as a case against a green transition (which would be throwing the baby out with the bathwater), but rather one for a well-thought-through strategy.
While the urgency of climate reforms cannot be overstated, details demand respect. Back home, India’s long-term goal of net zero by 2070 is being met through a pragmatically-paced shift to renewables. For us, the right scheme of action lies in prioritizing economic growth and sustaining the adoption of environment-conscious lifestyles. Here, growth will not only help build capabilities to deal with the structural changes associated with a green transition, but also ensure the availability of finance, technology, raw material, human capital, etc. Building a strong social security system and focusing on human capital development, in terms of labour skilling that eases inter-sector migration, would also help address the labour-market consequences of a green transition.
The brouhaha around a coal phase-out notwithstanding, an earnest effort in favour of a green transition warrants a serious engagement with real-world challenges. If these are unaddressed, they could render the whole exercise counter-productive.
V. Anantha Nageswaran, Deeksha Supyaal Bisht & Ritika Bansal are, respectively, the chief economic advisor to the Government of India, and Indian Economic Service officers in the ministry of finance.
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