A Just Transition for U.S. Fossil Fuel Industry Workers

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From The American Prospect:

by Robert Pollin & Brian Callaci

According to the U.S. National Oceanic and Atmospheric Administration, 2015 was the globe’s warmest year since at least 1880, when such figures were first recorded. 2014 was the next warmest, and the hottest five years also include 2013, 2010, and 2005. Can it be any more obvious that we absolutely must stop playing Russian roulette with the global climate?

The two most important things we need to do to stabilize the climate are straightforward. First, the world must dramatically cut its reliance on oil, coal, and natural gas in energy production. This is because carbon dioxide (CO2) emissions generated through burning fossil fuels, along with methane emissions released during fossil fuel extraction processes, are responsible for about 75 percent of all greenhouse gas emissions causing climate change. Second, as the alternative to fossil fuel consumption, again on a global scale, we must massively expand investments in energy efficiency and clean renewable energy sources—solar, wind, geothermal, low-emissions bioenergy, and small-scale hydropower.

Both parts of this climate stabilization program will produce large-scale impacts on the employment opportunities for working people as well as on the communities in which they live. The investments in efficiency and clean renewables will generate millions of new jobs. But workers and communities whose livelihoods depend on the fossil fuel industry will unavoidably lose out in the clean energy transition. Unless strong policies are advanced to support these workers, they will face layoffs, falling incomes, and declining public-sector budgets to support schools, health clinics, and public safety. This in turn will increase political resistance to any effective climate stabilization program.

It follows that the global climate stabilization project must unequivocally commit to providing generous transitional support for workers and communities tied to the fossil fuel industry. The late U.S. labor leader and environmental visionary Tony Mazzocchi pioneered thinking on what is now termed a “Just Transition” for these workers and communities. As Mazzocchi wrote as early as 1993, “Paying people to make the transition from one kind of economy to another is not welfare. Those who work with toxic materials on a daily basis … in order to provide the world with the energy and the materials it needs deserve a helping hand to make a new start in life.”

In this article, we propose a Just Transition framework for U.S. workers. Our rough high-end estimate for such a program is a relatively modest $600 million per year. This is about 1 percent of the annual level of public investment that will be needed to advance a successful overall U.S. climate stabilization program. As we show, this level of funding would pay for income and pension-fund support for workers facing retrenchments as well as effective transition programs for what are now fossil fuel–dependent communities.

One reason that the costs for this program can be kept relatively modest is precisely because the fossil fuel industry cutbacks will be occurring in conjunction with the growth of the clean energy industry. This is critical because, among other factors, within the U.S. economy, the number of jobs generated by clean energy investments will be much larger than the jobs that will be lost through fossil fuel industry retrenchments. Specifically, spending $1 million on clean energy investments generates about 17 jobs across all sectors of the U.S. economy, while spending the same $1 million on maintaining the existing fossil fuel infrastructure produces only about five jobs. Clean energy investments will produce more jobs for electricians, roofers, steelworkers, machinists, engineers, truck drivers, research scientists, lawyers, accountants, and administrative assistants. One major policy challenge is to locate good jobs in areas that will be hard hit by the decline of fossil fuel businesses.

Developing a viable Just Transition program is a matter of simple justice, as Mazzocchi emphasized. But it is equally a matter of strategic politics. Without such adjustment assistance, the workers and communities facing retrenchment will, predictably and understandably, fight to defend their livelihoods. This, in turn, will create unacceptable delays in proceeding with effective climate stabilization policies. As one stark case in point, in mid-May, the AFL-CIO Building Trades department sent a blistering letter to the federation’s president, Richard Trumka, condemning the AFL-CIO’s newly announced get-out-the-vote alliance with environmental funder and activist Tom Steyer. The broader rift in the U.S. between several major unions and environmentalists over projects that provide union jobs, like the Keystone Pipeline, demonstrates clearly what is at stake.

How Large a Contraction for U.S. Fossil Fuels?

The Intergovernmental Panel on Climate Change (IPCC) provides conservative benchmarks on what’s required to stabilize the average global temperature at no more than 3.6 degrees Fahrenheit (2 degrees Celsius) above the pre-industrial average. A fair summary of their assessment is that global CO2 emissions need to fall by 40 percent by 2035 and by 80 percent by 2050.

Let’s say that U.S. emissions will need to decline at this average global rate, and let’s focus on the 20-year goal of a 40 percent decline. To accomplish this goal will require across-the-board cuts in both production and consumption in all domestic fossil fuel sectors. But cuts will need to be greater for coal. Per unit of energy produced, emissions from burning coal are about 40 percent higher than oil and 50 percent higher than natural gas. In addition, certainly over the next 20 years, it will be more difficult to find substitutes for oil as a liquid fuel in transportation than for coal as a generator of electricity. Given these considerations, we proceed with the assumption that, by 2035, U.S. coal consumption will need to fall by 60 percent, while the cuts will need to be around 40 percent for oil and 30 percent for natural gas.

Other major differences between coal versus oil and gas are also important for our purposes—in particular, the fact that the U.S. coal industry has experienced a sharp decline in profitability over the past decade. The rise of environmental regulations has been only one factor here. Competition from low-cost natural gas, generated through fracking technology, has also caused major losses. The combined impact has been devastating. Bloomberg News reported in January that “coal producers are suffering through a historic rout. Over the past five years, the industry has lost 94 percent of its market value, from $68.6 billion to $4.02 billion.” In addition, half the debt issued by U.S. coal companies is presently in default, and major coal producers Arch Coal, Alpha Natural Resources, and Peabody Energy have all filed for bankruptcy over the past year. This is all before we would begin the 60 percent cut in production over the next 20 years.

Conditions in oil and gas are different. The industry was booming from 2011 to 2014, as crude oil prices hovered around $100 a barrel. But profitability fell sharply as the price of oil declined to less than $60 a barrel in 2015 and less than $40 a barrel in 2016. Plunging oil prices also rendered unprofitable most projects to produce natural gas through fracking. In 2016, defaults on debt by oil and gas companies reached nearly 15 percent. In Texas alone, the industry shed about 70,000 jobs. It is not clear how much of an increase in the oil price would be needed to reverse these negative trends, or whether any such oil price increase is likely to emerge soon. In any case, a 30 percent to 40 percent production cut over the next 20 years will certainly worsen the already unstable situation. What will this mean for fossil fuel industry workers and communities? 

Subsidizing Early Retirements

The U.S. government has mounted multiple programs designed to assist workers facing job losses resulting from government policy choices. The most prominent of these is the federal Trade Adjustment Assistance (TAA) initiative, which was first implemented in 1962 and still operates today. The TAA is designed to help workers displaced by shifts in U.S. global trade policies. The program supports wage subsidies, health insurance, counseling, retraining, relocation, and job search. The overall cost is about $10,000 per worker per year, and workers, on average, benefit for about two years. However, the labor movement has long derided this level of funding as paltry, the equivalent of burial insurance.

Similar federal programs have been no more effective than the TAA in relocating displaced workers into good new jobs. Rather, despite such initiatives, displaced workers have been largely shunted into low-wage occupations. For example, a 1999 study by Laura Powers and Ann Markusen on the post–Cold War transition programs such as the Defense Reinvestment and Conversion Initiative found that “a majority of the workers displaced from defense-related industries between 1987 and 1997 now work at jobs that pay them less than their former wages and that fail to take advantage of their defense-bred skills, and a sizable minority has experienced a drop in earnings of 50 percent or more.”

Given this pattern, one cannot be optimistic that the results would be significantly better if similar policies were implemented as one component of the clean energy transition. Fortunately, there is a simple and relatively inexpensive alternative approach that can work. This is to provide a one-year early retirement program for some workers. If we focus on the industry contractions through 2035—60 percent for coal, 40 percent for oil, and 30 percent for natural gas—the needed retrenchments will be only slightly in excess of the normal rate at which fossil fuel–sector workers will be retiring anyway at age 65.

Here are the basic figures. As of May 2015, there were 69,000 people employed in the U.S. coal-mining industry, and 194,000 in oil and gas extraction. This includes the people directly engaged in the mining and extraction work itself as well as everyone else doing all kinds of jobs involved in producing coal, oil, and natural gas, ranging from office support to top-level executives. The adjustment assistance program would apply across the board to all employees in both industries, regardless of occupation.

Starting with the coal industry, let’s assume that production does decline by 60 percent over a 20-year period. This means that the industry will shed about 41,000 jobs over the next 20 years. That averages out to about 2,100 job losses per year in the industry.

There are 28,000 workers in the coal industry between the ages of 45 and 64. This translates to an average of 1,400 workers retiring per year over the next 20 years. In other words, two-thirds of the 2,100 jobs that have to be shed per year in the coal industry will happen through natural attrition via retirements at age 65. But that does still leave nearly 700 jobs that need to be shed by workers who would not have reached the standard retirement age of 65.

These additional job cuts can be handled simply by providing a fund that would provide full-compensation buyouts at age 64 for these 700 workers. We estimate the average level of total compensation (wages plus benefits) in the industry, including that for executives, to be about $78,000 per year. This would amount to buyouts totaling around $55 million for the 700 workers per year. The federal government would need to pay for these buyouts.

We can apply comparable calculations for the 194,000 people employed in the oil and gas industry. Assuming that production in the industry will need to fall by roughly 40 percent within 20 years, about 900 workers per year will need to be supported through a full-compensation buyout when they reach age 64. The average compensation in the industry, again including the pay for executives, is presently around $120,000. This means that the total buyout package for the 900 64-year-old oil and gas workers will be about $108 million per year. The buyouts for workers in both the coal and oil industries total about $165 million per year—a remarkably modest sum.

In addition to workers directly employed in the U.S. coal, oil, and natural gas industries in all occupations, there are additional workers engaged in “support activities” for these and kindred industries. Providing fair retirement subsidies for these workers should also be readily manageable. As of the 2015 government figures, about 412,000 people were employed in all support activities for all U.S. mining and extractive industries. These include workers in management, professional jobs, manufacturing, construction, transportation, clerical jobs, and cleaning services. There are another 72,000 workers in the U.S. engaged in various petroleum-refining activities.

Most of these roughly 500,000 people—including workers employed in support activities as well as refining—will not be significantly affected through retrenchments in the fossil fuel industries. Among other factors, a high proportion of them are connected with sectors such as iron and copper mining rather than fossil fuel extraction. With refining, a large share are engaged in producing petrochemicals, as opposed to refined gasoline. Petrochemical production will not have to be cut as part of a clean energy transition, since it generates only negligible CO2 emissions. Still more significant, the expanding clean energy sectors will need to employ a large number of support workers to perform services similar to those needed for fossil fuel production.

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