• What are the Economic Benefits of Energy Efficiency and Renewable Energy?
• Quantifying Economic Benefits
  • Step 1. Determine Method of Analysis
  • Step 2: Quantify Direct Expenditures and Savings
  • Step 3: Apply Method to Quantify Macroeconomic Effects
• State Examples
• Tools and Resources

What are the Economic Benefits of Energy Efficiency and Renewable Energy?

Clean energy policies and programs generate economic benefits including jobs and increases in gross state product, economic output, economic growth, and personal income or earnings. Clean energy can also generate economic benefits to the electricity sector by reducing fuel and new plant construction costs and to the public through improved air quality and public health. In order to fully assess the potential economic impact of clean energy initiatives, these benefits should be considered along with the costs.

The economic benefits of clean energy include the direct, indirect, and induced benefits of policies or programs.

Direct economic benefits of clean energy initiatives come from on-site or immediate effects created by an investment or change in final demand for affected sectors.

For example, the direct effects of a wind initiative can be increases in the:

• Sales of wind turbines
• Income of local turbine manufacturers
• Jobs of workers who assemble the wind turbines at the manufacturing plant

Indirect economic benefits result from changing demands for those sectors that help produce the technologies.

For example, an increase in production of wind turbines can expand:

• Sales of steel to supply the turbine manufacturers
• Income of supplier companies
• Jobs of workers who supply materials to the turbine assemblers

Induced economic benefits occur when the income generated from the direct and indirect effects is re-spent in the local economy.

For example, induced benefits could include increases in:

• Sales of groceries in the towns where turbine assembly workers live
• Income of local businesses in the towns where turbine assembly workers live and spend their money
• Jobs for workers at the local grocery store because turbine assemblers used their increased wages to buy groceries

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Quantifying Economic Benefits

Note: This Web page focuses on projecting the benefits of future state policies and programs (i.e., prospective analysis). Retrospective analysis, which evaluates the effects of implemented measures, uses many of the same approaches, but with measured rather than modeled data for inputs.

States can estimate potential economic benefits by projecting potential changes in the flow of goods, services, and income within a regional, state, or local economy.

Assessing the state-level macroeconomic benefits of clean energy initiatives involves measuring changes in the flow of dollars to households and businesses. Changes in these economic flows can be estimated as gross impacts (changes without adjustment for what would have occurred anyway) or net impacts (changes over and above what would have occurred anyway). Quantifying macroeconomic effects provides an aggregate measure of the magnitude of the benefits achieved by a clean energy initiative.

A state can follow several basic steps to analyze the actual or potential* macroeconomic benefits of clean energy initiatives:

• Step 1: Determine the method of analysis, the desired level of rigor, and the desired level of detail about geographic and industrial sectors.
• Step 2: Quantify the direct costs and savings expected from or achieved through the initiative.
• Step 3: Apply the previously determined method to quantify the macroeconomic impacts created by those costs and savings.

*Note: Many of the methods that can be used for prospective analysis can also be used for retrospective analysis.

Step 1. Determine Method of Analysis

States can use basic screening level approaches and/or sophisticated analyses to estimate the economic effects of clean energy initiatives.

Screening approaches provide relatively simple approximations of the economic feasibility and impact of clean energy initiatives under consideration. They provide quick estimates of employment, price, and output changes and are appropriate when considering broad economic impacts of proposals or conducting a preliminary analysis. Screening approaches can be used to help states narrow a large number of options to a smaller list of those that seem promising and warrant further analysis.

Examples of screening approaches or tools detailed in Tools and Resources include:

• Rule-of-thumb estimates
• Community Energy Opportunity Finder
• Job and Economic Development Impact (JEDI) Model
• REPP Labor Calculator

States can conduct a more sophisticated analysis of the macroeconomic effects of alternative clean energy initiatives once they have narrowed the list of potential options. Sophisticated modeling approaches include:

• Input-output models
• Econometric models
• Computable general equilibrium models
• Hybrid models

Overview of Modeling Approaches provides more details on the advantages, disadvantages, and uses of these four models.

Step 2: Quantify Direct Expenditures and Savings

States can develop estimates of direct expenditures and savings associated with clean energy initiatives as inputs to the economic analysis. Generally speaking, these expenditures and savings include estimates of energy savings associated with the policy or program, data on expenditures by participating entities, and the costs of administering the program.

States can choose from a wide range of methods to quantify the expected direct expenditures and savings of a potential clean energy initiative and often develop a customized approach based on their specific needs and resources. At a basic level, states can adapt and project results from existing initiatives in other states to their own conditions. For a more sophisticated analysis, states can use modeling tools to estimate direct effects. Information on models available for prospective analyses is available in Tools and Resources.

Step 3: Apply Method to Quantify Macroeconomic Effects

Once a state quantifies or estimates the direct expenditures and savings of a clean energy initiative, the final step is to assess the aggregate macroeconomic effects of the initiative by applying the screening tool or modeling method selected in Step 1.

States develop a projected baseline scenario to specify what the state economy would look like without the policy and compare the policy results against it.

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State Examples

Clean Energy Analyses that Used Input-Output Analysis

• California: Economic, Energy, and Environmental Benefits of Concentrating Solar Power in California (PDF) (69 pp, 1.48M), April 2006
• New England: Electric Energy Efficiency and Renewable Energy in New England: An Assessment of Existing Policies and Prospects for the Future (PDF) Exit(131 pp, 511K), May 2005
• Oregon: Economic Impacts of Oregon Energy Tax Credit Programs (BETC/RETC) (PDF)  Exit(30 pp, 266K), May 30, 2007

Clean Energy Analyses that Used Econometric Models

• California: The Public Benefit of California's Investments in Energy Efficiency (PDF) Exit(84 pp, 713K), March 2000
• Massachusetts: The Public Benefit of Energy Efficiency to the State of Massachusetts (PDF) Exit(66 pp, 1.89M), 2002
• Minnesota: The Public Benefit of Energy Efficiency to the State of Minnesota (PDF)  Exit(66 pp, 1.89M), 2002
• Washington: The Public Benefit of Energy Efficiency to the State of Washington (PDF) Exit(82 pp, 422K), February 2002

Clean Energy Analysis that Used Computable General Equilibrium Models

• California: Managing Greenhouse Gas Emissions in California (PDF) Exit(32 pp, 245K)

Clean Energy Analysis that Used Hybrid Models

• Iowa: The Long-Term Economic Impact of Energy Efficiency Programs and Renewable Power for Iowa Exit, December 1995
• Wisconsin: An Approach to Quantifying Economic and Environmental Benefits for Wisconsin's Focus on Energy (PDF) Exit (12 pp, 54K), August 2003

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Tools and Resources

Co–Benefits RiskAssessment (COBRA) Screening Model

COBRA is a free tool that helps state and local governments estimate and map potential air quality, human health, and related economic benefits from reductions in particulate matter, sulfur dioxide, nitrogen oxides, ammonia, and volatile organic compounds expected to occur due to clean energy policies or programs. Use COBRA to:

• Better understand the potential for clean energy to enhance air quality, health, and social well being.
• Design or select program options that maximize benefits.
• Build support for clean energy investments based on the air and health benefits.
• Narrow a list of policy options to those that should be evaluated using more sophisticated air quality models.
• Present information about localized health benefits in easy–to–interpret tables and maps.
• Support a balanced decision-making process that considers both the potential costs and benefits of policy options.

Job and Economic Development Impact (JEDI) Models

JEDI models are easy-to-use models that analyze the economic impacts of constructing and operating power generation and biofuel plants at the local and state level. First developed to model wind energy development impacts, JEDI now includes models to analyze the job and economic impacts of biofuel plants and concentrating solar power, coal and natural gas power plants.

Models

• Applied Dynamic Analysis of the Global Economy (ADAGE) model Exit – Dynamic computable general equilibrium model
• DOE-2.2 model Exit – Building energy simulation and cost calculation engine
• IMPLAN model Exit – Input-output method for short-term analysis
• Regional Economic Models, Inc. (REMI) Exit – Hybrid method for short-and long-term analysis
• Regional Imput-Output Multipliers (RIMS) II model – Estimates how much increased economic activity will be supplied by industries in that region

Regional Economics Applications Laboratory (REAL)

REAL Exit, a laboratory at the University of Illinois, focuses on the development and use of analytical models for urban and regional forecasting and economic development. Their capabilities revolve around comprehensive state and metropolitan models that integrate econometric and input-output analysis to provide for both impact and forecasting analyses.