Industrial Efficiency Can Restore Jobs and Competitiveness

Learn more about NRDC’s response to COVID-19.

The COVID-19 crisis continues to impact all of our lives. Many are battling illness or taking care of loved ones. There are those who are working in unsafe conditions or have lost jobs and are worrying about how to pay bills. The economic impacts have hit many job sectors; this blog focuses on industry.

Total industrial production in the U.S. fell 11.2 percent in April for its largest monthly drop in the 101-year history of the Federal Reserve's index, on the heels of a 4.5 percent drop in March, as the pandemic led many factories to slow or suspend operations throughout the month. Manufacturing output dropped 13.7 percent, its largest decline on record, as all major industries posted decreases.

This decline is contributing to a worldwide reduction in climate pollution, projected at 8 percent for 2020—the biggest decline in decades.

These outcomes result from a catastrophic pandemic that continues to wreak health and economic devastation. We hope that governments, businesses, and people work together to stop the disease, guided by the best available science. But we don’t have to wait for these health efforts to succeed before trying to jump-start the industrial economy: there are constructive, healthy ways to rebuild our manufacturing sector for a cleaner future—one that produces more jobs and greater profit than before the crisis hit.

No one knows how long the current pain will last, and we all hope it will end as soon as possible. When it does, and even before it is completely over, we expect demand for manufactured goods to increase. This will allow factories to call back workers and restore jobs. How can we make this happen faster? Will we be able to do it while protecting public health? Will this result in a rebound of climate pollution? Can the industrial sector go back to work in a way that further limits emissions?

Investment in clean energy is a smart response in the next few months—and years—while the world tries to rebuild its economy and prevent future pandemics. The International Energy Agency notes that “Stimulus goals align very well with wider clean energy goals, and investment in all fields of clean energy can deliver great opportunities to increase employment and economic activity.”

Of course, ANY transfer of money from the government to citizens or even businesses will promote economic recovery. But clean energy allows this to happen in a way that is also beneficial for the environment and creates more jobs per dollar spent than other options. Until this year clean energy had produced over 3 million jobs in America, of which over 2.5 million are related to energy efficiency.

Figure 1: Clean Energy Jobs in America (pre-COVID)

We have two trends that we need to address. First, how can expanding industrial energy efficiency initiatives help accelerate the return to economic growth? And second, who will benefit from a return of something nearer normalcy when growth starts to happen: when the nation’s and the world’s demand for industrial products starts to rebound? Which nation’s industry will supply these restored demands for manufactured goods? Will it be China or Mexico (the largest two sources of imports to the U.S.) or France or Korea? Or will American companies produce them?

How Inefficiency Hurts American Companies

There are millions of reasons why a given buyer may choose this vendor over that one, but two common reasons are cost and quality.

American companies are often at a hidden disadvantage, because they pay more for energy as a result of inefficient manufacturing processes. Despite being one of the first countries to industrialize, the United States is nowhere near leading in the efficiency of its production processes.

We don’t even know the true potential for savings. While most analyses suggest savings of 14 to 22 percent, other countries have already achieved more than that. [To find the referenced paper, use linked website and search for my name.] This positive outcome—achieving more than was thought possible-- is a consequence of looking holistically at energy performance in the context of managing an organization for continual improvement, as summarized in the paper just linked to. It doesn’t only occur at the national level, one can see it in individual plant results as well.

Managing an organization for continual energy improvement appears to improve other important aspects of plant operation as well: product quality, worker health and safety, and environmental performance. The experience with appliance efficiency shows that when manufacturers are required—or even incentivized—to make products more efficient, costs do not increase as one would have predicted. Similarly with respect to worker health and safety: my observations, and those of my colleagues, have been that energy-efficient plants have better ergonomics for their line workers, are cleaner, and lead to higher worker satisfaction.

Apparently the need to improve energy performance leads manufacturers to look more carefully at other performance parameters in their manufacturing process as well. They usually find that they can cut costs and improve quality at the same time as increasing the efficiency of their products and of their production.

I have talked with a number of industrial efficiency program managers at utilities and in state and federal government, and they have found that plants that made their production processes more energy efficient became more competitive, and their products became more desirable. As a result they were more likely to continue to offer good, safe jobs and make more money while slashing energy use.

A New Policy Tool to Advance Energy Performance

In the past decade, we have seen the introduction of a new tool to help manufacturers improve energy performance. Often called strategic energy management (SEM), it is a process, not a result. It tells organizations how to manage their energy use. [To find the referenced paper, use linked website and search for my name.] This data-driven approach demands a commitment from top management to meet increasing energy performance goals based on measurement.

It is based on ISO 50001, an international management systems standard. In North America, simpler versions are described in the CEE Minimum Elements, which offers guidance to utilities that want to offer industrial energy savings incentives for SEM, and the Department of Energy’s 50001-Ready program, aimed at manufacturers. These programs have worked well, to the extent that they have been deployed: they save more emissions more quickly than anyone would have anticipated, and in a way that returns far more per dollar invested than almost any other option.

This is not surprising for two distinct reasons. First, industrial energy savings calculations are almost always performed from outside the plant gate: manufacturers do not want their processes known to outsiders. Thus the studies are limited to simple generic measures like more efficient motors and lights, but cannot get into process changes because the analyst doesn’t know even the broad outlines of the process much less the technical specifications. The second reason is that efficiency studies are limited to  technical measures like better air compressors, and fail to consider operational improvements. For example is the air compressor turned off during lunch break? Is it used to run equipment, as it was designed to do, or is it also used as a leaf blower to clean up debris?

These stories relate to energy as the sole performance metrics, but the same methods can be applied to other outcomes of interest, including emissions, health and safety, quality…

Despite individual plant successes, the uptake of SEM has been small.

How Can We Advance Industrial Energy Efficiency Faster?

Utility-sponsored industrial SEM programs often have occurred only as pilot projects and most utilities still do not offer them.

This is grossly out of scale with the need.  We have millions of people unemployed, and even with a 2020 decline in climate pollution, far more progress needs to be made to meet global goals.

While there are many tools in the tool kit, part of the answer is to expand programs that are already working: information and technical assistance offered by state energy offices, by ENERGY STAR®, the Department of Energy, and  utilities (often in conjunction with financial incentives). Another is to improve energy efficiency in the supply chain. This can be accomplished through SEM, and leading companies are already doing this. Governments can institute policies such as Buy Clean.

One new way to encourage ambitious new industrial efficiency efforts is by offering financial incentives at the national level—for example, tax deductions.  How do we know they work? ISO 50001 is a global standard, but half of the compliance certificates come from Germany. Why might that be? Germany offers generous financial incentives for manufacturers to improve their processes to meet that standard.

What if the United States government offered similar but small incentives for compliance, coupled with powerful incentives for manufacturers to set and meet ambitious long-term goals for energy performance improvement? Experience with tax credits structured similarly shows that performance-based incentives can work powerfully [to find the referenced paper, use linked website and search for Meg Waltner] when they reward exceptionally demanding achievements. These tax incentives helped inspire the introduction and sales of products that were virtually nonexistent when the incentives were created—products that went beyond the levels of efficiency that efficiency potentials studies thought were possible.

Thus it is not unreasonable to expect the SEM tax incentives could do the same—help create industrial processes that yield a 20 percent decrease in emissions in the first year or two and much more by the end of a decade. They do this by encouraging innovations in process as well as in operation. They could give U.S. companies a leg up in global competition for the supply of manufactured goods in a post-COVID economy.  A possible structure for such incentives is suggested here.

Necessity is the mother of invention. History shows the necessity to secure a financial incentive or to meet an environmental regulation spurs invention and innovation that goes far beyond the energy sphere. Encouraging energy efficiency in industry can open the door to innovations that promote American leadership and the recreation of good jobs.