Environmental Policy and Employment: The Effect of the Regional Greenhouse Gas Initiative on the Labor Market

This paper estimates the impacts that the Regional Greenhouse Gas Initiative, implemented in 2009, has had on labor market outcomes within the policy region. The Regional Greenhouse Gas Initiative is a carbon cap-and-trade program that consists of ten states in the Northeast. Using a difference-in-difference framework, I found that, overall, there was no significant impact on the annual employment growth rate because of RGGI. When broken down into industry-specific effects, most industries still had no significant employment effects, although the mining industry did see a weakly significant 0.09 percentage point decrease in its annual employment growth rate. These estimates are based on the time period of 2001 – 2018. This paper provides initial evidence on how the Regional Greenhouse Gas Initiative has impacted labor market outcomes. Environmental Policy and Employment 2 Section 1 – Introduction In recent years, the impacts of environmental regulations have become more heavily debated. As a central issue throughout the most recent presidential election, the different concerns regarding environmental policies were countered by the benefits that advocates proposed. Among the highest concerns was the impact that environmental regulations will have on employment. This concern was the highlight of former President Trump’s reasoning for leaving the Paris Climate Agreement, citing that regulations would increase costs for companies, either causing mass layoffs to occur or the shutdown of entire firms (Borchers and Phillips 2017). However, other politicians, such as Rep. Ocasio-Cortez and other supporters of the Green New Deal, claim that environmental regulations can strengthen the economy by creating new, green jobs (Kurtzleben 2019). The effects of environmental policies on employment largely depend on their structure and implementation. This paper seeks to inform the public and policymakers about the effect that environmental policies can have on employment through examining the employment impact of the Regional Greenhouse Gas Initiative (RGGI). RGGI began in 2009 as a regional cap and trade system agreed on by ten Northeast states in the US (Elements of RGGI 2021). RGGI is the first mandatory, market-based CO2 emissions reduction program in the United States. Each year, auctions are held in these states for electric power plants to purchase allowances in order to emit a certain number of tons of CO2 per year. The number of allowances is capped to a certain number each year within the region. This cap has been adjusted over time to decrease emissions and account for allowances that firms have banked for future use. States also have the discretion to use the revenues from their CO2 auctions however they see fit. Most use the revenue for energy efficiency projects (The Investments of Environmental Policy and Employment 3 RGGI Proceeds in 2018). While RGGI only effects the utilities labor market directly, this allows me to observe the pass-through effects of environmental policies to other sectors that may be indirectly impacted by the regulations and hold a larger share of employment. I utilize a simple labor market model to explain the theory behind my empirical analysis. This model illustrates the various effects that environmental policies can have on employment. The first is the factor substitution effect. The cap-and-trade policy may increase labor demand as firms substitute away from energy towards labor. However, the policy may also decrease labor demand. RGGI could increase a firm’s marginal cost and therefore decrease its output. This is called the output effect. Another effect comes from the increase in market price after the shift in the market supply curve. Lastly, these effects could be minimized depending on what states do with their auction revenues. Since there are multiple effects that can impact the labor market outcomes of this cap-and-trade policy, the overall effect determined by the theoretical model is ambiguous. Therefore, further empirical analysis is necessary to determine the actual size of the effect. My empirical methods are most closely related to Greenstone (2002), Yamazaki (2017), and Huang and Zhou (2019). I use industry and state-level data to show the changes in employment before and after RGGI was implemented. These data are from the Bureau of Economic Analysis and they provide information on employment numbers and wage. My treatment region is comprised of all states that were in RGGI from 2009 – 2018, excluding New Jersey. My control region consists of states that are in the Pennsylvania-New Jersey-Maryland energy market that are not also in RGGI. The time period of my data is from 2001 – 2018. I use a difference-in-difference equation to estimate the impact that RGGI had on employment growth. I also use various fixed effects and state covariates to attempt to control for other events that may Environmental Policy and Employment 4 have happened at the same time as RGGI and impacted employment. I use a difference in difference approach to estimate both the overall impact of RGGI and industry-specific impacts. The results indicated that RGGI had no significant impact on employment overall for the policy region. When broken down by industry, RGGI had a weakly significant negative impact on the mining industry. Based off of my results, annual employment growth rate in the mining industry decreased by 0.09 percentage points because of RGGI. This result is consistent with previous studies that have shown that energy intense industries are more vulnerable to impacts from environmental policy (Yamazaki 2017). My results also return some unexpected results, such as a significant negative impact on the finance industry and a significant positive impact on the accommodation services industry. These results may indicate that different specifications or more data are required to control for outside effects more accurately. The rest of this paper proceeds as follows. Section 2 covers the history of RGGI, its construction, implementation, and effects. Section 3 examines previous papers that have been written about RGGI and the effects of environmental regulation on the labor market. Section 4 identifies the theoretical labor model that shows how RGGI would impact employment. Section 5 explores the empirical analysis and I explain my data, methods, results, and robustness checks. Lastly, in Section 6 I discuss the conclusions that arise from this analysis. Section 2 – Overview of RGGI In 2003, the governors of nine states gathered to discuss the possibility of starting a regional cap-and-trade system to curb greenhouse gas emissions. Seven of the original nine states signed a Memorandum of Understanding (MOU) in 2005 that outlined the framework of the Regional Greenhouse Gas Initiative (RGGI). The remaining two states, as well as Maryland, signed the MOU in 2007, and RGGI went into effect on January 1, 2009, with Connecticut, Environmental Policy and Employment 5 Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont as member states. In 2012, New Jersey withdrew from RGGI, but rejoined in 2020. Lastly, Virginia joined in 2021. RGGI is an agreement between eleven states in Northeast of the United States to reduce carbon dioxide (CO2) emissions from the region. It is the first mandatory, market-based CO2 emission reduction program in the United States (Elements of RGGI 2021). Figure 1 shows a map of the RGGI states. Through independent regulations, these states have agreed to moderate CO2 emissions from their states in order to comply with the RGGI Model Rule set through the collaboration of members. Within the RGGI states, fossil-fuel-fired electric power generators with a capacity of 25 megawatts or greater are required to hold allowances equal to their CO2 emissions over a three-year period (Elements of RGGI 2021). Firms buy allowances at regional auctions and can trade them in secondary markets with other firms. One allowance is equal to one US ton of CO2 emissions. Figure 1: Map highlighting the member states of RGGI. New Jersey and Virginia are highlighted in light yellow because they joined most recently. Source: RGGI Project Series (https://www.rggiprojectseries.org/states) Environmental Policy and Employment 6 Each state sets independent regulations that follow the RGGI Model Rule. The involved states have established CO2 Budget Trading Programs that limit emissions of CO2 from electric powerplants, issue CO2 allowances, and establish participation in regional CO2 allowance auctions (Elements RGGI 2021). All of the allowances administered by the state budgets add up to the total RGGI cap. RGGI caps have been adjusted since the inception of the program to reflect trends. At the beginning of the program in 2009, the cap was 188 million allowances. This cap has been adjusted over time to decrease emissions and account for allowances that firms have banked for future use. In 2021, the adjusted cap is just over 100 million allowances. In RGGI auctions, there is a cost containment reserve (CCR) that consists of extra allowances available for purchase if auction prices reach a certain point. This was created in order to keep allowance prices below a certain level. Moving forward, this price will increase as the number of allowances decreases to help minimize CO2 emissions over the years. The trigger price in 2020 was $10.77 and in 2021 it is $13 (Elements of RGGI 2021). There is also an emission containment reserve (ECR) that was first implemented in 2021. The states will withhold allowances to create additional emissions reductions and to make sure that auction prices do not fall below a certain level. This price will also increase each year. For 2021, the ECR trigger price is $6.00 (RGGI 2016 Program Review 2017, 3). Each state also decides what to do with the revenue from their auctions. Many of the investments go to energy bill assistance,