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X. Economic Impact Analysis

A. Introduction

The rule will affect two sectors directly: vehicle manufacturing and 

petroleum refining. For these two regulated sectors, the economic impact analysis 

discusses the market impacts from the rule: changes in price and quantity sold. In 

addition, although analysis of employment impacts is not part of a benefit-cost 

analysis (except to the extent that labor costs contribute to costs), employment 

impacts of federal rules are of particular concern in the current economic climate of 

sizeable unemployment. Executive Order 13563, “Improving Regulation and 

Regulatory Review” (January 18, 2011), states, “Our regulatory system must 

protect public health, welfare, safety, and our environment while promoting 

economic growth, innovation, competitiveness, and job creation” (emphasis added). 

For this reason, we are examining the effects of this rule on employment in the 

regulated sectors.

Some commenters suggest that the overall effects of Tier 3 on the economy 

are likely to be positive, because the standards encourage innovation and reduce 

emissions. In addition, they suggest that Tier 3 will lead to greater employment to 

develop the emissions control technologies and to upgrade refineries. As discussed 

further below, other commenters suggest negative impacts, especially due to the 

fuel standards. The Motor and Equipment Manufacturers Association asks that the 

regulations “be based on sound science and data and balance the public interest 

objectives with economic realities of manufacturers.” EPA has used the best 

available information in developing these standards (including the use of peer 

reviewed literature, peer reviewed models, public comments received, etc.), and has 

documented its final estimates of the economic impacts from these standards in the 

RIA. 

B. Vehicle Sales Impacts

This rule takes effect from MY 2017-2025. In the intervening years, it is 

possible that the assumptions underlying a quantitative analysis, as well as market 

conditions, might change. For this reason, we present a qualitative discussion of the 

effects on vehicle sales of the standards at the aggregate market level. Vehicle 

manufacturers are expected to comply with the standards primarily through 

technological changes to vehicles. These changes to vehicle design and 

manufacturing are expected to increase manufacturers’ costs of vehicle production. 

Section VII.A estimates the increase in vehicle costs due to the standards. 

These costs differ across years and range from $46 to $65 for cars, $73 to $88 for 

trucks and $33 to $75 for Class 2b/3 vehicles (see Section VII.A). These costs are 

small relative to the cost of a vehicle. In a fully competitive industry, these costs 
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would be entirely passed through to consumers. However in an oligopolistic 

industry such as the automotive sector, these increases in cost may not fully pass 

through to the purchase price, and the consumers may face an increase in price that 

is less than the increased manufacturers’ costs of vehicle production.1 We do not 

quantify the expected level of cost pass-through or the ultimate vehicle price 

increase consumers are expected to face, apart from noting that prices are expected 

to increase by an amount up to the increase in manufacturers’ costs.

This increase in price is expected to lower the quantity of vehicles sold. 

Given that we expect that vehicle prices will not change by more than the cost 

increase, we expect that the decrease in vehicle sales will be negligible. 

The effect of this rule on the use and scrappage of older vehicles is related to 

its effects on new vehicle prices and the total sales of new vehicles. The increase in 

price is likely to cause the “turnover” of the vehicle fleet (i.e., the retirement of used 

vehicles and their replacement by new models) to slow slightly, thus reducing the 

anticipated effect of the rule on fleet-wide emissions. Because we do not estimate 

the effect of the rule on new vehicle price changes nor do we have a good estimate 

of the effect of new vehicle price changes on vehicle turnover, we have not 

attempted to estimate explicitly the effects of the rule on scrappage of older vehicles 

and the turnover of the vehicle fleet.

Commenters note that the incentives to go beyond the 8-year/80,000-mile 

warranty could improve vehicle reliability and lower costs, in addition to improving 

air quality. Other commenters suggest that harmonizing standards across the whole 

U.S. will benefit the economy. EPA agrees that harmonized standards will simplify

manufacturing and marketing decisions for automakers. The Manufacturers of 

Emission Controls Association points out that many SULEV- and PZEV-compliant 

vehicles have already been sold in the U.S. Commenters did not raise other 

concerns with the qualitative vehicle sales analysis. 

C. Impacts on Petroleum Refinery Sector Production

The key change for refiners from the standards is more stringent sulfur 

requirements. This change to fuels is expected to increase manufacturers’ costs of 

gasoline production by about 0.65 cents per gallon (see Section VII.B).

 

1

See, for instance, Gron, A., and Swenson, D. (2000), Cost Pass-Through in the U.S. Automobile 

Market. Review of Economics and Statistics 82, 316-324 (Docket EPA-HQ-OAR-2011-0135-0056),

who found significantly less than full-cost pass-through using data from 1984-1994. Using full-cost 

pass-through overstates costs and thus contributes to lower vehicle sales than using a lower estimate. 

To the extent that the auto industry has become more competitive over time, full-cost pass-through 

may be more appropriate than a result based on this older study.
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Some commenters raise concerns about the economic burdens to refineries 

and to consumers who must buy more expensive gasoline, in part based on 

estimates of the costs of the standards as high as 6-9 cents per gallon. As discussed 

in Section VII.B. of this preamble, EPA has considered the costs to refineries and 

has estimated that the additional cost of gasoline will be about 0.65 cents per gallon. 

Though some refineries may face costs of up to 2.1 cents per gallon, and one 

refinery up to 2.8 cents per gallon, most will face much lower costs, as the 

averaging, banking, and trading provisions of the standards significantly ease the 

challenge of refineries to meet the standards. 

In a perfectly competitive industry, this cost would be passed along 

completely to consumers. In an imperfectly competitive industry, as noted above, 

full cost pass-through is not necessary: firms may choose to reduce impacts on 

sales by not passing along full costs. In 2004, the Federal Trade Commission 

reported that “concentration for most levels of the petroleum industry has remained 

low to moderate.”2 Thus the assumption of competitive markets has some 

foundation in this industry. We estimate that the price increase that consumers are 

likely to face should be positive and up to the increase in manufacturers’ costs of 

gasoline production.

The Emissions Control Technology Association (ECTA) and Northeast 

States for Coordinated Air Use Management (NESCAUM) note that previous Tier 2 

standards, which required greater reductions in absolute magnitude, do not appear 

to have had measurable adverse impacts on refineries. ECTA cites a study by

Navigant Economics that found no measurable impact on gasoline price from Tier 

2. NESCAUM notes that refineries used a number of technologies and facility

improvements to achieve the standards in a cost-effective manner, and notes that the 

North American refining industry is making significant new investments in 

response to favorable long-term conditions. Small increases in gasoline price due to 

standards may be very difficult to identify, because of the natural volatility of 

gasoline prices. 

The effect of higher gasoline prices on gasoline sales is expected to be 

different over the short and long term. In the long run, in response to the increase in 

fuel costs, consumers can more easily change their driving habits, including where 

they live or what vehicles they use. Because of this, we expect that gasoline sales 

will decrease more in the long run compared to the short run as a result of the price 

increase due to the rule. However, because manufacturers’ costs are expected to 

 

2

Federal Trade Commission, Bureau of Economics. (2004). The Petroleum Industry: Mergers, 

Structural Change, and Antitrust Enforcement. Retrieved August 16, 2011from Federal Trade 

Commission website: http://www.ftc.gov/os/2004/08/040813mergersinpetrolberpt.pdf (Docket 

EPA-HQ-OAR-2011-0135-0055).
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increase less than one cent per gallon, we expect that the decrease in gasoline sales 

will be negligible over all time horizons. 

D. Employment Impacts

This section discusses changes in employment due to the rule. We focus on 

the auto manufacturing sector and the refinery sector because they are directly

regulated, and because they are likely to bear a substantial share of changes in 

employment due to this rule. We partially quantify impacts in the auto sector, 

providing a mix of qualitative and quantitative discussion, following the methods 

used in the Final Rulemaking for 2017–2025 Model Year Light-Duty Vehicle 

Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards.3 For 

the refinery sector we provide a qualitative analysis. We also include discussion of 

effects on the motor vehicle parts manufacturing sector because the auto 

manufacturing sector can either produce parts internally or buy them from an 

external supplier, and we do not have estimates of the likely breakdown of effort 

between the two sectors. For the same reasons, we discuss effects on producers of 

equipment that refiners will use to comply with the standards.

When the economy is at full employment, an environmental regulation is 

unlikely to have much impact on net overall U.S. employment; instead, labor would 

primarily be shifted from one sector to another. These shifts in employment impose 

an opportunity cost on society, approximated by the wages of the employees, as 

regulation diverts workers from other activities in the economy. In this situation, 

any effects on net employment are likely to be transitory as workers change jobs 

(e.g., some workers may need to be retrained or require time to search for new jobs, 

while shortages in some sectors or regions could bid up wages to attract workers). 

On the other hand, if a regulation comes into effect during a period of high 

unemployment, a change in labor demand due to regulation may affect net overall 

U.S. employment because the labor market is not in equilibrium. Schmalansee and 

Stavins point out that net positive employment effects are possible in the near term 

when the economy is at less than full employment due to the potential hiring of idle 

labor resources by the regulated sector to meet new requirements (e.g., to install 

new equipment) and new economic activity in sectors related to the regulated 

sector.4 In the longer run, the net effect on employment is more difficult to predict 

and will depend on the way in which the related industries respond to the regulatory

requirements. As Schmalansee and Stavins note, it is possible that the magnitude of 

the effect on employment could vary over time, region, and sector, and positive 

 

3

77 FR 62623 (October 15, 2012).

4

Schmalensee, R., & Stavins, R. (2011). A Guide to Economic and Policy Analysis of EPA’s 

Transport Rule” White paper commissioned by Excelon Corporation (Docket EPA-HQ-OAR-2011-

0135-0054).
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effects on employment in some regions or sectors could be offset by negative 

effects in other regions or sectors. For this reason, they urge caution in reporting 

partial employment effects since it can “paint an inaccurate picture of net 

employment impacts if not placed in the broader economic context.”

A number of commenters (including unions, environmentalists, investor 

organizations, Medical Advocates for Health Air, NESCAUM, and the National 

Association of Clean Air Agencies) argue that the standards will increase 

employment, by stimulating auto companies and refiners to invest in pollution 

abatement equipment. As will be discussed further below, EPA agrees that the 

standards are likely to lead to more employment to provide abatement equipment, 

but employment due to production may also be reduced (although by very small 

amounts) due to incrementally higher prices for vehicles and fuel; we expect the net 

impact on employment in the regulated sectors to be small. 

ECTA argues that job impacts will be not only positive in the auto and auto 

parts sectors, but substantially more positive than EPA states, based on Regional 

Input-Output Modeling System (RIMS) multipliers that find increases of 5.9 jobs 

for every $1 million investment in new auto parts. Multiplier impacts trace the 

entire chain of job impacts associated with an expenditure, including factors such as 

changes in employment in retail establishments due to changes in workers in the 

auto sector. Because the expenditures will occur when unemployment is still high, 

ECTA argues, it is important to consider the multiplier effects of the expenditures 

that are embedded in the RIMS multipliers. As discussed above, the multiplier 

impacts of expenditures depend heavily on the state of the macroeconomy. Because 

of uncertainty over the state of the economy when the increased expenditures will 

occur, EPA has not quantified the multiplier impacts due to changes in employment 

associated with these standards. As discussed again below, some expenditures, 

perhaps especially in the refinery sector, will occur before the standards take effect, 

to get the manufacturing processes in place to meet the standards. These near-term 

expenditures may have some multiplier effects, because they are more likely to 

have their impacts during the current period of above-average unemployment. In 

contrast, the ongoing costs of complying with the standards, which contribute most 

directly to price increases, are likely to come in future years, when it is expected 

that unemployment rates will be lower.

The Mercatus Center at George Mason University recommended that we 

“acknowledge that both jobs gained and jobs destroyed are costs of the proposed 

regulation. Ideally, compliance jobs should be minimized, not viewed as a benefit 

of a regulation.” This assertion is confusing, in that it implies that any effect on 

employment, positive or negative, is costly. Our analysis of the employment 

impacts of the standards is intended to identify additional ways that these standards 

will affect the public. Employment clearly provides benefits to the people who are 

employed, and reducing unemployment is considered a desirable outcome in times 

of high unemployment. EPA disagrees that minimizing compliance jobs should be 
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an independent objective of this rulemaking. The objective of the program is to 

improve air quality through reductions in vehicle emissions; we provide 

information concerning employment impacts as part of our overall analysis of 

economic impacts from the rule.5

The Mercatus Center also requests that we consider the long-term effects of 

unemployment on workers who may lose jobs, and that we acknowledge that those 

who lose jobs may not be the same people who gain jobs. We recognize there are 

costs to workers who shift from one job to another,6but we also note, as discussed 

further below, that we expect very small employment impacts from the standards.

After reviewing these comments, we conclude they have not identified any 

specific reason to depart from the approach to employment analysis that was used in 

the NPRM, though we here use a slightly modified theoretical framework. In the 

NPRM, we followed the theoretical structure in a study by Morgenstern, Pizer, and 

Shih (2002)7of the impacts of regulation in employment in the regulated sectors. 

We here shift to a very similar framework by Berman and Bui.8 RIA Chapter 9.1 

provides additional background on this framework. In Berman and Bui’s (2001, p. 

274-75) theoretical model, the change in a firm’s labor demand arising from a change in 

regulation is decomposed into two main components: output and substitution effects.9

 The output effect describes how, if labor-intensity of production is held constant, a 

decrease in output generally leads to a decrease in labor demand. However, as 

noted by Berman and Bui, although it is often assumed that regulation increases 

marginal cost, and thereby reduces output, it need not be the case. A regulation 

could induce a firm to upgrade to less polluting, and more efficient equipment that 

lowers marginal production costs, for example. In such a case, output could 

theoretically increase. 

 

5 We note that employment shows up in the benefit-cost analysis through labor costs, which are 

included in the costs of achieving the standards; any increases in employment are part of the 

increased expenditures due to the standards, and decreases in employment reduce expenditures.

6 E.g., Jacobson, Louis S., Robert J. LaLonde, and Daniel G. Sullivan, “Earnings Losses of 

Displaced Workers.” American Economic Review 83(4) (1993): 685-709.

7 Morgenstern, R., Pizer, W., & Shih, J. (2002). Jobs Versus the Environment: An Industry-Level 

Perspective. Journal of Environmental Economics and Management 43, 412-436 (Docket EPA-HQOAR-2011-0135-0057).

8 Berman, E. and L. T. M. Bui (2001). “Environmental Regulation and Labor Demand: Evidence 

from the South Coast Air Basin.” Journal of Public Economics 79(2): 265-295.

9 The authors also discuss a third component, the impact of regulation on factor prices, but conclude 

that this effect is unlikely to be important for large competitive factor markets, such as labor and 

capital. Morgenstern, Pizer and Shih (2002) use a very similar model, but they break the 

employment effect into three parts: 1) the demand effect; 2) the cost effect; and 3) the factor-shift 

effect. See Morgenstern, Richard D., William A. Pizer, and Jhih-Shyang Shih. “Jobs Versus the 

Environment: An Industry-Level Perspective.” Journal of Environmental Economics and 

Management 43 (2002): 412-436 (Docket EPA-HQ-OAR-2011-0135-0057).
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 The substitution effect describes how, holding output constant, regulation affects 

the labor-intensity of production. Although increased environmental regulation 

generally results in higher utilization of production factors such as pollution control 

equipment and energy to operate that equipment, the resulting impact on labor 

demand is ambiguous. For example, equipment inspection requirements, 

specialized waste handling, or pollution technologies that are added to the 

production process may affect the number of workers necessary to produce a unit 

of output. Berman and Bui (2001) model the substitution effect as the effect of 

regulation on pollution control equipment and expenditures that are required by the 

regulation and the corresponding change in labor-intensity of production. 

In summary, as the output and substitution effects may be both positive, 

both negative or some combination, standard neoclassical theory alone does not 

point to a definitive net effect of regulation on labor demand at regulated firms.

1. Employment Impacts in the Auto Sector

Following the Berman and Bui (2001) framework, we consider three effects 

for the auto sector: the output effect and the substitution effect.

a. The Output Effect

The output effect depends on the effects of this rule on vehicle sales. If 

vehicle sales decrease, employment associated with these activities will decrease. 

As discussed in Section X.B, we do not make a quantitative estimate on the effect 

of the rule on vehicle sales but we note that the decrease in vehicle sales is expected 

to be negligible. Thus we expect any decrease in employment in the auto sector 

through the output effect to be small as well.

b. The Substitution Effect

The output effect, above, measures the effect due to new vehicle sales only. 

The substitution effect measures the impacts due to the changes in technologies 

needed for vehicles to meet the standards, separate from the effect on output (that 

is, as though holding output constant). This effect includes both changes in 

employment due to incorporation of abatement technologies and overall changes in 

the labor intensity of manufacturing. We estimate the substitution effect by 

multiplying the ratio of workers to each $1 million of expenditures in the auto 

sector by the cost estimates for complying with the rule. This approach estimates 

the effects of increased expenditures while holding constant the labor intensity of 

manufacturing; it does not take into account changes in labor intensity due to 
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changes in the nature of production. This latter effect could either increase or 

decrease the employment impacts estimated here.10

Some of the costs of this rule will be spent directly in the auto 

manufacturing sector, but it is also likely that some of the costs will be spent in the 

auto parts manufacturing sector. We separately present the ratios for both the auto 

manufacturing sector and the auto parts manufacturing sector.

There are several public sources for estimates of employment per $1 million 

expenditures. As discussed in the RIA, EPA examines several sources for these 

estimates: the U.S. Bureau of Labor Statistics (BLS)’s Employment Requirements 

Matrix (ERM),11 the Census Bureau’s Annual Survey of Manufactures12 (ASM),

and its Economic Census. The use of these ratios has both advantages and 

limitations. It is often possible to estimate these ratios for quite specific sectors of 

the economy: for instance, it is possible to estimate the average number of workers 

in the light-duty vehicle manufacturing sector per $1 million spent in the sector, 

rather than use the ratio from another, more aggregated sector, such as motor 

vehicle manufacturing. As a result, it is not necessary to extrapolate employment 

ratios from possibly unrelated sectors. On the other hand, these estimates are 

averages for the sectors, covering all the activities in those sectors; they may not be 

representative of the labor required when expenditures are required on specific 

activities, or when manufacturing processes change sufficiently that labor intensity

changes. For instance, the ratio for the motor vehicle manufacturing sector 

represents the ratio for all vehicle manufacturing, not just for emissions reductions

associated with compliance activities. In addition, these estimates do not include 

changes in sectors that supply these sectors, such as steel or electronics producers. 

They thus may best be viewed as the effects on employment in the specific sectors 

due to the changes in expenditures in those sectors, rather than as an assessment of 

all employment changes due to these changes in expenditures.

The values used here are adjusted to remove the employment effects of 

imports through use of a ratio of domestic production to domestic sales of 0.667.13 

 

10 As noted above, Morgenstern et al. (2002) separate the effect of holding output constant into two 

effects: the cost effect, which holds labor intensity constant, and the factor shift effect, which 

estimates those changes in labor intensity.

11 Bureau of Labor Statistics. Employment Requirements Matrix. 

http://www.bls.gov/emp/ep_data_emp_requirements.htm (Docket EPA-HQ-OAR-2011-0135).

12 U.S. Census Bureau. Annual Survey of Manufactures. 

http://www.census.gov/manufacturing/asm/index.html (Docket EPA-HQ-OAR-2011-0135).

13 To estimate the proportion of domestic production affected by the change in sales, we use data 

from Ward’s Automotive Group for total car and truck production in the U.S. compared to total car 

and truck sales in the U.S. For the period 2001-2010, the proportion is 66.7 percent (Docket EPAHQ-OAR-2011-0135-0333).
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As discussed in the RIA, trends in the BLS ERM are used to estimate productivity

improvements over time that are used to adjust these ratios over time.

Table X-1 provides estimates of the substitution effect of this rule on 

employment. Chapter 2.1 of the RIA discusses the vehicle cost estimates developed 

for this rule, discussed in Section VII.A, presented in the second column. The 

maximum value for employment impacts per $1 million (2011$) (before 

adjustments for changes in productivity, after accounting for the share of domestic 

production) is 1.771 if all the additional costs are in the parts sector; the minimum 

value is 0.389, if all the additional costs are in the light-duty vehicle manufacturing 

sector. Increased costs of vehicles and parts will, by itself, and holding labor

intensity constant, be expected to increase employment between 2017 and 2025 by

some hundreds of jobs each year.

While we estimate employment impacts, measured in job-years, beginning 

with program implementation, some of these employment gains may occur earlier 

as auto manufacturers and parts suppliers hire staff in anticipation of compliance 

with the standard. A job-year is a way to calculate the amount of work needed to 

complete a specific task. For example, a job-year is one year of work for one 

person.

Table X-1 Employment Effects due to Increased Costs of Vehicles and Parts, 

in job-years

Year Costs 

(Millions of 

2010$)

Maximum Employment 

Effect (if all expenditures 

are in the Parts Sector)

Minimum Employment Effect 

(if all expenditures are in the 

Light Duty Vehicle Mfg 

Sector)

2016 $ 21 0 0 

2017 $ 297 400 100 

2018 $ 615 800 200 

2019 $ 653 800 200 

2020 $ 697 800 200 

2021 $ 725 800 200 

2022 $ 758 800 200 

2023 $ 751 800 200 

2024 $ 761 800 200 

2025 $ 773 700 200 

c. Summary of Employment Effects in the Auto Sector

The overall effect of the standards on auto sector employment depends on 

the relative magnitude of the output effect and the substitution effect. Because we 

do not have quantitative estimates of the output effect, and only a partial estimate of 

the substitution effect, we cannot reach a quantitative estimate of the overall 
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employment effects of the standards on auto sector employment or even whether 

the total effect will be positive or negative. However, given that the expected 

increase in production costs to the auto manufacturers is relatively small, we expect 

that the magnitudes of all these effects will be small as well. 

Additionally, the standards are not expected to provide incentives for 

manufacturers to shift employment between domestic and foreign production. This 

is because the increased standards of the rule will apply to vehicles sold in the U.S. 

regardless of where they are produced. If foreign manufacturers already have 

increased expertise in satisfying the requirements of the rule, there may be some 

initial incentive for foreign production, but the opportunity for domestic 

manufacturers to sell in other markets might increase. To the extent that the 

requirements of this rule might lead to installation and use of technologies that other 

countries may seek now or in the future, developing this capacity for domestic 

production now may provide some additional ability to serve those markets. This 

potential benefit for domestic production will not apply if other countries are not 

likely to have similar standards.

2. Refinery Employment Impacts

The Berman and Bui (2001) framework of output and substitution effects 

can also be applied to the impact of the rule on employment in the refinery sector. 

Here we use a fully qualitative approach. A qualitative discussion allows for a 

wider incorporation of additional considerations, such as timing of impacts and the 

effects of the rule on imports and exports. Because the discussion is qualitative, we 

do not sum the net effects on employment. 

The output effect on refining sector employment is expected to be negative. 

The discussion in Section X.C above suggested that the standards will cause a small 

decrease in the quantity of gasoline demanded due to higher production costs being 

passed through to consumers. This slightly reduced level of sales will likely have a 

negative impact on employment in the refining sector. While we do not quantify

the level of job losses that could be expected here, recall that the quantity of 

gasoline sold as a result of these standards is expected to decrease by only a very

small amount over any time horizon. 

The substitution effect of the standards on employment in the refining sector 

can be either positive or negative in the Berman and Bui framework; here, we 

expect a small, possibly positive impact. In order to satisfy the requirements of the 

rule, firms in the refining industry are expected to perform additional work that will 

require hiring more employees, especially perhaps in the short run. Section V.L.2.e

discusses the expected employment needed to reduce the sulfur content of fuels; as 

noted there, to meet the Tier 3 sulfur standards, refiners are expected to invest $2 

billion between 2012 and 2019 and utilize approximately 250 front-end design and 

engineering jobs and 1,500 construction jobs. As the petroleum sector employed 
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approximately 71,000 workers in 2011, this temporary increase in employment will

be small when compared to 2011 levels.

This rule is not expected to provide incentives to shift employment between 

domestic and foreign production. First, the standards will apply to gasoline sold in 

the U.S. regardless of where it has been produced. U.S. gasoline demand is 

projected to continue to decline for the foreseeable future in response to higher 

gasoline prices, more stringent vehicle and engine greenhouse gas and fuel 

economy standards as well as increased use of renewable fuels. As a result, this 

analysis of incentives to shift employment between domestic and foreign 

production focuses on investments for existing capacity instead of expanding 

capacity.

14

 In this case, what is relevant is whether the necessary modifications to 

comply with Tier 3 will be significantly cheaper overseas than in the U.S. 

The main impacts on capital and operating costs to comply with Tier 3 

associated with adding hydrotreating capacity are likely to be similar overseas as in 

the U.S. This is particularly true when analyzing likely sources of U.S. imports. 

The majority of gasoline imported to the U.S. today comes into the East Coast and 

is sourced out of either Europe or refineries in Canada or the Caribbean that exist 

almost solely to supply the U.S. market. These Canadian and Caribbean refineries, 

by virtue of their focus on the U.S. market, are very similar to U.S. based refineries 

and would be expected to have to incur similar capital and operating costs as their 

U.S. based competitors meeting the 10 ppm standard. Furthermore, the European 

refineries are already producing gasoline to a 10 ppm sulfur cap for Europe. To the 

extent they have refinery streams that are more difficult to hydrotreat, the U.S. 

market currently serves as an outlet for their higher sulfur gasoline streams. As a 

result, they may incur capital and operating costs on a per gallon basis at least as 

high as for their U.S. based competitors for these remaining higher sulfur gasoline 

streams. Alternatively, they may instead choose to find markets outside the U.S., 

opening the way for increased U.S. based refinery demand. 

Finally, despite refining industry projections that previously imposed diesel 

rules would lead to greater U.S. reliance on imports through major negative impacts 

on domestic refining, the reverse has actually occurred. Over the last 8 years, 

imports of gasoline and diesel fuel have continued to be the marginal supply, and 

have even dropped precipitously so that the U.S. is now a net exporter of diesel fuel 

and is importing half the gasoline that it did at its peak in 2006. With the projected 

decline in future gasoline demand in the U.S. as vehicle fuel efficiency improves, 

gasoline imports are expected to continue to decline.

 

14 While refinery capacity has been increasing around the world in recent years, it has been designed 

primarily to supply foreign markets other than the U.S. (e.g., increasing demand in China and India).
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Thus it is expected that for the refining sector, the output effect will lower 

employment, and the substitution effect will raise employment. As a whole then, it 

is not evident whether the standards will increase or decrease employment in the 

refining sector. However, given the small anticipated reduction in quantity sold, it 

appears that the standards will not have major employment consequences for this 

sector. 

The petroleum refining industry is one of the manufacturing industries 

studied by Berman and Bui (2001) when they looked at the effect of environmental 

expenditures on employment. They found that “Employment effects are very small, 

generally positive, but not statistically different from zero.” (p. 281) [Berman and 

Bui, Table 3]. Berman and Bui also state that the estimates rule out large negative 

effects (p. 282). Because most of the abatement cost of the regulations they analyze 

is incurred by refineries, in their sample, they report separate employment effects 

for refineries and non-refineries “which are also all small.” (p. 282). Berman and 

Bui suggest some explanations for the zero or small estimates, particularly for oil 

refineries: they are capital-intensive industries with relatively little employment 

when compared to other manufacturing; they face relatively inelastic demand 

because they sell output in local markets and/or because there are no unregulated 

refineries to compete with; and, finally, regulations may have been associated with 

productivity gains in petroleum refineries. We note that the regulations that these

estimates are derived from are not directly comparable to the current rule; they are 

based on the costs of reductions in refinery air pollution emissions instead of 

changing fuel properties, and therefore may not be applicable for these standards. 

The American Petroleum Institute requested that we delete reference to use of 

analysis by Morgenstern et al. (2002) because it is based on temporary construction 

jobs and a single study. We had presented that figure not as a conclusive estimate, 

but rather as one estimate that we too consider of unclear applicability to the 

standards; we have substituted Berman and Bui’s results. Several commenters cite 

a study by Navigant Economics that estimates 24,500 installation jobs during the 

first three years of the program, and 5,300 permanent jobs, associated with the 

refinery standards. These estimates include employment not just in the refinery

sector, but also multiplier effects (discussed above) for suppliers, which EPA does 

not estimate. As noted above, EPA estimates approximately 250 front-end design 

and engineering jobs and 1,500 construction jobs. 

Section 5.3 of the RIA contains some historical discussion regarding the 

impact on refineries and refining capacity of earlier rules which resulted in higher 

costs for refiners. Over the period 2003-2011, when a number of rules were being 

implemented, EIA data show a net of two refinery closures on its website. 

Meanwhile, over this same period the average size of U.S. refineries increased from 

113,000 barrels per day to 123,000 barrels per day, and total U.S. refining capacity 

increased by six percent. Thus, historically during a time when rules with much 

larger expected impacts were being implemented (the 2003 ultra-low sulfur nonroad 

diesel proposal alone was expected to have a cost impact on refineries more than 
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five times greater than the current rule), U.S. refining capacity increased even as the 

number of U.S. refineries slightly fell. While closing refineries has a negative effect 

on industry employment, it is likely that the increased refining capacity at many of 

the remaining plants had a positive effect on industry employment.

The standards are also likely to have a positive impact on employment 

among producers of equipment that refiners will use to comply with the standards. 

Section V.A.2.c notes that some refiners are expected to need to revamp their 

current treatment units, and others will need to add additional treatment units. 

Producers of this equipment will be expected to hire additional labor to meet this 

increased demand. We also note that the employment effects may be different in 

the immediate implementation phase than in the ongoing compliance phase. It is 

expected that the employment increases through the substitution effect from 

revamping old equipment and installing additional equipment should occur in the 

near term, when current unemployment levels are high, and the opportunity cost of 

workers is relatively low. Meanwhile, the employment decreases in the refining 

sector from the output effect will not start until 2017, when compliance will be 

required, and when unemployment is expected to be reduced; in a time of full 

employment, any changes in employment levels in the regulated sector are mostly

expected to be offset by changes in employment in other sectors.