**EO12866_Tier 3 2060 -**  **AQ86 FRM FRN Chapter X**  **_201401 30**  **. pdf**  ***** EO12866 Review -**  **Draft -**  **Do Not Cite, Quot e, or Release During Review ** ***

Page 1 of 13 

## X. **Econom ic**  **Im pact**  **Analysis A.**  **Introduction** The rule will affect two sectors directly : vehicle manufacturing and petroleum refining. For these two regulated sectors, the economic impact analy sis discusses the market impacts from the rule : changes in price and q uantity sold. In addition, although analy sis of employ ment impacts is not part of a benefit
- cost anal ys is (except to the extent that labor costs contribute to costs), employ ment impacts of federal rules are of particular concern in the current economic cl imate of sizeable unemploy

ment. Executive Order 13563, “Improving Regulation and Regulatory

Review” (January

18, 2011), states, “ Our regulatory s ys tem 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 employ ment in the regulated sectors. Some commenters suggest that the overall effects of Tier 3 on the econom y are likel y to be positi ve, 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 commente rs suggest negative impacts, especiall y 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 manufa cturers.” 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 ye ars, it is possible that the assumptions underlying a quantitative anal ys is, 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 primaril y through technological changes to vehicles. These changes to vehicl e 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 $8 8 fo r 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 full y competitive industry , these costs**EO12866_Tier 3 2060 -**  **AQ86 FRM FRN Chapter X**  **_201401 30**  **. pdf**  ***** EO12866 Review -**  **Draft -**  **Do Not Cite, Quot e, or Release During Review ** ***

Page 2 of 13 would be entirel y 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 b y 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 veh icles 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 sli ghtly , 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
- ye ar/80,000
- mile warranty could improve vehicle reliabilit y 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 anal ys is. **C. Impacts on Petroleu**  **m 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 b y about 0. 65 cents per gallon (see Section VII.B)
.

1 See, for instance, Gr on, 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 signi ficantly 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 o ver time, full
- cost pass - through may be more appropriate than a result based on this older study.**EO12866_Tier 3 2060 -**  **AQ86 FRM FRN Chapter X**  **_201401 30**  **. pdf**  ***** EO12866 Review -**  **Draft -**  **Do Not Cite, Quot e, or Release During Review ** ***

Page 3 of 13 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 th is 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 g allon, most will face much lower costs, as the averaging, banking, and trading provisions of the standards si gnificantl y ease the challenge of refineries to meet the standards
. In a perfectl y competitive industry , this cost would be passed along complete ly

to consumers. In an imperfectl y 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 u p 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 i n 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 t o 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 inc rease in fuel costs, consumers can more easil y 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 ).**EO12866_Tier 3 2060 -**  **AQ86 FRM FRN Chapter X**  **_201401 30**  **. pdf**  ***** EO12866 Review -**  **Draft -**  **Do Not Cite, Quot e, or Release During Review ** ***

Page 4 of 13 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 discu sses changes in employ ment due to the rule. We focus on the auto manufacturing sector and the refinery sector because they

are directly regulated, and because they are likel y to bear a substantial share of changes in employ ment due to this rule. We parti ally 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 Li ght
- Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards. 3 For the refinery

sector we provide a qualitative anal ys is. 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 ex ternal 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 econom y is at full employ ment, an environmental regulation is unlikely to have much impact on net overall U.S. employ ment; instead, labor would primarily be shifted from one sector to another. These shifts in employ ment impose an opportunity

cost on society , approximated by th e wages of the emplo ye es, as regulation diverts workers from other activities in the econom y. In this situation, any effects on net employ

ment are likel y 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 unemploy ment, a change in labor demand due to regulation may affect n et overall U.S. employ

ment because the labor market is not in equilibrium. Schmalansee and Stavins point out that net positive employ ment effects are possible in the near term when the economy

is at less than full employ ment due to the potential hiring of idle labor resources b y 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 Inthe 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 emplo ym ent could vary over time, region, and sector, and positive

3 7 7 FR 62623 ( October 1 5 , 201 2 )
. 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 EP A
- HQ
- OAR
- 2011
- 0135
- 0054 ).**EO12866_Tier 3 2060 -**  **AQ86 FRM FRN Chapter X**  **_201401 30**  **. pdf**  ***** EO12866 Review -**  **Draft -**  **Do Not Cite, Quot e, or Release During Review ** ***

Page 5 of 13 effects on employ

ment 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 employ

ment effects since it can “paint an inaccurate picture of net employ ment impacts if not pl aced 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 increas e employ ment, by stimulating auto companies and refiners to invest in pollution abatement equipment. As will be discussed further below, EPA agrees that the standards are likel y to lead to more employment to provide abatement equipment, but employ

ment 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 employ

ment in the regulated sectors to be small. ECTA argues that job impacts will be not only posit ive in the auto and auto parts sectors, but substantially more positive than EPA states , based on R egional Input - Output M odeling S ys tem (RIMS) multipliers that find increases of 5.9 jobs for every $1 million investment in new auto parts. Multiplier impact s trace the entire chain of job impacts associated with an expenditure, including factors such as changes in emplo ym ent in retail establishments due to changes in workers in the auto sector. Because the expenditures will occur when unemplo ym ent is still h igh, 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 macroeconom y. Because of unc ertainty

over the state of the econom y when the increased expenditures will occur, EPA has not quantified the multiplier impacts due to changes in employ ment associated with these standards. As discussed again below, some expenditures, perhaps especiall y 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 durin g the current period of above
- average unemploy ment. In contrast, the ongoing costs of complying with the standards, which contribute most directly to price increases, are likel y to come in future years, when it is expected that unemploy

ment rates will be lower. The Mercatus Center at George Mason University recommended that we “acknowledge that both jobs gained and jobs destroy ed 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 employ ment, positive or negative, is costly
. Our analy sis of the employ ment impacts of the standards is intended to identify additional way s that these standards will affect the public
. E mploy ment clearl y provides benefits to the people who are employed, and reducing unemploy ment is considered a desirable outcome in times of high unemploy

ment
. EPA disagrees that minimizing compliance jobs should be**EO12866_Tier 3 2060 -**  **AQ86 FRM FRN Chapter X**  **_201401 30**  **. pdf**  ***** EO12866 Review -**  **Draft -**  **Do Not Cite, Quot e, or Release During Review ** ***

Page 6 of 13 an independent objective of this rulemaking . The objective of the program is to improve air qualit y through reductions in vehicle emissions ; we provide information concerning employ ment impacts as part of our overall anal ys is of economic impacts from the rule. 5 The Mercatus Center also requests that we consider the long
- term effects of unemploy ment 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, 6 but we also note , as discussed further below, that we expect very small employ

ment impacts from the standards
. After reviewing these comments, we conclude they have not identified an y specific reason to depart from the approach to employ ment analy sis that wa s used in the NPRM , though we here use a slightly modified theoretical framework
. In the NPRM, w e follow ed the theoretical structure in a study by Morgenstern, Pizer, and Shih (2002) 7 of the impacts of regulation in employment in the regulated sectors. We here shift to a very

similar framework b y 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 regulati on 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 productio n 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.” Americ an 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
- HQ
OAR
- 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 c onclude 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 em ployment 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
- Shy ang 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)
.**EO12866_Tier 3 2060 -**  **AQ86 FRM FRN Chapter X**  **_201401 30**  **. pdf**  ***** EO12866 Review -**  **Draft -**  **Do Not Cite, Quot e, or Release During Review ** ***

Page 7 of 13  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, e quipment inspection requirements, specialized waste handling, or polluti on 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 expenditure s 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 po int to a definitive net effect of regulation on labor demand at regulated firms. 1. Employ

ment 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, employ ment 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 an y decrease in e mploy ment 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 onl y. The substitution effect measures the impacts due to th e 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 employ ment due to incorporation of abatement technologies and overal l 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 b y the cost estimate s for compl yi ng with the rule. This approach estimat es 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**EO12866_Tier 3 2060 -**  **AQ86 FRM FRN Chapter X**  **_201401 30**  **. pdf**  ***** EO12866 Review -**  **Draft -**  **Do Not Cite, Quot e, or Release During Review ** ***

Page 8 of 13 changes in the nature of production. This latter effect could either increase or decrease the employ

ment impacts estimated here. 10 Some of the costs of this rule will be spent directl y 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 separatel y present the r atios for both the auto manufacturing sector and the auto parts manufacturing sector. There are several public sources for estimates of employ ment 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 Employ ment Requirements Matrix (ERM), 11 the Census Bureau ’s Annual Survey of Manufactures 12 (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 econom y: 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, mo re aggregated sector, such as motor vehicle manufacturing. As a result, it is not necessary to extrapolate employ

ment 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 sufficientl y 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 th ese sectors, such as steel or electronics producers. They thus may best be viewed as the effects on employ ment in the specific sectors due to the changes in expenditures in those sectors, rather than as an assessment of all employ

ment changes due to these changes in expenditures. The values used here are adjusted to remove the employ ment 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 change s 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/manufactur ing/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 s ales in the U.S. For the period 2001
- 2010, the proportion is 66.7 percent (Docket EPA
HQ
- OAR
- 2011
- 0135
- 0333)
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Page 9 of 13 As discussed in the RIA, trends in the BLS ERM are used to estimate producti vity 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 employ ment. Chapter 2.1 of the RIA discusses the vehicle cos t estimates developed for this rule, discussed in Section VII.A, presented in the second column. The maximum value for employ ment impacts per $1 million (2011$) (before adjustments for changes in productivity , after accounting for the share of domestic pr oduction) is 1
. 771 if all the additional costs are in the parts se ctor; 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
- ye ars, beginning with program implementation, some of these employ ment gains may

occur earlier as auto manufacturers and parts suppliers hire staff in anticipation of compliance with the standard. A job
- ye ar is a way to calculate the amount of work needed to complete a specific task. For example, a job
- ye ar 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 Employ ment Effect (if all expenditures are in the Parts Sector) Minimum Employ m ent Effect (if all expenditures are in the Li ght Dut y 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 Employ

ment Effects in the Auto Sector The overall effect of the standards on auto sector employ ment 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 onl y a partial estimate of the substitution effect, we cannot reach a quantitative estimate of the overall**EO12866_Tier 3 2060 -**  **AQ86 FRM FRN Chapter X**  **_201401 30**  **. pdf**  ***** EO12866 Review -**  **Draft -**  **Do Not Cite, Quot e, or Release During Review ** ***

Page 10 of 13 employ ment effects of the standards on auto sector employ ment or even whether the total effect will be positive or negative. However, given that the expec ted increase in production costs to the auto manufacturers is relativel y 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 employ ment 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 technolog ies that other countries may

seek now or in the future, developing this capacit y 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 n ot likely to have similar standards. 2. Refinery

Employ ment Impacts The Berman and Bui (200 1 ) framework of output and substitution effects can also be applied to the impact of the rule on employ ment in the refinery

sector. Here we use a full y 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 discussio n is qualitative, we do not sum the net effects on employ ment. The output effect on refining sector emplo ym ent is expected to be negative. The discussion in Section X.C above suggested that the standar ds 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 employ ment in the refining sector. While we d o not quantify the level of job losses that could be expected here, recall that the quantity of gasoline sold as a result of the se standards is expected to decrease by only a very small amount over an y time horizon. The substitution effect of the st andards 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 s atisfy the requirements of the rule, firms in the refining industry are expected to perform additional work that will require hiring more employees, especiall y perhaps in the short run. Section V. L .2. e discusses the expected employ ment needed to reduce th e sulfur content of fuels; as noted there, to meet the Tier 3 sulfur standards, refiners are expected to invest $2 billion between 201 2 and 2019 and utilize approximately 25 0 front
- end design and engineering jobs and 1 , 5 00 construction jobs. As the petroleum sector employed**EO12866_Tier 3 2060 -**  **AQ86 FRM FRN Chapter X**  **_201401 30**  **. pdf**  ***** EO12866 Review -**  **Draft -**  **Do Not Cite, Quot e, or Release During Review ** ***

Page 11 of 13 approximately 71,000 workers in 2011 , this temporary increase in employment will be small when compared to 2011 levels. Thi s rule is not expected to provide incentives to shift employ ment 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 econom y standards as well as increased use of renewable fuels. As a result, this anal ys is of incentives to shift employ m ent between domestic and foreign production focuses on investments for existing capacity instead of expanding capacity
. 14 Inthis 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 anal yz ing 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 currentl y 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. Alternativel y, 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 actuall y occurre d. Over the last 8 years, imports of gasoline and diesel fuel have continued to be the marginal suppl y, 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).**EO12866_Tier 3 2060 -**  **AQ86 FRM FRN Chapter X**  **_201401 30**  **. pdf**  ***** EO12866 Review -**  **Draft -**  **Do Not Cite, Quot e, or Release During Review ** ***

Page 12 of 13 Thus it is expected that for the refining sector, the output effect will lower employ ment, and the substitution effect will raise employ ment . As a whole then, it is not evident whether the standards will increase or decrease employ ment in the refining sector. H owever, given the small anticipated reduction in quantity sold, it appears that the standards will not have major employ ment consequences for this sector. The petroleum refining industry is one of the manufacturing industries studied by Berman and Bui (200 1 ) when they look ed at the effect of environmental expenditures on employment. They found that “ Employ

ment effects are very

small, generall y 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 anal yz e is incurred b y refineries, in their sample, they report separate emplo ym ent 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, particularl y for oil refineries: they

are capital
- intensive industries with relativel y little employment when compared to othe r manufacturing; they face relativel y 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 ref

ineries. We note that the regulations that th e s e estimate s 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 the se standards. The American Petroleum Institute requested that we delete reference to use of anal ys is by

Morgenstern et al. (2002) because it is based on temporary construction jobs and a single stud y. We had present ed 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 Ber man and Bui’s results
. S everal commenters cite a study by Navigant Economics that estimates 24,500 installation jobs during the first three ye ars of the program, and 5,300 permanent jobs, associated with the refinery standards. These estimates include employ ment 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 25 0 front
- end design and engineering jobs and 1 , 5 00 construction jobs
. Section 5.3 of the RIA contains some historical discussion regarding the impact on refineries and refining capacity of earlier rules which resu lted 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 capacit y increased b y six percent. Thus, historically during a time when rules with much larger expected impacts were being implemented (the 2003 ultra
- low sulfur nonroad diesel p roposal alone was expected to have a cost impact on refineries more than**EO12866_Tier 3 2060 -**  **AQ86 FRM FRN Chapter X**  **_201401 30**  **. pdf**  ***** EO12866 Review -**  **Draft -**  **Do Not Cite, Quot e, or Release During Review ** ***

Page 13 of 13 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 indu stry

employ ment, it is likely

that the increased refining capacity at many of the remaining plants had a positive effect on industry employ ment. The standards are also likely to have a positive impact on employ ment among producers of equipment that refiner s 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 a dditional 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. Itis 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 unemploy ment levels are high, and the opportunity cost of workers is relatively

low. Meanwhile, the employment decreases in the refining s ector from the output effect will not start until 2017, when compliance will be required, and when unemploy ment is expected to be reduced; in a time of full employ ment, an y changes in employ ment levels in the regulated sector are mostly expected to be offset b y changes in emplo ym ent in other sectors.