From: Sorrels, Larry

To: Higgins, Cortney

Cc: Wood, Gil; Weatherhead, Darryl; Cole, David; Green, Gregory; McGartland, Al; Barron, Alex; DeMocker, Jim

Subject: Revised employment language for residential wood heaters NSPS proposal RIA

Date: Tuesday, December 03, 2013 5:20:43 PM

Attachments: Employmentimpactsrevisedlanguage2013RWHNSPSproposalRIA12-3-13.docx

Hi Cortney:

Attached is the revised employment language for the residential wood heaters proposal NSPS RIA. 

These revisions are in redline/strikeout to the existing employment impacts section of the RIA

(section 5.7). The revisions reflect review by NCEE in coordination with offices within EPA. In

addition, there is an edit to a sentence in section 3.2.5 of the RIA, p. 3-16, that needs to be made

to conform to the revised employment language. That edit is:

“In contrast, if locally-available alternative heating fuels (i.e., electricity, and fuel oil) are relatively

higher priced, it may make switching away from wood heating equipment less likely and, ultimately,

make demand for wood heating equipment inelastic”,

which is changed from

“In contrast, sustained higher prices for heating fuel (i.e., electricity, natural gas, and fuel oil) may

make switching away from wood heating equipment less likely and, ultimately, make demand for

wood heating equipment more inelastic.”

Please let me know if you have any questions. If this revised language and edit are fine to become

part of the RIA, I will include them in a redline/strikeout RIA version. Thanks.

Larry Sorrels

US EPA/OAQPS/HEID/AEG

Economist

919-541-5041

919-541-0839 (fax)

C439-02

Room C445A
1.15.7 Employment Impacts 

In addition to addressing the costs and benefits of the proposed rule, EPA has analyzed 

the impacts of this rulemaking on employment, which are presented in this section. While a 

standalone analysis of employment impacts is not included in a standard cost-benefit analysis , 

such an analysis is of particular concern in the current economic climate of sustained high 

unemployment. Executive Order 13563, states, “Our regulatory system must protect public 

health, welfare, safety, and our environment while promoting economic growth, innovation, 

competitiveness, and job creation” (emphasis added). Therefore, we seek to inform the 

discussion of labor demand and job impacts by providing an estimate of the employment impacts 

of the proposed regulation using labor requirements for the installation, operation, and 

maintenance of control requirements, as well as reporting and recordkeeping requirements. 

Unlike several recent RIAs, however, we do not provide employment impacts estimates based on

the study by Morgenstern et al. (2002); we discuss this decision after presenting estimates of the 

labor requirements associated with reporting and recordkeeping and the installation, operation, 

and maintenance of control requirements. A discussion of labor requirements associated with the 

installation, operation, and maintenance of control requirements, as well as reporting and 

recordkeeping requirements is included in the sSection 5.1.6, on compliance costs, of this RIA.

However, Wdue to data and methodology limitations, we have not quantified the rule’s effects 

on labor, or the effects induced by changes in workers’ incomes. What follows is an overview of 

the various ways that environmental regulation can affect employment. EPA continues to explore 

the relevant theoretical and empirical literature and to seek public comments in order to ensure 

that such estimates are as accurate, useful and informative as possible.

This proposal is expected to affect employment in the United States through the regulated 

sector – residential wood heater manufacturers – and related sectors, specifically, masonry 

contractors and residential construction (e.g. performing masonry and other on-site fireplace 

construction), wholesalers and distributors, and retailers (e.g. home furnishing stores that sell 

wood heaters), and suppliers of substitutes for residential wood-burning heaters (e.g. electric or 

natural gas heaters). The production of devices like wood stoves, hydronic heaters, and fireplace 

inserts is included under the heating equipment category (NAICS 333414). The U.S. Census 

Bureau reports that, in 2011, the industry employed 15,925 workers (see Table 3-1 in Section 

3.1.3 of this RIA). Based on company data obtained for this profile, the residential wood heaters 

industry has a large number of producers, and we were able to identify 635 firms, employing 

approximately 17,000 workers annually. Previous analysis suggests that the industry relies on 

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seasonal labor, ramping up production in months leading up to winter and reducing employment 

and production during the warmer parts of the year (AEI, 1986).

As described in Section 3.2.3 of this RIA, demand for residential wood heaters has been 

declining steadily, as shown from 1989 to 2005, but has stabilized more recently. More 

households rely on wood fuel as a supplemental heat source rather than as a primary source. In 

2010, 2.1% of total occupied homes in the United States relied on wood heat as the primary fuel 

source for home heating. About 10–12% of American households use wood when secondary 

wood heat demand is counted, according to the U.S. Census Bureau and the Energy Information 

Administration (EIA). Demand varies regionally, in part, due to availability of energy sources. 

Current regional demand patterns are expected to continue, with the Northeast and Northwest 

regions of the country driving wood fuel combustion demand, but analysts anticipate that the 

wood heat product market will be embraced in other areas of the country in which wood and 

biomass are viable and inexpensive fuel sources (Frost & Sullivan, 2010).

There are no recent empirical estimates of the price elasticity of demand for residential 

wood heaters. An estimate of −1.6 was derived for use in the RIA for the current Residential 

Wood Combustion NSPS (EPA, 1986). Available estimates for residential energy and heating 

fuel demand generally are relatively inelastic (i.e., there are only very small changes in demand 

in response to an increase in energy or fuel prices). A recent RAND report suggests that in the 

short term, demand for electricity and natural gas in residential markets is relatively inelastic 

(Bernstein and Griffin, 2005). There are a number of close substitutes for residential wood 

heating devices that include electric and gas furnaces and space heaters. The extent to which 

consumers are able to substitute between these options is likely to vary depending on geographic 

location. Overall, the presence of good substitutes will increase the elasticity of demand for 

wood heating equipment. In contrast, if locally-available alternative heating fuels (e.g. 

electricity, fuel oil) are relatively higher-priced, it may make switching away from wood heating 

equipment less likely and, ultimately, make demand for wood heating equipment inelastic. Also, 

the elasticity may depend on whether the fuel in question is a secondary source of fuel instead of 

a primary fuel source. 

From an economic perspective labor is an input into producing goods and services; if 

regulation requires that more labor be used to produce a given amount of output, that additional 

labor is reflected in an increase in the cost of production. Moreover, when the economy is at full 

employment, we would not expect an environmental regulation to have an impact on overall 
employment because labor is being shifted from one sector to another. On the other hand, in 

periods of high unemployment, employment effects (both positive and negative) are possible. 

For example, an increase in labor demand due to regulation may result in a short-term net 

increase in overall employment due to the potential hiring of previously unemployed workers by 

the regulated sector to help meet new requirements (e.g., to install new equipment) or by the 

environmental protection sector to produce new abatement capital. When significant numbers of 

workers are unemployed, the opportunity costs associated with displacing jobs in other sectors 

are likely to be smaller. And, in general, if a regulation imposes high costs and does not increase 

the demand for labor, it may lead to a decrease in employment. The responsiveness of industry 

labor demand depends on how these forces all interact. Economic theory indicates that the 

responsiveness of industry labor demand depends on a number of factors: price elasticity of 

demand for the product, substitutability of other factors of production, elasticity of supply of 

other factors of production, and labor’s share of total production costs. Berman and Bui (2001) 

put this theory in the context of environmental regulation, and suggest that, for example, if all 

firms in the industry are faced with the same compliance costs of regulation and product demand 

is inelastic, then industry output may not change much at all.

To provide a partial picture of the employment consequences of this rule, EPA considers 

the methodology of Morgenstern, Pizer, and Shih (2002) in describing the effects of the 

regulation on the regulated industry. This approach has been used by EPA previously in 

Regulatory Impact Analyses prepared recently.

Regulations set in motion new orders for pollution control equipment and services. New 

categories of employment have been created in the process of implementing environmental 

regulations. When a regulation is promulgated, one typical response of industry is to order 

pollution control equipment and services in order to comply with the regulation when it becomes 

effective, while closure or of plants or facilities that choose not to comply occurs after the 

compliance date. Environmental regulation may increase revenue and employment in the 

environmental technology industry. While these increases represent gains for that industry, they 

are translate into costs to the regulated industries required to install the equipment. As with any 

pool of labor, the gross size of the labor pool does not reflect the net impact on overall 

employment after adjusting for shifts in other sectors.

Environmental regulations support employment in many basic industries. Regulated firms 

either hire workers to design and build pollution controls directly or purchase pollution control 

devices from a third party for installation. Once the equipment is installed, regulated firms hire 

workers to operate and maintain the pollution control equipment—much like they hire workers 

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to produce more output. Morgenstern et al. estimated the effects of pollution abatement 

expenditures on net employment in four highly polluting/regulated sectors (pulp and paper, 

plastics, steel, and petroleum refining). They conclude that increased abatement expenditures 

generally have not caused a significant change in net employment in those sectors. 

Environmental regulations support employment in many basic industries. In addition to the 

increase in employment in the environmental protection industry (via increased orders for 

pollution control equipment), environmental regulations also support employment in industries 

that provide intermediate goods to the environmental protection industry. The equipment 

manufacturers, in turn, order steel, tanks, vessels, blowers, pumps, and chemicals to manufacture 

and install the equipment. Currently in most cases there is no scientifically defensible way to 

estimate the employment impacts in these intermediate goods sectors. 

1.1.15.7.1 Employment Impacts within the 

Regulated Industry

In recent RIAs we have applied estimates from a study by Morgenstern, Pizer and Shih

(2002)1 to derive the employment effects of new regulations within the regulated industry. (See, 

for example, the Regulatory Impact Analyses for the recently released final MATS and CSAPR 

regulations). Determining the direction of employment effects in the regulated industry is also 

challenging due to competing effects. Complying with the new or more stringent regulation 

requires additional inputs, including labor, and may alter the relative proportions of labor and 

capital used by regulated firms in their production processes. Morgenstern et al. (2002) 

demonstrate that environmental regulations can be understood as requiring regulated firms to add 

a new output (environmental quality) to their product mixes. Although legally compelled to 

satisfy this new demand, regulated firms have to finance this additional production with the 

proceeds of sales of their other (market) products. Satisfying this new demand requires additional 

inputs, including labor, and may alter the relative proportions of labor and capital used by 

regulated firms in their production processes.

More specifically, Morgenstern, Pizer, and Shih (2002) decompose the effect of 

regulation on net employment in the regulated sector into the following three subcomponents:

 The Demand Effect: higher production costs from complying with the regulation will 

raise market prices, reducing consumption (and production), thereby reducing 

demand for labor within the regulated industry. The “extent of this effect depends on 

 1 Morgenstern, R. D., W. A. Pizer, and J. S. Shih. 2002. Jobs versus the Environment: An Industry-Level 

Perspective.‖ Journal of Environmental Economics and Management 43(3):412-436.

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the cost increase passed on to consumers as well as the demand elasticity of industry 

output.” (p. 416)

 The Cost Effect: Assuming that the capital/labor ratio in the production process is 

held fixed, as “production costs rise, more inputs, including labor, are used to produce 

the same amount of output,” (p. 416). For example, to reduce pollutant emissions 

while holding output levels constant, regulated firms may require additional labor. 

 The Factor-Shift Effect: Regulated firms’ production technologies may be more or 

less labor intensive after complying with the regulation (i.e., more/less labor is 

required relative to capital per dollar of output). “Environmental activities may be 

more labor intensive than conventional production,” meaning that “the amount of 

labor per dollar of output will rise.” However, activities may, instead, be less labor 

intensive because “cleaner operations could involve automation and less employment, 

for example.” (p. 416)

The demand effect is expected to have an unambiguously negative effect on employment, 

the cost effect to have an unambiguously positive effect on employment, and the factor-shift 

effect to have an ambiguous effect on employment. Without more information with respect to the 

magnitudes of these competing effects, it is not possible to predict the total effect environmental 

regulation will have on overall employment levels in the regulated sector.

Morgenstern et al. estimated the effects of pollution abatement expenditures on net 

employment in four highly polluting/regulated sectors (pulp and paper, plastics, steel, and 

petroleum refining). They conclude that increased abatement expenditures generally have not 

caused a significant change in net employment in those sectors. While the specific sectors 

Morgenstern et al. examined are different than the sectors considered here, the methodology that 

Morgenstern et al. developed is still an informative way to qualitatively assess the effects of this 

rulemaking on employment in the regulated sector.

While the theoretical framework laid out by Morgenstern et al. still holds for the 

industries affected under this proposed NSPS, important differences in the markets and 

regulatory settings analyzed in their study and the setting presented here lead us to conclude that 

it is inappropriate to utilize their quantitative estimates to estimate the employment impacts from 

this proposal. The differences between the underlying regulations motivating the abatement 

expenditures studied in Morgenstern et al. are potentially too many to allow for the direct 

transfer of their quantitative estimates to the proposed NSPS amendments. There are important 

differences between the affected industries and the four manufacturing industries studied by 

Morgenstern et al. In addition to important differences between the regulated sectors, the 

pollution control strategies that form the basis of the cost inputs in the Morgenstern et al. 
analysis are primarily add-on or end-of-line pollution controls, in general covering more than 

70% of the abatement expenditures in most years and industries analyzed, as may be seen in 

Table 5-8. However, the control strategies analyzed for this RIA mostly include process and 

design changes to reduce emissions during the production of affected heaters, and not after these 

heaters are in operation.2 For instance, use of a catalyst combustor is common in wood stoves in 

order to reduce emissions and also improve heat efficiency. Retrofits are uncommon because 

replacing the wood stove is often a more economical alternative. For these reasons we conclude 

there are too many uncertainties as to the comparability of the Morgenstern et al. study to apply 

their estimates to quantify the employment impacts within the regulated sectors for this proposed 

regulation. 

Table 5-8. Percent of Abatement Expenditures on Changes in Production Processes3

Industry 1979 1983 1988 1991

Pulp and Paper 16% 20% 39% 53%

Plastics 15% 12% 25% 33%

Petroleum Refining 28% 43% 37% 39%

Iron and Steel 4% 7% 6% 8%

 2 More detail on how emission reductions expected from compliance with this rule can be obtained can be found in 

Section 4 of this RIA. 3 U.S. Bureau of the Census. Pollution Abatement Costs and Expenditures. Washington, DC: U.S. Government 

Printing Office, various years. The pulp and paper industry is defined by SIC 2611 & 2621, plastics by SICE 

282, petroleum refining by SIC 2911, and iron and steel by SIC 332. For pulp and paper and iron and steel 

industries in 1983 the data is partially estimated based on non reported data due to disclosure reasons. The 1984 

(1989) data for plastics (pulp and paper) is used instead of 1983 (1988) due to a lack of reported data in the 

original year.