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 C445A1.1 5.7 Employment Impacts
In addition to addressing the cos ts 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 lab or requirements associated with the installation, operation, and maintenance of control requirements, as well as reporting and recordkeeping requirements is included in the s S ection 5. 1.6, on compliance costs

, of this RIA

. H owever, W due to data and methodology limitations, w e 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 resident ial 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. e lectric 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 15,92 5 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 Formatted: Outline numbered + Level: 2 + Numbering Style: 1, 2, 3,

... + Start at: 7 + Alignment: Left + Aligned at: 1.5" + Indent at: 1.75"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 r ather t han 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

. C urrent 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 resi dential 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. Als o, 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 overallemployment bec ause 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 pr oduce new abatement capita l. W h en significant numbers of
workers are unemployed, the opportunity costs associated with displacing jobs in oth er 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 l ead to a decrease in employment. The responsiveness of industry labor demand depends on how these f orces all interact. Economic theory indicates that the responsiveness of industry labor demand depends on a number of factors: p rice 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 t hat, for example, if al l firms in the industry are fac ed with the same compliance costs of regulation and product demand
is inelastic

, th e n 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 describ ing the effects of the regulation on the regulated industry. This approach has been used by EPA previou sly 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 regulati on 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

c ompliance 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 th e 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 polluti on control equipment

— much like they hire workers Formatted: Highlightto 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 petrol eum 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 imp acts in these intermediate goods sectors.

1.1.1 5.7.1 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 regulate d 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 wit h 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

procee ds 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, Mor genstern, 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, r educing 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. Formatted: Highlight

Formatted: Outline numbered + Level: 3 + Numbering Style: 1, 2, 3,

... + Start at: 1 + Alignment: Left + Aligned at: 3" + Indent at: 3.5"the cost increase passed on to consumers as well as the demand elasticity of industry output. ” (p. 416)

 The Cost Ef fect : Assuming that the capital/labor ratio in the production process is held fixed, a s “ production costs rise, more inputs, including labor, are used to pr oduce 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). “E nvironmental 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 “ clean er operations could involve automation and less employment, for example. ” (p. 416)

The demand effect is expected to have a n unambiguously negative effect on employment,
the cost effect to have a n 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 abatemen t 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 st ill 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 differ ences 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
diff erences 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 M orgenstern 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 emiss ions 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 Processes 3

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 SI C 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.