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Chapter 9 Economic Impact Analysis

9.1 Introduction

The standards 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 standards: the 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 these standards on employment in the regulated sectors.

The employment effects of environmental regulation are difficult to disentangle from 

other economic changes and business decisions that affect employment, over time and across 

regions and industries. In light of these difficulties, economic theory provides a constructive 

framework for approaching these assessments and for better understanding the inherent 

complexities in such assessments. Neoclassical microeconomic theory describes how profitmaximizing firms adjust their use of productive inputs in response to changes in their economic 

conditions.AIn this framework, labor demand impacts for regulated sectors can be decomposed 

into output and substitution effects. For the output effect, by affecting the marginal cost of 

production, regulation affects the profit-maximizing quantity of output. The substitution effect 

describes how, holding output constant, regulation affects the labor-intensity of production. 

Because 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.

In the labor economics literature there is an extensive body of peer-reviewed empirical 

work analyzing various aspects of labor demand, relying on the above theoretical framework.B

This work focuses primarily on the effects of employment policies, e.g. labor taxes, minimum 

wage, etc.CIn contrast, the peer-reviewed empirical literature specifically estimating 

employment effects of environmental regulations is very limited. Several empirical studies,

including Berman and Bui (2001)1and Morgenstern et al (2002),

2

suggest that net employment 

impacts may be zero or slightly positive but small even in the regulated sector. Other research 

suggests that more highly regulated counties may generate fewer jobs than less regulated ones.3

However, since these latter studies compare more regulated to less regulated counties, they

 

A See Layard, P.R.G., and A. A. Walters (1978), Microeconomic Theory (McGraw-Hill, Inc.), Chapter 9, a standard

microeconomic theory textbook treatment, for a discussion. 

B

See Hamermesh (1993), Labor Demand (Princeton, NJ: Princeton University Press), Chapter 2 for a detailed 

treatment. 

C

See Ehrenberg, Ronald G., and Robert S. Smith (2000), Modern Labor Economics: Theory and Public Policy 

(Addison Wesley Longman, Inc.), Chapters 3 and 4, for a concise overview.
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overstate the net national impact of regulation to the extent that regulation causes plants to locate 

in one area of the country rather than another. List et al. (2003)4find some evidence that this type 

of geographic relocation may be occurring. Overall, the peer-reviewed literature does not contain 

evidence that environmental regulation has a large impact on net employment (either negative or 

positive) in the long run across the whole economy.

Analytic challenges make it very difficult to accurately produce net employment 

estimates for the whole economy that would appropriately capture the way in which costs, 

compliance spending, and environmental benefits propagate through the macro-economy. 

Quantitative estimates are further complicated by the fact that macroeconomic models often have 

very little sectoral detail and usually assume that the economy is at full employment. The EPA is 

currently in the process of seeking input from an independent expert panel on modeling 

economy-wide impacts, including employment effects. For more information, see: [insert EPA 

website URL for SAB panel on economy-wide modeling. To be posted sometime in early 2014.]

9.2 Impacts on Vehicle Manufacturing Sector

9.2.1 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. Light-duty 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. The 

calculation is performed for an average car, an average truck and an average Class 2b/3 vehicle 

rather than for individual vehicles. The analysis conducted for this rule does not have the 

precision to examine effects on individual manufacturers or different vehicle classes.

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 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.D 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 increased 

manufacturers’ costs.

 

D

See, for instance, Gron, Ann, and Deborah Swenson, 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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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 these standards on the use and scrappage of older vehicles will be 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 

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

standards on scrappage of older vehicles and the turnover of the vehicle fleet.

9.2.2 Employment Impacts in the Auto Sector

This chapter describes changes in employment in the auto sector due to this rule. As with 

the refinery sector, discussed below, we focus on the auto manufacturing sector because it is 

directly regulated, and because it is likely to bear a substantial share of changes in employment 

due to this rule. We include discussion of effects on the 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.

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.5In 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 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.”

We follow the theoretical structure in a study by Berman and Bui 6of the impacts of 

regulation in employment in the regulated sectors. In Berman and Bui’s (2001, p. 274-75) theoretical 
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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.E

 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. 

 The substitution effect describes how, holding output constant, regulation affects the laborintensity 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. 

Following the Berman and Bui framework for the impacts of regulation on employment 

in the regulated sector, we consider two effects for the auto sector: the output effect and the 

substitution effect. 

9.2.2.1 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 Chapter 

9.2.1, 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.

 

E 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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9.2.2.2 The Substitution Effect

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

substitution effect includes 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.

One way to estimate this effect, given the cost estimates for complying with the rule, is to 

use the ratio of workers to each $1 million of expenditures in that sector. 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 auto 

sector due to the changes in expenditures in that sector, rather than as an assessment of all 

employment changes due to these changes in expenditures. In addition, 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 changes in the nature of 

production. This latter effect could either increase or decrease the employment impacts 

estimated here.F

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. The U.S. Bureau of Labor Statistics (BLS) provides its Employment 

Requirements Matrix (ERM),7 which provides direct estimates of the employment per $1 million 

in sales of goods in 202 sectors. The values considered here are for Motor Vehicle 

Manufacturing (NAICS 3361) and Motor Vehicle Parts Manufacturing (NAICS 3363) for 2010. 

 

F 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.
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The Census Bureau provides both the Annual Survey of Manufacturers

8

(ASM) and the 

Economic Census. The ASM is a subset of the Economic Census, based on a sample of 

establishments; though the Census itself is more complete, it is conducted only every 5 years, 

while the ASM is annual. Both include more sectoral detail than the BLS ERM: for instance, 

while the ERM includes the Motor Vehicle Manufacturing sector, the ASM and Economic 

Census have detail at the 6-digit NAICS code level (e.g., light truck and utility vehicle 

manufacturing). While the ERM provides direct estimates of employees/$1 million in 

expenditures, the ASM and Economic Census separately provide number of employees and 

value of shipments; the direct employment estimates here are the ratio of those values. The 

values reported are for Motor Vehicle Manufacturing (NAICS 3361), Automobile and Light 

Duty Motor Vehicle Manufacturing (NAICS 33611), and Motor Vehicle Parts Manufacturing 

(NAICS 3363), for 2011 for the ASM, and 2007 for the Economic Census.

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.G 

Table 9-1 provides the values, either given (BLS) or calculated (ASM, Economic Census) 

for employment per $1 million of expenditures, all based on 2011 dollars, though the underlying 

data come from different years (which may account for some of the differences). These values 

have changed from the Draft RIA to use the most recent values for the ASM, and to put them all 

in 2011$. The different data sources provide similar magnitudes for the estimates for the sectors. 

Parts manufacturing appears to be more labor-intensive than vehicle manufacturing; light-duty 

vehicle manufacturing appears to be slightly less labor-intensive than motor vehicle 

manufacturing as a whole. 

Table 9-1 Employment per $1 Million Expenditures (2011$) in the Motor Vehicle 

Manufacturing Sectora

Source Sector Ratio of workers 

per $1 million 

expenditures

Ratio of workers per $1 

million expenditures, 

adjusted for domestic vs. 

foreign production

BLS ERM Motor Vehicle Mfg 0.754 0.503

ASM Motor Vehicle Mfg 0.633 0.422

ASM Light Duty Vehicle Mfg 0.583 0.389

Economic Census Motor Vehicle Mfg 0.651 0.434

Economic Census Light Duty Vehicle Mfg 0.590 0.393

BLS ERM Motor Vehicle Parts Mfg 2.558 1.706

ASM Motor Vehicle Parts Mfg 2.190 1.461

Economic Census Motor Vehicle Parts Mfg 2.656 1.771

 

G 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.
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Note:

a BLS ERM refers to the U.S. Bureau of Labor Statistics’ Employment Requirement Matrix. ASM refers to 

the U.S. Census Bureau’s Annual Survey of Manufactures. Economic Census refers to the U.S. Census 

Bureau’s Economic Census.

Over time, the amount of labor needed in the auto industry has changed: automation and 

improved methods have led to significant productivity increases. The BLS ERM, for instance, 

provided estimates that, in 1993, 1.64 workers in the Motor Vehicle Manufacturing sector were 

needed per $1 million of 2005$, but only 0.86 workers by 2010 (in 2005$).

9

 Because the ERM 

is available annually for 1993-2010, we used these data to estimate productivity improvements 

over time. We regressed logged ERM values on year for both the Motor Vehicle Manufacturing 

and Motor Vehicle Parts Manufacturing sectors. We used this approach because the coefficient 

describing the relationship between time and productivity is a direct measure of the percent 

change in productivity per year. The results suggest a 3.9 percent per year productivity

improvement in the Motor Vehicle Manufacturing Sector, and a 3.8 percent per year 

improvement in the Motor Vehicle Parts Manufacturing Sector. We then used the equation 

resulting from the regression to project the ERM through 2025. In the results presented below, 

these projected values (adjusted to 2011$) were used directly for the BLS ERM estimates. For 

the ASM, we used the ratio of the projected value in each future year to the projected value in 

2011 (the base year for the ASM) to determine how many workers will be needed per $1 million 

of 2011$; for the Economic Census estimates, we used the ratio of the projected value in the 

future years to the projected value in 2007 (the base year for that estimate). 

Section 2.7 of the RIA discusses the vehicle cost estimates developed for this rule. The 

maximum value for employment impacts per $1 million (before adjustments for changes in 

productivity, after accounting for the share of domestic production) is 1.771 in 2011$ if all the 

additional costs are in the parts sector; the minimum value is 0.389 in 2011, if all the additional 

costs are in the light-duty vehicle manufacturing sector. Increased costs of vehicles and parts 

would, 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. The decline in maximum employment between 2024 and 2025 is 

due to a combination of expected higher productivity and rounding, which makes an employment 

decrease from 760 to 743 job-years appear larger than it is.

Table 9-2 Employment Effects due to Increased Costs of Vehicles and Parts, in job-years

Year Costs (Millions 

of 2011$)

Maximum Employment Due to 

Substitution Effect (if all 

expenditures are in the Parts 

Sector)

Minimum Employment Due to 

Substitution Effect (if all 

expenditures are in the Light Duty 

Vehicle Mfg Sector)

2016 $ 21 0 0 

2017 $ 297 400 100 

2018 $ 615 800 200 
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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 

9.2.2.3 Summary of Employment Effects in the Auto Sector

The overall effect of the rule 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 employment effects of the rule 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 effects combined will be small as well. 

The standards are not expected to provide incentives for manufacturers to shift 

employment between domestic and foreign production. This is because the standards 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 standards, 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 will not apply if other countries are not likely to have 

similar standards.

9.3 Impacts on Petroleum Refinery Sector

9.3.1 Refinery Sales Impacts

The key change for refiners from the standards will be more stringent sulfur 

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

production by about 0.7 cents per gallon (see Section VII.B of the Preamble).

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.”10 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 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 
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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 increase less than one cent per gallon, we expect that the decrease in gasoline 

sales will be negligible over all time horizons. 

9.3.2 Refinery Employment Impacts

The Berman and Bui framework of output and substitution effects can also be applied to 

the impact of the rule on employment in the refinery sector.11 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 Chapter 9.3.1 above suggests 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. This effect will persist as long as the increase in price is in 

place. The higher long-run elasticity suggests that sales will be lower in the long run than in the 

short run, leading to a greater reduction in employment due to the output effect over time. While 

we do not quantify the level of job losses that are expected here, recall that the quantity of 

gasoline sold as a result of the standards here is expected to decrease by only a very small 

amount over any time horizon. 

The substitution effect of the rule 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 need to perform additional work that will require hiring more employees. This effect 

may be larger in the short run, when initial investments for compliance need to be made; over 

time, the increase in employment due to these investments may be reduced. Chapter 4.5.1

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 15000 

construction jobs. As the petroleum sector employed approximately 71,000 workers in 2011, 

this increase in employment is small when compared to 2011 levels.

These standards are not expected to provide incentives to shift employment between 

domestic and foreign production. First, the standards 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 
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production focuses on investments for existing capacity instead of expanding capacity.

H

 In this 

case, what is relevant is whether the necessary modifications to comply with Tier 3 would 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 are 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.

Thus it is expected that for the refining sector, the output effect will lower employment, 

and the substitution effect may raise employment. As a whole then, it is not evident whether the 

rule 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)

7 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: 

 

H 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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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 estimate are derived from are not directly comparable to the current rule; it 

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

properties, and therefore may not be applicable for the standards here.

Section VII.B.5 of the Preamble 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 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. Chapter 5 notes that some 

refiners are expected to revamp their current treatment units, and others will need to add 

additional treatment units. Producers of this equipment are 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 

is 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.
EO12866_Tier 3 2060-AQ86 FRM RIA_Chapter 9 20140130.pdf

*** EO12866 Review - Draft - Do Not Cite, Quote, or Release During Review

9-12

References

1Berman, 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.

2Morgenstern, Richard D., William A. Pizer, and Jhih-Shyang Shih. “Jobs Versus the Environment: An IndustryLevel Perspective.” Journal of Environmental Economics and Management 43 (2002): 412-436 (Docket EPA-HQOAR-2011-0135-0057).

3 Greenstone, M. (2002). “The Impacts of Environmental Regulations on Industrial Activity: Evidence from the 

1970 and 1977 Clean Air Act Amendments and the Census of Manufactures,” Journal of Political Economy 110(6): 

1175-1219; Walker, Reed. (2011).“Environmental Regulation and Labor Reallocation." American Economic 

Review: Papers and Proceedings 101(3): 442-447.

4List, J. A., D. L. Millimet, P. G. Fredriksson, and W. W. McHone (2003). “Effects of Environmental Regulations 

on Manufacturing Plant Births: Evidence from a Propensity Score Matching Estimator.” The Review of Economics 

and Statistics 85(4): 944-952.

5

Schmalensee, Richard, and Robert N. Stavins. “A Guide to Economic and Policy Analysis of EPA’s Transport 

Rule.” White paper commissioned by Excelon Corporation, March 2011 (Docket EPA-HQ-OAR-2011-0135-0054).

6Berman, 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.

7

http://www.bls.gov/emp/ep_data_emp_requirements.htm

8

http://www.census.gov/manufacturing/asm/index.html

9

http://www.bls.gov/emp/ep_data_emp_requirements.htm; this analysis used data for sectors 88 (Motor Vehicle 

Manufacturing) and 90 (Motor Vehicle Parts Manufacturing) from “Chain-weighted (2000 dollars) real domestic 

employment requirements table. . . adjusted to remove imports.”

10 Federal Trade Commission, Bureau of Economics. “The Petroleum Industry: Mergers, Structural Change, and 

Antitrust Enforcement.” http://www.ftc.gov/os/2004/08/040813mergersinpetrolberpt.pdf , accessed 8/16/11 (Docket 

EPA-HQ-OAR-2011-0135-0055).

11 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.