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9 - 1 

## Chapter 9 **Econom ic**  **Im pact**  **Analysis 9.1**  **Introduction** The standards will affect two sectors directly : vehicle manufacturing and petroleum refining. For these two regulated sectors, the economic impact anal ys is discusses the market impacts from the standards : the change s in price and quantity sold. In addition, although anal ys is 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 cur rent economic climate 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 economi c growth, innovation, competitiveness, and job creation ” (emphasis added). For this reason, we are examining the effects of these standards on employ ment in the regulated sectors . The employ

ment effects of environmental regulation are difficult to disentangle from other economic changes and business decisions that affect emplo ym ent, 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 profit maximizing firms adjust their use of productive inputs in response to changes in their economic conditions. A Inthis framework , labor demand impacts for regulated sectors can be decomposed into output and substitution effects. For the output effect, b y 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 anal yz ing various aspects of labor demand, relying on the above theoretical framework. B This work focuses primarily on the effects of employ

ment policies, e.g. labor taxes, minimum wage, etc. C Incontrast, the peer - reviewed empirical literature specificall y estimating employ ment effects of environmental regulations is very limited. S everal empirical studies , includi ng Berman and Bui (2001) 1 and Morgenstern et al (2002) , 2 suggest that net employ ment 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 l ess 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.EO12866_Tier 3 2060 - AQ86 FRM RIA_Chapter 9 201401 30 . pdf

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9 - 2 overstate the net national impact of regulation to the extent that regulation causes plants to locate in one area of the country rather than an other. List et al . (2003) 4 find some evidence that this ty pe of geographic relocation may be occurring. Overall , the peer - reviewed literature does not contain evidence that environmental regulation has a large impact on net emplo ym ent (either negative or p ositive) in the long run across the whole economy. Analy tic 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 environment al benefits propagate through the macro - econom y. Quantitative estimates are further complicated b y the fact that macroeconomic models often have very little sectoral detail and usually assume that the economy is at full employ ment. The EPA is currentl y i n the process of seeking input from an independent expert panel on modeling econom y- wide impacts, including emplo ym ent 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 ye ars, it is possible that the assumptions underlying a quantitative anal ys is, as well as market conditions, might change. For th is reason, w e present a qualitative discussion of the effects on vehicle sales of the standards at the aggregate market level. Light - duty vehicle manufacturers are expect ed to comply with the standards primaril y 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 2 b /3 vehicle rather than for individual vehicles . The anal ys is conducted for this rule does not have the precision to examine effects on individual manufacturers or different vehicle classes . Se ction VII.A estimates the increase in vehicle costs due to the standards . These costs differ across ye ars an d 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 full y competitive industry, these costs 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 o f 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 b y 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,” Revie w of

Economics and Statistics 82: 3 16 - 324 (Do cket 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 e xtent 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.EO12866_Tier 3 2060 - AQ86 FRM RIA_Chapter 9 201401 30 . pdf

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9 - 3 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 thes e 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 flee t (i.e. , the retirement of used vehic les and their replacement b y 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 Employ

ment Impacts in the Auto Sector This chapt er describes changes in employ ment 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 chang es in emplo ym ent 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 econom y is at full employment, 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

the wages of the employees, 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 wo rkers 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 net overall U.S. employ ment because the labor market is not in equilibrium. Schmalansee and Stavins point out that net positive employment effects are possible in the near term wh en the econom y 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. 5 In the longer run, the net effect on employ ment 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 employ ment could vary

over time, region, and sector, and positive effects on employ ment in some regions or sectors could be offset b y 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 placed in the broader economic context.” We follow the theoretical structure in a study by Berman and Bui 6 of the impacts of regulation in employ

ment i n the regulated sectors. In Berman and Bui’s (2001, p. 274 - 75) theoreticalEO12866_Tier 3 2060 - AQ86 FRM RIA_Chapter 9 201401 30 . pdf

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9 - 4 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 describ es 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 ou tput, 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 des cribes 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 t hat equipment, the resulting impact on labor demand is ambiguous. For example, e quipment 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 framewor k for the impacts of regulation on employ ment 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 effe ct 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 Chapter 9.2.1 , we do not make a quantitative estimate on the effect of the rule on vehicle sale s , but we note that the decrease in vehicle sales is expected to be negligible . Thus we expect any decrease in employ ment 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 conclud e 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 ) .EO12866_Tier 3 2060 - AQ86 FRM RIA_Chapter 9 201401 30 . pdf

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9 - 5 9.2.2.2 The Substitution Effect The output effect, above , measures the effect due to new vehicle sales onl y. The s ubstitution 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 employ ment due to incorporation of abatement technologies and overall changes in the labor intensity of manufacturing. One way to estimate th i s effect, given the cost estimates for compl yi ng 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 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, more 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 rati o 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 employ ment in the auto sector due to the changes in expenditures in that sector, rather than as an assessment of all employ ment 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 emplo yment impacts estimated here. F 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 separately present the ratios 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. The U.S. Bureau of Labor Statistics (BLS) provides its Employ ment Requirements Matrix (ERM), 7 whi ch provides direct estimates of the employ ment 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 (NAI CS 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.EO12866_Tier 3 2060 - AQ86 FRM RIA_Chapter 9 201401 30 . pdf

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9 - 6 The Census Bureau pro vides both the Annual Survey of Manufacturer s 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 BL S 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 manufa cturing). While the ERM provides direct estimates of employees/$1 million in expenditures, the ASM and Economic Census separatel y provide number of employees and value of shipments; the direct emplo ym ent 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 us ed 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. G Table 9 - 1 p rovides the values, either given (BLS) or calculated (ASM, Economic Census) for emplo ym ent per $1 million of expenditures , all based on 20 1 1 dollars, though the underl yi ng data come from different years (which may account for some of the differences). These values have changed from the Draft RIA to use the most recent values for the ASM, and to put them all in 2011$. 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 ap pears to be slightly less labor - intensive than motor vehicle manufacturing as a whole. **Table 9**  **- 1**  **E mployment p**  **er $1 Million Expenditures (2011 $) in the Motor Vehicle**  **Manufacturing Sector a**  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 0.7 54 0.5 03 ASM Motor Vehicle Mfg 0.6 33 0. 4 22 ASM Light Duty Vehicle Mfg 0.583 0. 389 Economic Ce nsus Motor Vehicle Mfg 0.6 51 0. 434 Economic Census Light Duty Vehicle Mfg 0. 590 0. 393 BLS ERM Motor Vehicle Parts Mfg 2. 558 1.7 06 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 .EO12866_Tier 3 2060 - AQ86 FRM RIA_Chapter 9 201401 30 . pdf

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9 - 7 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 i ndustry 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 b y 2010 (in 2005$) . 9 Because the ERM is available annuall y for 1993 - 20 1 0, 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 ye ar 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 201 1 $) were used directl y for the BLS ERM estimates. F or the ASM, we used the ratio of the projected value in each future year to the projected value in 20 1 1 (the base ye ar for the ASM) to determine how many workers will be needed per $1 million of 201 1 $; for the Economic Census estimates, we used the ratio of the projected value in the future ye ars 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 employ ment impacts per $1 million (before adjustments for changes in productivity , after accounting for the share of domestic production) is 1 . 771 in 201 1$ if all the additional cost s are in the parts se ctor; the minimum value is 0.389 in 201 1 , if all the additional costs are in the light - duty vehicle manufacturing sector . In creased costs of vehicles and parts would , by itself, and holding labor intensity constant, be expected to inc rease employ ment between 2017 and 2025 by some hundred s of jobs each ye ar . 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 ye ar of work for one person. The decline in maximum employ ment between 2024 and 2025 is due to a combination of expected higher productivity and rounding, which makes an employ ment decrease from 760 to 743 job - ye ars appear larger than it is. **Table 9**  **- 2**  **Employment Effects d**  **ue to Increased Costs of Vehicles and Parts , in job**  **- years**  Year Costs (Millions

of 201 1 $) Maximum Employment Due to

Substitution Effect (if all expenditures are in the Parts Sector) Minimum Employment Due to Substitution Effect (if all expenditure s are in the Light Duty Vehicle Mfg Sector) 2016 $ 21 0 0 2017 $ 297 400 100 2018 $ 615 800 200EO12866_Tier 3 2060 - AQ86 FRM RIA_Chapter 9 201401 30 . pdf

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9 - 8 2019 $ 653 800 200 2020 $ 697 800 200 2021 $ 725 800 200 2022 $ 7 58 800 200 2023 $ 751 800 200 2024 $ 761 800 200 2025 $ 773 700 200 9.2.2.3 Summary

of Employ

ment Effects in the Auto Sector The overall effect of the rule on auto sector employment d epends 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 employ ment effects of the rule on auto sector employ ment 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 employ ment between domestic and foreign production. This is becaus e 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 produc tion, 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, developin g 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 likel y 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 perfectl y 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 alon g 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 likel y 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 canEO12866_Tier 3 2060 - AQ86 FRM RIA_Chapter 9 201401 30 . pdf

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9 - 9 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 co mpared 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 horizon s. 9.3.2 Refinery

Employ ment Impacts The Berman and Bui framework of output and substitution effects can also be applied to the impact of the rule on employ ment 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 emplo ym ent is expected to be negative. The discussion in Chapter 9.3.1 a bove suggest s that the standards will cause a small decrease in the quantity o f gasoline demanded due to higher production costs being passed through to consumers . This slightl y reduced level of sales will likely have a negative impact on employ ment 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 employ ment 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 b y only a very small amount over any time horizon. The substitution effect of the rule on emplo ym ent 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 employ ment due to these investments may be reduced . Chapter 4.5.1 discusses the expected employ ment 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 201 2 and 2019 and utilize approximately 25 0 front - end design and engineering jobs and 1 5 000 construction jobs. As the petroleum sector employed approximately 71,000 workers in 2011 , this increase in emplo ym ent is small when compared to 2011 levels. These standards are not expected to provide incentives to shift employ ment 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 analy sis of incentives to shift employ ment between domestic and foreignEO12866_Tier 3 2060 - AQ86 FRM RIA_Chapter 9 201401 30 . pdf

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9 - 10 production focuses on investments for existing capacity instead of expanding capacity . H Inthis case, what is relevant is whether the necessary modifications to comply with Tier 3 would be significantl y cheaper overseas than in the U.S. The main impacts on capital and operating costs to comply with Tier 3 associated with adding h ydrotreating capacity are likel y to be similar overse as 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 exi st almost solely to suppl y the U.S. market. These Canadian and Caribbean refineries , by virtue of their focus on the U.S. market , are very sim ilar to U.S. - based refineries and are expected to have to incur similar capital an d 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. Alternatively , they may instead choose to find markets outside the U.S., ope ning 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 occurred. Over the last 8 ye ars, 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 employ ment, and the substitution effect may raise employ ment . As a whole then, it is not evid ent whether the rule will increase or decrease emplo ym ent in the refining sector. However, 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 r efining industry is one of the manufacturing industries studied by Berman and Bui (200 1 ) 7 when they look ed at the effect of environmental expenditures on employ ment. They found that “ Employ

ment effects are very

small, generall y po sitive, 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 employ ment 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).EO12866_Tier 3 2060 - AQ86 FRM RIA_Chapter 9 201401 30 . pdf

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9 - 11 they are capital - intensive industries with relatively little employ ment when compared to other 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 refineries. We note that the regulation s that th e s e estimate are derived from are not directl y comparable to the current rule ; it is based on the costs of reduction s 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 histo rical 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 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 stand ards are also likely to have a positive impact on employ ment 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 employ ment effects may be different in the immediate implementation phase than in the ongoing compliance phase. It is expected that the employ ment 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 employ ment decreases in the refining sector from the output effect will not start until 2017, when compliance is required, and when unemploy ment is expected to be reduced; in a time of full employ ment , any 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.EO12866_Tier 3 2060 - AQ86 FRM RIA_Chapter 9 201401 30 . pdf

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9 - 12 **References** 1 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 . 2 Morgenstern, Richard D., William A. Pizer, and Jhih - Shyang Shih. “Jobs Versus the Environment: An Industry Level Perspective.” Journal of Env ironmental Economics and Management 43 (2002): 412 - 436 (Docket EPA - HQ OAR - 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 Revie w: Papers and Proceedings 101( 3 ) : 442 - 447 . 4 List, J. A., D. L. Millimet, P. G. Fredriksson, an d 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 Guid e to Economic and Policy Analysis of E PA’s Transport Rule.” White paper commissioned by Excelon Corporation, March 2011 (Docket EPA - HQ - OAR - 2011 - 0135 - 005 4 ) . 6 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 . 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 V ehicle Manufacturing) and 90 (Motor Vehicle Parts Manufacturing) from “ Chain - we ighted (2000 dollars) real domestic em ployment requirements table. . . adjusted to remove imports.” 10 Federal Trade Commission, Bureau of Economics. “The Petroleum Industry: M ergers, Structural Change, and Antitrust Enforcement.” http://www.ftc.gov/os/2004/08/040813mergersinpetrolberpt.pdf , accessed 8/16/11 (Docket EPA - HQ - OAR - 2011 - 0135 - 005 5 ) . 11 Berman, E. and L. T. M. Bui (2001). “Environmental Regulation and Labor Demand: Ev idence from the South Coast Air Basin.” Journal of Public Economics 79 (2): 265 - 295 .