From: Higgins, Cortney To: Wood, Gil Cc: VanLare, Paula ; Sorrels, Larry ; Edwards, Chebryll ; Cole, David ; Green, Gregory ; Weatherhead, Darryl Subject: RE: Employment language Date: Friday, December 06, 2013 5:36:55 PM Attachments: Employmentimpactsrevisedlanguage2013RWHNSPSproposalRIA (2).docx



### Hi all, Attached are edits the employment language. Please let me know if you have any questions.

Is the new employment language going to be ready next week? If so, I'd prefer to have that in the package. Can you let me know about it.

Thanks, Cortney

-----Original Message----- From: Wood, Gil [ mailto:Wood.Gil@epa.gov ] Sent: Friday, December 06, 2013 3:03 PM To: Higgins, Cortney Cc: VanLare, Paula; Sorrels, Larry; Edwards, Chebryll; Cole, David; Green, Gregory; Weatherhead, Darryl Subject: RE: Employment language

Thank you.

-----Original Message----- From: Higgins, Cortney [ mailto:Cortney_Higgins@omb.eop.gov ] Sent: Friday, December 06, 2013 3:00 PM To: Wood, Gil Cc: VanLare, Paula; Sorrels, Larry Subject: Employment language

Hi Gil, We have some edits to the employment language. I will send them over after the 12866 meeting.

Regards, Cortney5.7 Employment Impacts
In addition to addressing the cos ts and benefits of the proposed rule , EPA has qualitatively analyzed the impacts of this rulemaking on employment , which are discussed 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). A discussion of labor requirements associated with the insta llation, operation, and maintenance of control requirements, as well as reporting and recordkeeping requirements is included in S ection 5.1.6, on compliance costs

, of this RIA

. However, due to data and methodology limitations, w e have not quantified the ru le ’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 propos ed al regulation is expected to affect employment in the United States through the regulated sector

– residential wood heater manufacturers

– and related sectors, specifically,

masonry contractor s and residential construction ( e.g. performing masonry and other on

- site fireplace construction), wholesalers and distributors, and retailers ( e.g. home furnishing stores that sell wood heaters), and suppliers of substitutes for residential wood

- burning h eaters (e.g. electric or natural gas heaters). The production of devices like including wood stoves, hydronic heaters, and fireplace inserts is are included under the heating equipment category (NAICS 333414). The U.S. Census Bureau reports that , in 2011

, the this industry employed 15,925 workers (see Table 3

- 1 in Section 3.1.3 of this RIA). Based on company data obtained for this profile, the residential wood heaters industry has a large number of producers, and we were able to identify 635 firms, employing approximately 17,000 workers annually. Previous analysis suggests that the industry relies on seasonal labor, ramping up production in months leading up
to winter and reduci ng 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 than as a primary source. In2010, 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 rely on wood to heat their
homes 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 urr ent 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 s will be embraced in other areas of the country in which wood and biomass are viable and inexpensive fuel sources (Frost & Sullivan,
2010 ).

The extent to which an increase in the price of residential wood heaters due to this rule would reduce the sales depends on the elasti city of demand for residential wood heaters. However, T there are no recent empirical estimates of the price elasticity of demand for
residential wood heaters. An estimate of −1.6 was derived for use in the RIA for the current Residential Wood Combustion NSPS (EPA, 1986). Available estimates for residential energy and heating fuel demand generally are relatively inelastic (i.e., there are only very small changes in demand in response to an increase in energy or fuel prices). A recent RAND report suggests that in the short term, demand for electricity and natural gas in residential markets is relatively inelastic (Bernstein and Griffin, 2005 ). There are a number of close substitutes for residential wood heating devices that include electric and gas furnaces and space heaters. The extent to which consumers are able to substitute between these options is likely to vary depending on geographic location. Overall, the presence of good substitutes will increase the elasticity of demand for wood heating equipment. In contrast, if locally

- available alternative heating fuels (e.g. electricity, fuel oil) are relatively higher

- priced, it may make switching away from wood heating equipment less likely and, ultimately, make demand for wood heating equipment
inelastic. Also, the elasticity may depend on whether the fuel in question is a secondary source of fuel instead of a primary fuel source. Based on this limited analysis we do not expect sales of residential wood to fall substantially due to this rule.

From an economic perspective labor is an input into producing goods and services; if a regulation requires that more labor be used to produ ce a given amount of output, that additional labor is reflected in an increase in the cost of production. Moreover, when the economy is at full employment, we would not expect an environmental regulation to have an impact on overall employment because lab or 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 Comment [A1]: This paragraph needed to be motivated.

Comment [A2]: Assuming EPA believes this is the case.incr ease 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 capital. 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 lead to a decrease in employment. The responsiveness of industry labor demand depends on how these forces all interact. Economic theory indicates that the responsiveness of industry labor demand depends on a number of factors: price elasticity of demand for the product, substitutability of other factors of production, elasticity of supply of other factors of production, and labor’s share of total product ion costs. Berman and Bui (2001) put this theory in the context of environmental regulation, and suggest that, 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 o utput may not change much at all.

Regulations set in motion new orders for pollution control equipment and services. New categories of employment have been created in the process of implementing environmental regulations. When a regulation is promulgated, one typical response of industry is to order pollution control equipment and services in order to comply with the regulation when it becomes
effective . On the other hand

, while the closure of plants or facilities that choose not to comply
and the reduction in the scale of operation of plants, due to regulatory costs, that do choose to comply occurs after the compliance date. Furthermore, E e nvironmental regulation may increase revenue and employment in the environmental technology industry. While these increases represent gains for that industry, they translate into costs to the regulated industries required to install the equipment.

Environmental regulations support employment in many basic industries. Regulated firms
either hire workers to design and build pollution controls directly or purchase pollution control devices from a third party for installation

. Once the equipment is installed, regulated firms hire workers to operate and maintain the pollution control equipment

— much like they hire workers

t o produce more output. 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 goo ds 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 est imate the employment impacts in these intermediate goods sectors.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) to derive the employment effects of new regulati ons within the regulated industry. (See, for example, the Regulatory Impact Analyses for the recently released final MATS and CSAPR regulations). There is widespread belief among non

- economists that new or more stringent environmental regulations raise pro duction costs thereby reducing production which in turn must lead to lower employment. However, D d etermining the direction of employment effects in the regulated industry is also challenging due to competing effects. Environmental regulations are assumed to raise production costs and thereby the cost of output, so we expect the “output” effect of environmental regulation to be negative (higher prices lead to lower sales). On the other hand,
C c omplying with the new or m ore 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

. Two sets of researchers discussed here, Berman and Bui (2001) and Morge nstern, Pizer, and Shih (2002) 1

, Morgenstern et al. (2002) demonstrate using standard
neoclassical microeconomics that environmental regulations have an ambiguous effect on employment in the regulated sector. 2 These theoretical results imply that the effe ct of environmental regulation on employment in the regulated sector is an empirical question and both sets of authors tested their models empirically using different methodologies. Both Berman and Bui and Morgenstern et al. examine the effect of very str ingent environmental regulation s on employment and both find that overall they had no significant impact on employment in the sectors they examined

.
can be understood as requiring regulated firms to add a new output (environmental quality) to their product mixes

. Although legally compelled to satisfy this new demand, regulated firms have to finance this additional production with the proceeds of sales of their other (market) products. Satisfying this new demand requires additional inputs, including l abor, and may alter the relative proportions of labor and capital used by regulated firms in their production

processes.

2 Two studies are discussed here. EPA plans to offer a rigorous discussion on employment effects in future agency analysis. 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. 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. Comment [A3]: Including th is sentence allows us to drop the next two (highlighted) paragraphs if we decide to say very little about these studies. If we decide to keep the next two paragraphs then we can delete th is sentence.More specifically, Morgenstern, Pizer, and Shih (2002) decompose the effect of regulation on net employment in the regulated sector in to the following three subcomponents:

 The Demand Effect : higher production costs from complying with the regulation will raise market prices, reducing consumption (and production), thereby reducing demand for labor within the regulated industry. The “ extent of this effect depends on the cost increase passed on to consumers as well as the demand elasticity of industry output. ” (p. 416)

 The Cost Effect : Assuming that the capital/labor ratio in the production process is held fixed, a s “ production costs ri se, 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 f irms’ 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 prod uction, ” meaning that “ the amount of labor per dollar of output will rise. ” However, activities may, instead, be less labor intensive because “ cleaner operations could involve automation and less employment, for example. ” (p. 416)

The demand effect is expected to have 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

mag nitudes 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

. Berman and Bui (2001) examine how an increase in local air quality regulation that

r educes NOx emissions affects manufacturing employment in the South Coast Air Quality Management District (SCAQMD), which incorporates Los Angeles and its suburbs. During the time frame of their study, 1979 to 1992, the SCAQMD enacted some of the country’s most stringent air quality regulations, which were more stringent than federal and state regulations. Using SCAQMD’s local air quality regulations, Berman and Bui identify the effect of environmental regulations on net employment in the regulated industri es. 3

, 4 The authors find that “while regulations do impose large costs, they have a limited effect on employment” (Berman and Bui, 2001, p. 269). Their conclusion is that local air quality regulation “probably increased labor demand slightly” but that “the employ ment effects of both compliance and increased

3 Note, like Morgenstern, Pizer, and Shih (2002), this study does not estimate the number of jobs created in the environmental protection sector.
4 Berman and Bui include over 40 4

- digit SIC industr ies in their sample. Formatted: Body Text1,bt,body tx,indent,flush,memo body text,body 4h,body 4equationhstringency are fairly precisely estimated zeros [emphasis added], even when exit and dissuaded entry effects are included” (Berman and Bui, 2001, p. 269). 5

Morgenstern et al. (2002) estimated the effects of po llution abatement expenditures on net employment in four highly polluting/regulated sectors (pulp and paper, plastics, steel, and petroleum refining). They conclude that increased abatement expenditures generally have not caused a significant change in net employment in those sectors. While the specific sectors Morgenstern et al. examined are different than the sectors considered here, the methodology that Morgenstern et al. developed is still an informative way to qualitatively assess the effects of this

r ulemaking on employment in the regulated sector.

While the theoretical framework laid out by Berman and Bui (2001) and Morgenstern et
al. (2002) still holds for the industries affected under this proposed NSPS, important differences in the markets and regu latory 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 propos ed al regulation

. In particular, the industries us ed in these
two studies a s well as The differences between the timeframe (late 1970’s to early 1990’s) underlying regulations are quite different than those in this proposed rule. motivating the
abatement expenditures studied in Morgenstern et al. are potentially too many to allow for the direct transfer of their quantitative estimates to the proposed NSPS amendments. There are important differences between the affected industries and the four manufacturing industries studied by Morgenstern et al. I n addition to important differences between the regulated sectors, the pollution control strategies that form the basis of the cost inputs in the Morgenstern et al. analysis are primarily add

- on or end

- of

- line pollution controls , in general covering more than 70% of the abatement expenditures in most years and industries analyzed, as may be seen in
Table 5

- 8. Furthermore, 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. 6 For instance, use of a catalyst combustor is common in wood stoves in order to reduce emissions and also improve heat efficiency. Retrofits are uncommon because replacing the wood stove i s often a more economical alternative. On the other hand, the pollution control strategies examined by Berman and Bui and Morgenstern et al are primarily add

- on or end

- of

- line pollution controls

. For these reasons we conclude there are too many uncertainti es as to the comparability of the quantitative estimates in these two

5 Including the employment effect of exiting plants and plants dissuaded from opening will increase the estimated impact of regulation on employment.
6 More detail on how emission reductions expected from compliance with this rule can be obtained can be found in Section 4 of this RIA.Morgenstern et al. stud y ies 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 7

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%

7 U.S. Bureau of the Census. Pollution Abatement Costs and Expenditures . Washington, DC: U.S. Government Printing Office, various years . The pulp and paper industry is defined by SIC 2611 & 2621, plastics by SICE 282, petroleum refining by SIC 2911, and iron and steel by SIC 332. For pulp and paper and iron and steel industries in 1983 the data is partially estimated based on non reported data due to disclosure reasons. The 1984 (1989) data for plastics (p ulp and paper) is used instead of 1983 (1988) due to a lack of reported data in the original year.