From: Sorrels, Larry

To: Higgins, Cortney

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

Ferris, Ann

Subject: Revised employment language for proposed residential wood heaters RIA

Date: Wednesday, December 11, 2013 1:00:07 PM

Attachments: EmploymentimpactsrevisedlanguagefromEPA2013RWHNSPSproposalRIA-12_11.docx

Hello Cortney:

Attached is the revised employment language from EPA. The language largely accepts the edits

that you sent us last Friday afternoon, but we have made some additions and edits to what you

have sent us based on discussions between NCEE, OPAR, and us in OAQPS. 

Please let me know if you have any questions on this revised language. Thank you.

Larry Sorrels

US EPA/OAQPS/HEID/AEG

Economist

919-541-5041

919-541-0839 (fax)

C439-02

Room C445A
5.7 Employment Impacts 

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

qualitatively analyzed the impacts of this rulemaking on employment, which are discussed 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 installation, operation, and maintenance of control 

requirements, as well as reporting and recordkeeping requirements is included in Section 5.1.6,

on compliance costs, of this RIA. However, due to data and methodology limitations, we have 

not quantified the rule’s effects on labor, or the effects induced by changes in workers’ incomes. 

What follows is an overview of the various ways that environmental regulation can affect 

employment. EPA continues to explore the relevant theoretical and empirical literature and to 

seek public comments in order to ensure that such estimates are as accurate, 

usefulcharacterization of employment effects of EPA regulation is valid and informative as 

possible.

This proposed regulation is expected to affect employment in the United States through 

the regulated sector – residential wood heater manufacturers – and related sectors, specifically, 

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

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

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

electric or natural gas heaters). The production of devices including wood stoves, hydronic 

heaters, and fireplace inserts are included under the heating equipment category (NAICS 

333414). The U.S. Census Bureau reports that, in 2011, 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 

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

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

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

households rely on wood fuel as a supplemental heat source rather than as a primary source. In 
2010, 2.1% of total occupied homes in the United States relied on wood heat as the primary fuel 

source for home heating. About 10–12% of American households 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. Current regional demand patterns are expected to continue, with 

the Northeast and Northwest regions of the country driving wood fuel combustion demand, but 

analysts anticipate that the wood heat product markets 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 elasticity of demand for residential wood heaters. 

However, [OMB: This paragraph needed to be motivated.] 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 more inelastic in those locations. 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 analysisthe available information, including the RAND report, we 

do not expect sales of residential wood to fall substantially due to this rule. [OMB: Assuming 

EPA believes this is the case.], particularly in the near-term.

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

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

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

employment, we would not expect an environmental regulation to have an impact on overall 

employment because labor is being shifted from one sector to another. On the other hand, in 
periods of high unemployment, employment effects (both positive and negative) are possible. 

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

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

workers are hired by the regulated sector to help meet new requirements (e.g., to install new 

equipment) or by the environmental protection sector to produce new abatement capital., 

resulting in hiring of previously unemployed workers either directly by these two sectors or 

indirectly as other sectors replace workers lured away by these two sectors. When significant 

numbers of workers are unemployed, the opportunity costs associated with displacing jobs in 

other sectors are likely to be smaller. And, in general, if a regulation imposes high costs and does 

not increase the demand for labor, it may lead to a decrease in employment. The responsiveness 

of industry labor demand depends on how these forces all interact. Economic theory indicates 

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

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

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

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

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

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

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, the closure of plants that choose not to comply –and the 

reductionany changes in the scale of operation ofproduction levels at plants, due to regulatory 

costs, that do choose choosing to comply occursand remain in operation—occur after the 

compliance date, or earlier in anticipation of the compliance obligation. Furthermore, 

environmental 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 

to 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 goods to the 

environmental protection industry. The equipment manufacturers, in turn, order steel, tanks, 

vessels, blowers, pumps, and chemicals to manufacture and install the equipment. Currently in 

most cases there is no scientifically defensible way to estimategenerate sufficiently reliable 

estimates of the employment impacts in these intermediate goods sectors. 

5.7.1 Employment Impacts within the Regulated 

Industry

ThereIt is widespread belief sometimes claimed that new or more stringent environmental 

regulations raise production costs thereby reducing production which in turn must lead to lower 

employment. However, the peer-reviewed literature indicates that determining the direction of 

net employment effects in thea 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, complying with the new or more stringent regulation requires 

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

by regulated firms in their production processes. Two sets of researchers discussed here, Berman 

and Bui (2001) and Morgenstern, Pizer, and Shih (2002) 1 ,),

2 demonstrate using standard 

neoclassical microeconomics that environmental regulations have an ambiguous effect on 

employment in the regulated sector.3 These theoretical results imply that the effect 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 environmental regulations on employment

and both find that overall they had no significant net impact on employment in the sectors they 

examined. [OMB: Including this 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 this sentence.]

 

 

3 A total of Two five studies are discussed in this RIA sectionhere. 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. ‖-436. Journal of Environmental Economics and Manage 
Berman and Bui (2001) examine how an increase in local air quality regulation that 

reduces 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 industries.4,5 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 employment effects of both compliance and increased 

stringency are fairly precisely estimated zeros [emphasis added], even when exit and dissuaded 

entry effects are included” (Berman and Bui, 2001, p. 269).6

Morgenstern et al. (2002) estimated the effects of pollution abatement expenditures on 

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

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

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

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

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

rulemaking on employment in the regulated sector.

While there is an empirical, peer-reviewed literature analyzing the effect of 

environmental regulations on various economic outcomes including productivity, investment, 

competitiveness as well as environmental performance, there are only a few papers that examine 

the impact of environmental regulation on employment, but this area of the literature has been 

growing. As stated previously in this RIA section, eEmpirical results from Berman and Bui 

(2001) and Morgenstern et al (2002), suggest that net employment impacts may be positive but 

small even in the regulated sector. Other empirical research suggests that more highly regulated 

counties may generate fewer jobs than less regulated ones (Greenstone 2002, Walker 2011). 

However, the methodology used in these two studies cannot estimate whether aggregate 

employment is lower or higher due to more stringent environmental regulation, it can only imply

 4 Note, like Morgenstern, Pizer, and Shih (2002), this study does not estimate the number of jobs created in the 

environmental protection sector. 5 Berman and Bui include over 40 4-digit SIC industries in their sample. 6 Including the employment effect of exiting plants and plants dissuaded from opening will increase the estimated 

impact of regulation on employment.

Formatted: Line spacing: At least 18 pt
that relative employment growth in some sectors differs between attainment and non-attainment 

areas. List et al. (2003) find some evidence that this type of geographic relocation, from more 

regulated areas to less regulated, 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.

While the theoretical frameworkframeworks laid out by Berman and Bui (2001) and 

Morgenstern et al. (2002) still holdshold for the industries affected under this proposed NSPS, 

important differences in the markets and regulatory settings analyzed in their study and the 

setting presented here lead us to conclude that it is inappropriate to utilize their quantitative 

estimates to estimate the employment impacts from this proposed regulation. In particular, the 

industries used in these two studies as well as the timeframe (late 1970’s to early 1990’s) are 

quite different than those in this proposed rule. Furthermore, 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.7 For instance, use of a catalyst 

combustor is common in wood stoves in order to reduce emissions and also improve heat 

efficiency. Retrofits are uncommon because replacing the wood stove is often a more economical 

alternative. 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 uncertainties as to the comparabilitytransferability of the 

quantitative estimates in these two studies to apply their estimates to quantify the employment 

impacts within the regulated sectors for this proposed regulation. 

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. 

List, 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. 

Walker, Reed. (2011).“Environmental Regulation and Labor Reallocation." American Economic Review: 

Papers and Proceedings, 101(2).

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

Section 4 of this RIA.