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 C445A5.7 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 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, o peration, 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 rule ’s effec ts 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 characterization of employment effects of EPA regu lation is valid and informative as possible

.

This propos ed 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
fire place 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 inc luding 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 1 7,000 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 ).

A s 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 primar y 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 rely on wood to heat their
homes when secondary wood heat demand is counted, accordin g to the U.S. Census Bureau and the Energy Information Administration (EIA). Demand varies regionally, in part, due to availability of energy sources. C urrent regional demand patterns are expected to continue, with the Northeast and Northwest regions of th e 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 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 electri city 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 s pace 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 con trast, 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 th ose 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 analysis th e available information, including the RAND report, we do not expect sales of res idential 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 emplo yment because labor is being shifted from one sector to another. On the other hand, inperiods 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 sh ort

- term net increase in overall employment due to the potential hiring of previously unemployed workers as 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 pr oduce 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

. 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 prod uction, 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 al l firms in the industry are fac e d with the same compliance costs of regulation and product demand
is inelastic
, th e n 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 creat ed 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 ot her hand
, the closure of plants that choose not to comply

– a nd the
reduction any changes in the scale of operation of production levels at plants , due to regulatory
costs, that do choose choosing to comply occurs and remain in operation

— o ccur after the compliance date , or earlier in anticipation of the compliance obligation

. Furthermore,

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 to produce more output. In addition to the increase in employment in the environmental protection industry (via increased orders for pollution control equipment), environmentalregulations also support employment in industries that provide intermediate goods to the
environmental protection industry. The equipment manufacturers, in turn, order steel, tanks, vessels, blowers, pumps, and chemicals to manufacture and install the equipment. Currently in most cases there is no scientifically defensible way to estimate generate sufficient ly reliable
estimates of the employment impacts in these intermediate goods sectors.

5.7.1 Employment Impacts within the Regulated Industry

There It is widespread belief sometimes claimed that new or more stringent environmental regulations raise production cost s thereby reducing production which in turn must lead to lower employment. However, the peer

- reviewed literature indicates that d etermining the direction of

net employment effects in the a regulated industry is also challenging due to competing effects.
En vironmental 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 omplying 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 Morgenst ern, 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 Mor genstern et al. examine the effect of environmental regulation s 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 (highlig hted) 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 section 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 In dustry

- Level Perspective. ‖ Journal of Environmental Economics and Manage

- 436.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 string ent 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 polluti on 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 empl oyment 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
rulema king 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, e E mpirical 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 highl y regulated counties may generate fewer jobs than less regulated ones (Greenstone 20 02, Walker 20 11). However, the methodology used in these two studies cannot estimate whether aggregate employment is lower or higher due to more stringent environmental re gulation, 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 ptthat 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 framework framewo rk s laid out by Berman and Bui (2001) and Morgenstern et al. (2002) still holds hold 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 le ad us to conclude that it is inappropriate to utilize their quantitative estimates to estimate the employment impacts from this propos ed regulation

. In particular, the
industries used in these two studies a s 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 comparability transferability of the quantit ative estimates in these two stud ies 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 an d 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.