8.2 Employment Impacts for the Transport Rule

In addition to addressing the costs and benefits of the Transport Rule, EPA has estimated the impacts of this rulemaking on labor demand, and the results are presented in this section. 1 While a standalone anal ysis of employ ment impacts is not included in a standard cost

- benefit anal ys is, such an analy sis is of particular concern in the current economic climate. Executive Order 13563, states, “ Our regulatory s ys tem must protect public health, welfare, safety , and our environment while promoting economic growth, innovation, competitiveness, and job creation ” (emphasis added). Therefore, we have provided this partial employ ment analy sis to inform the discussion of labor demand and job impacts. We provide an e stimate of the employ ment impacts on the regulated industry

over time. We also provide the short

- term employment impacts (increase in labor demand) associated with the construction of needed pollution control equipment. We have not quantified the rule’s e ffects on all labor in other sectors not regulated b y this rule, or the effects induced by changes in workers’ incomes. What follows is an overview of the various way s that environmental regulation can affect emplo ym ent, followed by a discussion of the es timated impacts of this rule. EPA continues to explore the relevant theoretical and empirical literature and seeks public comment in order to ensure that such estimates are as accurate, useful and informative as possible. From an economic perspective, lab or is an input into producing goods and services; if 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 econom y is at full employ ment, we would not expect an environmental regulation to have an impact on overall employ ment since labor is being shifted from one sector to another. On the other hand, in periods of high unemploy

ment, an increase in labor demand due to regulation may hav e the potential to result in a net increase in overall emplo ym ent. With significant numbers of workers unemploy ed, the opportunity

costs associated with displacing jobs in other sectors are likely to be smaller. To provide a partial picture of the emp loy ment consequences of this rule, EPA takes two approaches. First, the analy sis uses the results of Morgenstern, Pizer, and Shih (2002) to estimate the effects of the regulation on the regulated industry , the electric power industry in this case. This a

pproach has been used by EPA in recent Regulatory Impact Analy ses. (See, for

1 See TSD as part of the Transport Rule Docket: “Employment Estimates of Direct Labor in Response to the Transport Rule in 2014.”example, the Regulatory Impact Anal ys is for the recentl y finalized Industrial Boilers and Commercial and Institutional Solid Waste (CI SWI) rulemakings, promulgated on February 21 , 2011). Second, EPA uses projections from IPM to estimate the short

- term employ ment effects resulting from construction and resource requirements as a result of the additional demand for pollution control equipment. Historically , EPA has only reported e mployment impacts on a few regulations. Section 8.3 discusses the estimates of the employ ment consequences in the electricit y sector, using the Morgenstern, et al. approach. Section 8.4 estimates the employment effects in the environmental protection sec tor, using the second approach.

8.3 Employment Impacts primarily on the regulated industry: Morgenstern, Pizer, and Shih (2002) EPA examined possible employ ment effects within the electric utility sector using a peer

reviewed, published study that explore s historical relationships between industrial employ ment and environmental regulations (Morgenstern, Pizer, and Shih, 2002 ) . The fundamental insight of Morgenstern, et al. is that environmental regulations can be understood as requiring regulated firms to add a new output (environmental quality) to their product mixes. Although legall y compelled to satisfy

this new demand, regulated firms have to finance this additional production with the proceeds of sales of the ir other (market) products. Satisfying this new demand requires additional inputs, including labor, and may alter the relative proportions of labor and capital used by regulated firms in their production processes. Thus, Morgenstern et al. decompose the ov erall effect of a regulation on employ ment into the following three subcomponents: The “Demand Effect”: higher production costs raise market prices, reducing consumption (and production), thereb y reducing demand for labor within the regulated industry 2 ; T he “Cost Effect”: As production costs increase, plants use more of all inputs, including labor, to maintain a given level of output. For example, in order to reduce pollutant emissions while holding output levels constant, regulated firms may require addi tional labor;

2 The Morgenstern et al. results rely on industry demand and supply elasticities to determine cost pass

- through and reductions in output.The “Factor

- Shift Effect”: Regulated firms’ production technologies may be more or less labor intensive after complying with a regulation (i.e., more/less labor is required per dollar of output). Decomposing the overall employ ment impact of e nvironmental regulation into three subcomponents clarifies the conceptual relationship between environmental regulation and emplo ym ent in regulated sectors, and permitted Morgenstern, et al. to provide an empirical estimate of the net impact. For present p urposes, the net effect is of particular interest, and is the focus of our anal ysis. Using plant

- level Census information between the years 1979 and 1991, Morgenstern et al. estimate the size of each effect for four polluting and regulated industries (petroleum, plastic material, pulp and paper, and steel). On average across the four industries, each additional $1 million ($1987) spending on pollution abatement results in a (statistically insignificant) net increase of 1.55 (+/

- 2.24) jobs. As a result, the authors conclude that increases in pollution abatement expenditures do not necessaril y cause economically significant employ

ment changes. The conclusion is similar to Berman and Bui (2001 ) who found that increased air qualit y regulation in L os Angeles did not cause in large employ ment changes 3

. Since the Morgenstern, et al. parameter estimates are expressed in jobs per million ($1987) 4 of environmental compliance expenditures, their study offers a transparent and simple way to transfer estimates for other emplo ym ent analy sis. For each of the three job effects outlined above, EPA used the Morgenstern et al. four industry average parameters and standard errors along with the estimated private compliance costs to provide a range of electricity sector employ ment effects associated with the Transport Rule. By appl yi ng these estimates to pollution abatement costs for the final rule for the electric power sector, we estimated each effect. The results are Demand effect: −to + jobs in th e directly affected sector with a central estimate of

− ; Cost effect: + to + jobs in the directl y affected sector with a central estimate of +; and Factor

- shift effect: + to + jobs in the directl y affected sector with a central estimate of +.

3 For alternative view s, see Henderson (1996 ) and Greenstone (2002 )

. 4 The Morgenstern et al. analysis uses “production worker” as defined in the US Census Bureau’s Annual Survey of Manufactures (ASM) in order to define a job. This definition can be found on the Internet at http://www.census.gov/manufacturing/asm/definitions/index.html

.EPA estimates the net employ ment effect to range from

- to + jobs in the directly affected sector with a central estimate of +. 5 , 6 These estimates are shown in Table 8

- 3. Table 8 - 3. Employment Impacts Using Peer - Reviewed Study Estimates using Morgenstern et al. (2002)

Demand Effect Cost Effect Factor Shift Effect Net Effect Change in Full

- Time Jobs per Million Dollars of Environmental Expenditure a −3.56 2.42 2.68 1.55

Standard Error 2.03 0.83 1.35 2.24

EPA estimate for Transport Rule b +200 to

- 3,000 +400 to 2,000 0 to +2,000

- 1,000 to 3,000

a Expressed in 1987 dollars. See footnote 8 for inflation adjustment factor used in the analysis.
b According to the 2007 Economic Census, the electric power generation, transmission and distribution sector (NAICS 2211) had approximately 510,000 paid employees. Both the midpoint and range for each effect are reported in the last row

of the table. All ranges for these job changes are based on the 95 th percentile of results. EPA recognizes there will be other employ ment effects which are not considered in the Morgenstern et al. study . For example, employ ment in environmental protection industries may increase as firms purchase more pollution contro l equipment and services to meet the rule’s requirements. EPA does provide such an estimate of emplo ym ent change later in this section in a separate anal ys is. On the other hand, industries that use electricity will face higher electricity prices as the res ult of the transport rule, reduce output, and demand less labor. In the earlier part of Chapter 8 we use a Multimarket Model to estimate that there will be a .002% reduction in output in nonmanufacturing industries and .002 to .007 percent reductions in o utput in various

5 Since Morgenstern’s analysis reports environmental expenditure s in $1987, w e make an inflation adjustment the IPM costs using the ratio of the consumer price index, U.S. city, all items reported by the U.S. Bureau of Labor Statistics: CPI 1987 / CPI 2007 = (113.6/207.3) = 0.55 6 Net employment effect = 1.55× $832 million × 0.55. This estimated net result is not statistically different from zero.manufacturing industries. Itis difficult, however, to extend these results to an estimate of

employ ment effects across these many different industries; therefore, we feel we do not currentl y have sufficient information to quantify the se impacts as potential employ ment losses. 8.3.1 Limitations Although the Morgenstern et al. paper provides information about the potential job effects of environmental protection programs, there are several caveats associated with using those est imates to anal yz e the final rule. First, the Morgenstern et al. estimates presented in Table 8

- 3 and used in EPA’s anal ys is represent the weighted average parameter estimates for a set of manufacturing industries (pulp and paper, plastics, petroleum, and s teel). Morgenstern, et al. present those industries’ estimates separatel y, and they range from

- 1.13 jobs per $1 million (in 1987 dollars) of environmental expenditures for pulp and paper, to +6.90 jobs for plastics. Only two of the total jobs estimates are statistically significantl y different from zero, and the overall weighted average used here, 1.55 jobs per $1 million, is not statistically significant. Moreover, here we are applying the estimate to the electricity generating industry

. Second, rel yi ng on Morgenstern et al. implicitly assumes that estimates derived from 1979

– 1991 data are still applicable. Third, the methodology used in Morgenstern et al. assumes that regulations affect plants in proportion to their total costs. In other words, each ad ditional dollar of regulatory

burden affects a plant b y an amount equal to that plant’s total costs relative to the aggregate industry

costs. By transferring the estimates, EPA assumes a similar distribution of regulatory

costs by plant size and that the r egulatory burden does not disproportionatel y fall on smaller or larger plants. 8.4 Employment Impacts of the Transport Rule - Environmental Protection Sector Approach, by 2014 7 The Transport Rule will require additional pollution control equipment and ser vices in order to reduce emissions from the power sector and address nonattainment and the transport of air emissions cross state borders. Historically , new categories of emplo ym ent have been created in the process of implementing regulations that reduce air emissions and other forms of pollution. When a regulation is promulgated, the first response of industry is to order pollution control equipment and services in order to comply with the regulation when it becomes eff ective. Revenue and employ

ment in the environmental technology industry have grown steadily between 2000 and 2008, reaching an industry total of approximately

$300 billion in revenues and

7 EPA expects that the installation of retrofit control equipment in response to the requirements of this rule will primarily take place within 2014.1.7 million employees in 2008. 8 While these revenues and emplo ym ent figures represent gains

for the environmental technologies industry , they are costs to the regulated industries required to install the equipment. Moreover, it is not clear the 1.7 million employees in 2008 represent any thing other than workers diverted from other productive employ ment as opposed to new additional employ

ment. Regulated firms hire workers to design and construct pollution control equipment. 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. A study by Resources for the Future examined how regulated industries respond to regulation. They found that on average, emplo ym ent goes up in regulated firms. Of course, these firms may also reassign existing employ ees to do these activities. Environmental regulations support employ ment in many

basic industries. In addition to the increase in emplo ym ent in the environmental protection industry (increased orders for pollution control equipment), environmental regulations also support employ ment in industries that provide intermediate goods to the environmental protection industry . F or example, $1 billion in capital expenditures to reduce air pollution involves the purchase of abatement equipment. The equipment manufacturers, in turn, order steel, tanks, vessels, blowers, pumps, and chemicals to manufacture and install the equipment. A study (2008) by

Bezdek, Wendling, and DiPernab found that “investments in environmental protection industries create jobs and displace jobs, but the net effect on employ ment is positive .” The focus of this part of the employ ment anal ys is is on short

- term jobs related to the compliance actions of the affected entities and includes estimates of the employ ment impacts due to the increased demand for pollution control equipment. 9 Results indicate that the Transport

8 In 2008, the indu stry totaled approximately $315 billion in revenues and 1.9 million employees including indirect em ployment effects, pollution abatement equipment production employed approximately 4.2 million workers in 2008. These indirect employment effects are based on a m ultiplier for indirect employment = 2.24 (1982 value from Nestor and Pasurka

- approximate middle of range of multipliers 1977

- 1991). Environmental Business International (EBI), Inc., San Diego, CA. Environmental Business Journal, monthly (copyright). http://www.ebiusa.com/ EBI data taken from the Department of Commerce International Trade Administration Environmental Industries Fact Sheet from April 2010: http://web.ita.doc.gov/ete/eteinfo.nsf/068f3801d047f26e85256883006ffa54/4878b7e2fc08ac6d85256883006c452c? OpenDocument 9 For more detail on methodology, approach, and assumptions, see Appendix D in this RIA: “E mp loyment Estimates of Direct Labor in Response to the Transport Rule in 2014.”Rule has the potential to result in a net increase of labor in these industries, driven by the increased demand for new pollution controls. Overall, the preliminary results of the environmental protection sector approach indicate that the Transport Rule could support an increase of about 2,230 jo b

- ye ars 10 by 2014. 8.4.1 Overall Approach and Methodology for Environmental Protection Sector Approach EPA commissioned I CF International to provide estimates for the Environmental Protection Sector, and the anal ys is utilizes a bottom

- up engineering based m ethodology combined with macroeconomic data on industrial output and productivity , to estimate employ ment impacts in the environmental control sector of the econom y . It relies on projections from the IPM model and projections for new pollution control equ ipment and related costs, along with data from the Bureau of Labor Statistics and other sources. The approach also relies upon prior EPA studies on similar issues, and in particular uses data and information from an extensive resource study conducted in 2 002, which was updated in the Spring of 2011 and reflects more recent information. 11 The approach involves using IPM projected results from the Transport Rule anal ys is for the set of pollution control technologies expected to be installed to comply with th e rule, along with data from secondary sources, to estimate the job impacts using this approach. 12 This includes the labor needed to design, manufacture and install the needed pollution control equipment over the ye ars leading up to compliance in 2014. For construction labor, the labor needs are derived from the 2002 EPA resource anal ys is for installing various retrofits (FGD

– Flue Gas Desulfurization scrubbers, SCR

- selective catal yt ic reduction, and DSI

- dry sorbent injection) and are further classifie d into different labor categories, such as boilermakers, engineers and a catch

- all “other installation labor.” For the inputs needed (e.g., steel), the 2002 resource study was used to determine the steel demand for each MW of additional pollution control and combined with labor productivity data from the Economic Census and BLS for relevant industries.

10 Numbers of job years are not the same as numbers of individual jobs, but represents the amount of work that can be performed by the equivalent of on e full

- time individual for a year (or FTE). For example, 25 job years may be equivalent to five full

- time workers for five years, twenty

- five full

- time workers for one year, or one full

- time worker for tw enty
- five years. 11 Engineering and Economic Factors Affecting the Installation of Control Technologies for Multipollutant Strategies EPA

- 600/R

- 02/073 (2002). 12 Detailed results from IPM for the Transport Rule can be found in Chapter 7 of the RIA.More detail on methodology , assumptions, and data sources can be found in Appendix D

of this RIA

- “Employ

ment Estimates of Direct Labor in Response to the Transport Rule in 2014.” Projections from IPM were used to estimate the incremental retrofit capacities projected in response to the final rule. These additional pollution controls are shown in Table 8

- 4 below, and reflect the added pollution controls nee ded to meet the requirements of the rule. Additional information on the power sector impacts can be found in Chapter 7 of the RIA. Table 8 - 4. Increased Pollution Control Demand due to the Transport Rule, by 2014 (GW)
Retrofit Type Existing Controls

Induced to Operate New ly Built Controls FGD 25 6 SCR 5 0 DSI 0 3

8.4.2 Summary of Employment Estimates from Environmental Protection Sector Approach Table 8

- 5 presents additional detail on the estimated employ ment impacts using the environmental protection sector approach resulting from the Transport Rule. Results for the Environmental Protection Sector Approach indicate the Transport Rule could support or create roughl y 2,230 one

- time job

- ye ars of increased demand for direct labor, driven by the need to design and build the pollution control equipment.

Table 8 - 5. Employment Effects Using the Environmental Protection Sector Approach for

the Transport Rule by 2014 (in Job - Years)

Employment Incremental Employment One - Time Employment Changes for Construction 1. Boilermakers 890 2. Engineers 440 3. General Construction 880 4. Steel Manufacturing 208.4.3 Other Employment Impacts of the Transport Rule

We expect ongoing employ ment impacts on regulated and non

- regulated entities for a variet y of reasons. These include labor changes in the regulated entities resulting from shifts in demand for fuels, increased demand for materials and the labor required to provide them to operate pollution control equipment, reductions in employ ment resulting from coal retirements, and reductions in other industries due to slight projected increase s in the price of electricit y and natural gas. The most notable of the ones we are unable to estimate are the impacts on employ ment as a result of the increase in electricity and other energy

prices in the econom y. Because of this inability

to estimate all the important employ ment impacts, EPA neither sums the impacts th at the Agency

is able to estimate for the ongoing non

- regulated group or make an y inferences of whether there is a net gain or loss of employ ment for the non

- regulated group. These other ongoing employ ment impacts are found in Table 8

- 6, and these employ me nt impacts are not included in the Agency estimate of employ

ment impacts for this Transport Rule for the reasons mentioned in this paragraph. Table 8 - 6. Employment Impacts for Entities Not Regulated by the Transport Rul e Employment Changes for Ongoing Annual Operation Employment Changes from Changes to Demand in Materials 13 1. Limestone (FGD) 2,440 2. Ammonia (SCR) 30 3. Cataly st (SCR) 20 4. Sodium Bicarbonate (DSI) 160 Sub - Total: 2,650 Employment Changes for Ongoing Annual Retrofit Operation 2,320 Employment Annual Changes due to Coal Capacity

Retirements (2,710) Annual Employment Changes due to Changes in Fuel Use (990) Coal (2,030) Natural Gas 810 New Natural Gas Pipeline 2308 .5 Summary

The two approaches use different anal yt ical techniques and are applied to different industries during different time periods, and they use different units of anal ysis. These estimates should not be summed because of the different metrics, length and methods of an al ys is as mentioned in Section 8.4. The Morgenstern estimates are used for the ongoing emplo ym ent impacts for the regulated entities (the electric power sector). The short term estimates for employ ment needed to design, construct, and install the polluti on control equipment in the period leading up to the compliance date are also provided. Finally some of the other ty

pes of employ ment impacts that will be ongoing are not included in the emplo ym ent impacts estimated for the final Transport Rule. Table 8

- 7 shows the employ ment impacts of the final Transport Rule as estimated by the environmental protection sector approach and b y the Morgenstern approach. Table 8 - 7. Estimated Employment Impact Table Annual (reoccurring) One time (construction during compliance period) Environmental Protection Sector approach* Not Applicable 2,230
Net Effect on Electric Utility Sector Employ

ment from Morgenstern et al. approach*** **+700

- 1,000 to +3,000**** Not Applicable

*T hese one

- time im

pacts on employment are estimated in terms of job

- years. **T his estimate is not statistically different from zero. ***T hese annual or recurring employment impacts are estimated in terms of production workers as defined by the US Census Bureau’s Annual Survey of Manufacturers (ASM). **** Based on the 95% confidence interval of the Morganstern study.