Summary of Interagency Working Comments Received on Draft Rule Under EO 12866 and EO 13563 Review. Subject to Further Policy Review.

1 Below is a summary of interagency comments received during EO 12866 and EO 13563 review of the draft final rule establishing GHG em issions standards and fuel efficiency standards for medium and heavy duty trucks. They are for your consideration and subject to further policy
review.



### 9.8 Employment Impacts

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### Introduction

Although analysis of employment impacts is not a standard part of a cost-benefit analysis (except to the extent that labor costs contribute to costs), employment impacts of federal rules are of particular concern in the current economic climate of sizeable unemployment. The recently issued Executive Order 13563, “Improving Regulation and Regulatory Review” (January 18, 2011), states, “Our regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness, and job creation ” (emphasis added). Although EPA and NHTSA did not undertake an employment analysis of the proposed rules, several commenters suggested that we undertake an employment analysis for the final rulemaking. Therefore Consistent with Executive Order 13563 , we have provided a robust qualitative discussion of the potential employment imp acts of the Heavy-Duty National Program.

Our general conclusion is that negative employment effects are not unlikely and that positive effects are possible, at least in the short-run. Ii n this context, estimates of the magnitudes of the various effects are extremely difficult. The reasons are XXYY. For this reason, the discussion is largely qualitative.

When the economy is at full employment, an environmental regulation is unlikely to have much impact on net overall U.S. employment; in stead, 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 economy. 1 In this situation, any effects on net employment are likely to be transitory as workers change jobs

. (e.g., For example, 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 )

. It should be emphasized that to the extent that workers lose jobs, and need to be retrained, they may face a significant long-te rm economic loss. See Louis Jacobson et al., Earnings Losses of Displaced Workers, 83 Am. Econ. Rev. 685 (1993).

On the other hand, It is also true that if a regulation comes into effect during a period of high unemployment, a change in labor demand due to regulation may affect net overall U.S. employment because the labor market is not in equilibrium. Either negative or positive effects are possible. Schmalansee and Stavins 2 point out that net positi ve employment effects are possible in the near term when the economy is at less than full employment due to the potential hiring of idle labor resources by the regulated s ector to meet new requirements (e.g., to install new equipment) and new economic activity in sectors related to the regulated sector. In the Comment [A1]: Interagency commenters suggest agencies move this section entirely into chapter 10 of

RIA.

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Formatted: Font: (Default) Times New RomanSummary of Interagency Working Comments Received on Draft Rule Under EO 12866 and EO 13563 Review. Subject to Further Policy Review.

2 longer run, the net effect on employment 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 employment could vary over time, region, and sector, and positive effects on employment in some regions or sectors could be offset by negative effects in other regions or sectors. For this reason, they urge caution in reporting partial employment effects since it can “paint an inaccurate picture of net employment impacts if not placed in the broader economic context.” A

This rulemaking is expected to affect net employment in the United States through the regulated sector – the truck and engine manufacturer industry

. – and several related sectors, specifically, industries that supply the truck and engine manufacturing industry (e.g., truck parts), the trucking industry itself, other industries involved in transporting goods (e.g., rail and shipping); the petroleum refining sector, and the re tail sector. According to the U.S. Bureau of Labor Statistics, about 1.25 million people were em ployed in the truck transportation industry and about 675,000 people were employed in the motor vehicle parts industry between 2010 and

2011. 3 Although heavy-duty vehicles (HD) account for approximately 4% of the vehicles on the road, these vehicles consume more than 20% of on-road gasoline and diesel fuel use. As discussed in Chapter 5 of this RIA, this rulemaking is predicted to reduce the amount of fuel these vehicles use, and thus affect the petroleum refinery industry. The petroleum refinery industry employed about 65,000 people in the U.S. in 2009, the most recent year that employment estimates are available for this sector. 4 Finally, since the net reduction in cost associated with these rules is expected to lead to lower transportation and shipping costs, in a competitive market a substantial portion of those cost savings will be passed along to consumers, who then will have additional discretionary income (how much of the cost is passed along to consumers depends on market structure and the relative price elasticities).

Several commenters suggested that the HD ve hicle rules would lead to an increase in employment in affected sectors by offering th e potential for new employment opportunities in the design and production of new vehicle technologies. Also, these commenters suggested that since the U.S. manufacturers and suppliers are leaders in certain advanced truck technologies, this program has the potential to help them cons olidate their leadership and thrive in a global
market. In this context, seve ral commenters referred to a n assessment by the Union of
Concerned Scientists (UCS) and CalStart of the economic and employment benefits of the improved efficiency in HD vehicles

. 5 The study predicts an increase in 63,000 jobs in 2020 a nd 124,000 in 2030, as result of higher fuel efficiency for HD vehicles

. These quantitative estimates
were derived using a standard input

- output model, though the estimates themselves have not yet been peer reviewed. Input

- output (I/O) models do not account for opportunity costs of labor

– that is, all employment needs due to the regulatory change will be met by unemp loyed workers. In addition, I/O models assume no changes in the average use of labor per dollar of output in the affected sectors. For these and other reasons, th ese may at best be considered an imprecise upper bound on actual employment impacts. 6

A Although there would be opportunity cost associated wi th shifting workers from one activity to another, the employment level would not change. Comment [A2]: Unless responding to comments, interagency commenters suggest deleting this discussion since it is dealing with second order

effects.

Comment [A3]: Intergency commenters strongly recommend deleting this reference. Not only it is not peer reviewed, and quoting here could be considered dissemination of this result by the agency, it is by definition a one-sided analysis that does not take into account an obvious potential negative impact.Summary of Interagency Working Comments Received on Draft Rule Under EO 12866 and EO 13563 Review. Subject to Further Policy Review.

3 Determining the direction (and not merely the magnitude) of employment effects even in the regulated industry may be difficult due to the presence of competing effects that lead to an ambiguous adjustment in employment as a resu lt of environmental regulation. Morgenstern,
Pizer and Shih 7 identify three separate ways that employment levels may change in the regulated industry in response to a new (or more stringent) regulation.

 Demand effect: higher production costs raise market prices and hence reduce consumption (and production), thus reducing demand for output, with potentially negative effects on employment; in the authors’ words, the “extent of this effect depends on the cost increase passed on to consumers as well as the demand elasticity of industry output”

 Cost effect: As costs go up, plants add more capital and labor (holding other factors constant), with potentially positive effects on employment; in the authors’ words, as “production costs rise, more inputs, including labor, are used to produce the same amount of output”

 Factor-shift effect: Post-regulation production technologies may be more or less labor intensive (i.e., more/less labor is required per dollar of output); in the authors’ words, “environmental activities may be more labor intensive than conventional production,” meaning that “the amount of labor per dollar of output will rise,” though it is also possible that “cleaner operations could involve automation and less employment, for example”

First, higher production costs due to the re gulation will lead to higher market prices ; higher prices in turn reduce demand for the good, reducing the demand for labor to make that good (“demand effect”) . Second, costs rise because of increased use of inputs, including labor, in order to comply with the new regulatory requirements (“cost effect”) . Third, p ost

- regulation production technologies may be more or less labor

- intensive (i.e., more/les s labor is required per dollar of output) (“factor

- shift effect”). The “demand effect” is expected to have a negative effect on employment, the “cost effect” to have a positive effect on employment, and the “factorshift effect” has an ambiguous effect on employment. Without more information as to with
respect to the magnitudes of these compe ting effects, it is not possible to predict the total effect environmental regulation will have on em ployment levels in a regulated sector

Morgenstern et al. estimated the effects on employment of spending on pollution abatement for four highly polluting/regulated industries (pulp and paper, plastics, steel, and petroleum refining). They conclude that increased abatement expenditures generally have not caused a significant change in employment in those sectors. More specifically, their results show that, on average across the industries studied , each additional $1 million spent on pollution abatement results in a (statistically insignifican t) net increase of 1.5 jobs. While the specific sectors Morgenstern et al. examined are diffe rent that the sectors considered here, the methodology that Morgenstern et al. developed is still useful in this context.

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### Overview of Affected Sectors

The above discussion focuses on employment changes in the regulated sector , but the regulated sector is not the only source of changes in employment . In these rules, the regulated Formatted: Bulleted + Level: 1 + Aligned at:
0.25" + Indent at: 0.5"Summary of Interagency Working Comments Received on Draft Rule Under EO 12866 and EO 13563 Review. Subject to Further Policy Review.

4 sectors are truck and engine manufacturers; they are responsible for meeting the standards set in these rules. The effects of these rules are also likely to have impacts beyond the directly regulated sector. The related sectors which these rules are also likely to impact include: motor vehicle parts producers, to the extent that the truck and engine industries purchase components rather than manufacture them in-house; shipping and transport, because many companies in this sector purchase trucks and their operating costs w ill be affected by both higher truck prices and fuel savings; oil refineries due to reduced demand for petroleum-based fuels; and the final retail market, which is where any net cost reductions due to fuel savings are ultimately expected to be experienced.

This discussion is focused on the regulated sector, because assessing the employment effect on related sectors raises unusually diff icult empirical challenges and therefore involves a high degree of speculation.

. The following discussion describes the direc tion of impacts on employment in these industries. The effects of the HD rule on net U.S. employment depend, not only on their relative magnitudes, but also on employment levels in the overall economy. As previously discussed, in a full-employment economy these sector-specific impacts will be mostly offset by employment changes elsewhere in the economy and would not be expected to result in a net change in jobs. However, in an economy with significant unemployment these changes may affect net employment in the U.S.



### (a) Truck and Engine Manufacturers

The regulated sector consists of truck and en gine manufacturers. Employment associated with manufacturing trucks and engines may be affected by the demand, cost, and factor-shift
effects.

The demand effect depends on the effects of this rulemaking on HD vehicle sales. If vehicle sales increase, then more people will be required to assemble trucks and their components. If vehicle sale s decrease, employment associated with these activities will decrease. The effects of this rulemaking on HD vehicle sales depend on the perceived desirability of the new vehicles. On one hand, th is rulemaking will increase vehicle costs; by itself, this effect would reduce vehicle sales. On the other hand, this rulemaking will reduce the fuel costs of operating the vehicle; by itself, this effect would increase vehicle sales. The agencies have not made an estimate of the po tential change in vehicle sales. However as discussed in Preamble Section VIII.E.5 the agencies have estimated an increase in vehicle miles traveled (i.e., VMT rebound) due to the reduced operating costs of trucks meeting these new standards. Since increased VMT is most likely to be met with more drivers and more trucks, our projection of VMT rebound is suggestive of an increase in vehicle sales and truck driver employment (recognizing that these increases may be partially offset by a decrease in manufacturing and sales for equipment of other modes of transportation such as rail cars or barges).

As discussed in Preamble Section VIII.A., the agencies find that the reduction in fuel costs associated with this rulemaking outweigh th e increase in vehicle cost. This finding is Comment [A4]: interagency commenters suggest deleting this discussion since it is dealing with
second order effects.

Comment [A5]: This discussion isn’t consistent with Morgenstern et al. Please discuss the employment effects consistent with the framework set up by Morgenstern et al.Summary of Interagency Working Comments Received on Draft Rule Under EO 12866 and EO 13563 Review. Subject to Further Policy Review.

5 puzzling: market forces should lead truck manufacturers and buyers to install all cost-effective fuel-saving technology, but the ag encies find that they have not. Preamble Section VIII.A. discusses various hypotheses that have been suggested to explain this phenomenon. Some of the explanations suggest that vehicle manufacturer s and buyers will benefit from the rulemaking, and vehicle sales will increase; others suggest th at the opposite might occur. The agencies do not have strong evidence supporting one specific explanation over another. As a result, the agencies do not suggest a direction for changes in employment due to changes in vehicle sales, though the net effect (as discussed above related to rebound) is not expected to be negative.

One commenter raised the issue of whether there could be a loss of recreation vehicle (RV) industry jobs due to a reduction in the sales of motor homes and towable RVs. As mentioned above, the effects of this rulemaking on HD vehicle sales depend on the desirability
of the new vehicles.

The truck and engine manufacturing sector has great flexibility in ho w to respond to the requirement for reduced greenhouse gases and increasing fuel efficiency, with a broad suite of technologies being available to achieve the standards. These technologies are described in detail in Chapter 2 of this RIA. Among these technologies, a distinction can be made between technologies that can be “added on” to conventional trucks versus those that replace features of a
conventional truck. “Added on” features require add itional labor to install the technologies on trucks, thus clearly increasing labor demand (the “cost effect”). For “replacement” technologies, the predicted impact on labor demand from regulation depends on the change in the amount of labor used to install one type of technology compared to another. In many cases, the new technologies are predicted to be more complex th an the existing technologies and are therefore likely to require additional labor installation in puts. However, most of the technologies that are expected to be used to meet these standard s are replacement technologies, therefore overall changes in the labor intensity are expected to be relatively small. For example, almost all of the engine improvements involve replacement technologies that are not expected to significantly change the labor requirements. Similarly, regula tions of the chassis on vocational vehicles will only require the installation of a different type of tire, which is also not expected to have large labor intensity impacts. Therefore, the potential magnitude of the factor shift effect is expected to be relatively small, though slightly positive due to the additional labor needed to install more complex technologies.

For the truck and engine manufacturing sector, the demand effect may result in either increased or decreased employment (though a decreas e is considered unlikely); the cost effect is expected to increase employment; and the factor-shift effect may have a slightly positive effect on employment in this sector.



### (b) Motor Vehicle Parts Manufacturing Sector

Some vehicle parts are made in-house and w ould be included directly in the regulated sector; alternatively, some are made by independent suppliers and are not directly regulated, but they will be affected by the rules as well. The parts manufacturing sector will be involved primarily in providing “add-on” parts, or components for replacement parts built internally.Summary of Interagency Working Comments Received on Draft Rule Under EO 12866 and EO 13563 Review. Subject to Further Policy Review.

6 Because demand for these parts is expected to increase, employment effects in this sector are expected to be positive.



### (c) Transport and Shipping Sectors

Although not directly regulated by these rules, employment effects in the transport and shipping sector are likely to result from these regulations. If the overall cost of shipping a ton of freight decreases because of increased fuel efficiency (taking into account the increase in upfront purchasing costs), in a perfectly competitive industr y these costs savings will be passed along to customers. With lower prices, demand for shipping would lead to an increase in demand for truck shipping services (consistent with the VMT rebound effect analysis) and therefore an increase in employment. In addition, if the rela tive cost of shipping freight via trucks becomes cheaper than shipping by other modes (e.g., rail or barge), then employment in the truck transport industry is likely to increase. To the extent that the trucking industry is more labor intensive than other modes, we would expect th is effect to lead to an overall increase in employment in the transport and shipping sectors.



### (d) Fuel Suppliers

In addition to the effects on the trucking industry and related truck parts sector, these
rules will result in reductions in fuel use that lower GHG emissions. Fuel saving, principally reductions in liquid fuels such as diesel and gasoline, will affect employment in the fuel suppliers industry sectors, principally the Petroleum Refinery sector. 8

Expected fuel consumption reductions by fuel type, and by heavy-duty vehicle type, can
be found in Table VIII-7. These reductions re flect impacts from the new fuel efficiency and GHG standards and include increased consumption from the rebound effect. These fuel savings are monetized in Table VIII-8 by multiplying the reduced fuel consumption in each year by the corresponding estimated average fuel price in that year, using the Reference Case from the AEO 2011. In 2014, the pre-tax fuel savings is $1.2 billion (2009$). While these figures represent a level of fuel savings for purchasers of fuel, it also represents a loss in value of output for the petroleum refinery industry. Since 50 percent of the fuel would have been refined in the U.S., the loss in output to the U.S. Petroleum Refinery sector is $600 million (2009$), which will result in reduced sectoral employment. 9 Because this sector is very capital-intensive, the employment effect is not expected to be large.



### (e) Fuel Savings

As a result of this rulemaking, it is anticipated that trucking firms will experience fuel savings. Fuel savings lower the costs of transportation goods and services

. and, as a result, could increase the profitability of trucking firms operating in the U.S. In a competitive market, the fuel saving that initially accrue to trucking firms are likely to be passed along as lower transportation costs that, in turn, could result in lower prices for final goods and services. In either case, the savings will accrue to some segm ent of consumers: either owners of trucking firms or the general public. In both cases, the effect will be increased spending by consumers in Comment [A6]: interagency commenters suggest deleting this discussion since it is dealing with

second order effects.

Comment [A7]: interagency commenters suggest deleting this discussion since it is dealing with

second order effects.

Comment [A8]: interagency commenters suggest deleting this discussion since it is dealing with
second order effects.

Comment [A9]: Lowering per unit costs of transportation is more plausible than the profitability argument, which is not needed here.Summary of Interagency Working Comments Received on Draft Rule Under EO 12866 and EO 13563 Review. Subject to Further Policy Review.

7 other sectors of the economy, creating jobs in a dive rse set of sectors, including retail and service
industries.

As mentioned above, the value of fuel savings from this rulemaking is projected to be $1.2 billion (2009$) in 2014, according to Table VIII-8. If all those savings are spent by consumers or trucking firm owners, the fuel sa vings will stimulate increased employment in the economy through those expenditures. If the fuel savings accrue primarily to firm owners, they may either reinvest the money or take it as profit. Reinvesti ng the money in firm operations would increase employment directly. If they take the money as profit, to the extent that these owners are wealthier than the general public, they may spend less of the savings, and the resulting employment impacts would be smaller than if the savings went to the public.

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### Summary

The net employment effects of this rulemaking are expected to be found through out several key sectors: truck and engine manufact urers, the trucking industry, truck parts manufacturing, fuel production, and consumers. For the regulated sector, the demand effect may result in either increased or decreased employment, depending on the net effect on HD vehiclesales. The cost effect is expected to increase employment in the regulated sector; and the factorshift effect may have a slightly positive effect on employment, though we cannot definitively say this is the case without quantification. Increas ed expenditures by truck and engine manufacturers are expected to require increased labor to build parts, though this effect also depends on any changes in the labor intensity of production; increased complexity of technologies may imply increased labor inputs. The rule will displace other HD sector investment, which would have a negative effect on employment in the areas no longer the subject of investment. Lower prices for shipping are expected lead to an increase in demand for truck shipping services and, therefore, an increase in employment, though this effect may be offset somewhat by changes in employment in other shipping sectors

. Reduced fuel production implies less employment in the fuel provision sectors. Finally, any net cost savings would be expected to be passed along to some segment of consumers: either the general public or the owners of trucking firms, who are expected then to increase employment through their expenditures Although we have n ot made a specific quantitative estimate of the overall employment impacts of this program , it is likely that employment increases due to additional truck parts manufacturing and to increased consumer expenditures will outweigh employment reductions in the fuel refining sector.

Given the current level of unemployment, net positive employment effects are possible in the near term due to the potential hiring of idle labor resources by the regulated sector to meet new requirements (e.g., to install new equipment), but is less likely as the economy approaches full employment . Quantitative estimates are not possible in light of XXYY, The agencies continue to explore the unresolved conceptual and empirical issues in this domain. Formatted: Font color: Accent 2

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8Summary of Interagency Working Comments Received on Draft Rule Under EO 12866 and EO 13563 Review. Subject to Further Policy Review.

9 Reference

1 Schmalensee, Richard, and Robert N. Stavins. “A Gu ide to Economic and Policy Analysis of EPA’s Transport Rule.” White paper commissioned by Excelon Corporation, March 2011.

2 Ibid.

3 U.S. Bureau of Labor Statistics seasonally-adjusted Current Employment Statistics Survey for the Truck Transportation Industry (NAICS 484) and the Motor Vehicle Parts Manufacturing Industry (NAICS 3363).

4 U.S. Census Bureau, 2009 Annual Survey of Manufactures, Published December 3, 2010.

5 Union of Concerned Scientists and CalStart, Delivering Jobs: The Economic Costs and Benefits of Improving Fuel Economy of Heavy Duty Vehicles , July, 2010. http:// www.ucsusa.org/deliveringjobs

.

6 Berck, Peter, and Sandra Hoffman. “Assessing the Employment Impacts of Environmental and Natural Resource Policy.” Environmental and Resource Economics 22 (2002): 133

- 156.

7 Morgenstern, Richard D., William A. Pizer, and Jhih-Shyang Shih. “Jobs Versus the Environment: An IndustryLevel Perspective.” Journal of Environmental Economics and Management 43 (2002): 412-436.

8 North American Industry Classification System (NAICS) Code 32411.

9 EPA and NHTSA estimate that approximately 50 percent of the reduction in fuel consumption resulting from adopting improved fuel GHG standards and fu el efficiency standards is likely to be reflected in reduced U.S. imports of refined fuel, while the remaining 50 percent is expected to be reflected in reduced domes tic fuel refining. Of this latter figure, 90 percent is anticipated to reduce U.S. imports of crude petroleum for use as a refinery feedstock, while the remaining 10 percent is expected to reduce U. S. domestic production of crude petroleum. Because we do not expect to see a significant reduction in crude oil producti on in the U.S., we do not expect this rule to have a significant impact on the Oil and Gas Extraction industry sector in the U.S. (NAICS 211000). For more information, refer to Section VIII-I on the energy security impacts from the program.