From: Higgins, Cortney

To: Sorrels, Larry

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

Ferris, Ann

Subject: RE: Revised employment language for proposed residential wood heaters RIA

Date: Wednesday, December 11, 2013 7:29:20 PM

Attachments: EmploymentimpactsrevisedlanguagefromEPA2013RWHNSPSproposalRIA-12_11_Interagencycomments.docx

Hi Larry,

A few edits from us – see the attached.

Regards,

Cortney

From: Sorrels, Larry [mailto:Sorrels.Larry@epa.gov] 

Sent: Wednesday, December 11, 2013 1:00 PM

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

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 the way EPA characterizesation of the employment 

effects of its EPA regulations is valid and informative.

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, 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 the available information, including the 

RAND report, we do not expect sales of residential wood to fall substantially due to this rule, 

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 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 

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 any changes in 

production levels at plants choosing to comply and 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 

Comment [A1]: Please delete
most cases there is no scientifically defensible way to generate sufficiently reliable estimates of 

the employment impacts in these intermediate goods sectors. 

5.7.1 Employment Impacts within the Regulated 

Industry

It is 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 a regulated industry is 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 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 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. 

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.3,4 The authors find that 

 

2 A total of five studies are discussed in this RIA section. 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 3 Note, like Morgenstern, Pizer, and Shih (2002), this study does not estimate the number of jobs created in the 

environmental protection sector. 

Comment [A2]: The footnote needs to be fixed.
“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).5

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

net employment in four highly 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 extensive 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, empirical results from Berman and Bui (2001) 

and Morgenstern et al (2002) suggest that new or more stringent environmental regulations do 

not have a substantial impact on net employment (either negative or positive) net employment 

impacts may be positive but small even in the regulated sector. Nevertheless, Oother 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 that relative employment growth in some sectors 

differs between more attainment and less regulatednon-attainment areas. List et al. (2003) find 

some evidence that this type of geographic relocation, from more regulated areas to less 

regulated,areas 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.

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

impact of regulation on employment.
While the theoretical frameworks laid out by Berman and Bui (2001) and Morgenstern et 

al. (2002) still 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 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.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 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 transferability 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).

 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.