Document ID: EPA-HQ-OAR-2009-0491-4548
Agency: epa
Document Type: Supporting & Related Material
Title: 
Posted Date: 2011-07-15T04:00Z

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. 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. 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).  Therefore, we have provided this partial employment analysis to inform the discussion of labor demand and job impacts.  We provide an estimate of the employment 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 effects on all labor in other sectors not regulated by this rule, or the effects induced by changes in workers' incomes.  What follows is an overview of the various ways that environmental regulation can affect employment, followed by a discussion of the estimated 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, labor 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 economy is at full employment, we would not expect an environmental regulation to have an impact on overall employment since labor is being shifted from one sector to another. On the other hand, in periods of high unemployment, an increase in labor demand due to regulation may have the potential to result in a net increase in overall employment. With significant numbers of workers unemployed, the opportunity costs associated with displacing jobs in other sectors are likely to be smaller.
To provide a partial picture of the employment consequences of this rule, EPA takes two approaches.  First, the analysis 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 approach has been used by EPA in recent Regulatory Impact Analyses.  (See, for example, the Regulatory Impact Analysis for the recently finalized Industrial Boilers and Commercial and Institutional Solid Waste (CISWI) rulemakings, promulgated on February 21, 2011).  Second, EPA uses projections from IPM to estimate the short-term employment effects resulting from construction and resource requirements as a result of the additional demand for pollution control equipment.  Historically, EPA has only reported employment impacts on a few regulations.  Section 8.3 discusses the estimates of the employment consequences in the electricity sector, using the Morgenstern, et al. approach.  Section 8.4 estimates the employment effects in the environmental protection sector, using the second approach.

8.3	Employment Impacts primarily on the regulated industry: Morgenstern, Pizer, and Shih (2002)
EPA examined possible employment effects within the electric utility sector using a peer-reviewed, published study that explores historical relationships between industrial employment 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 legally compelled to satisfy this new demand, regulated firms have to finance this additional production with the proceeds of sales of their 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 overall effect of a regulation on employment into the following three subcomponents:
         The "Demand Effect": higher production costs raise market prices, reducing consumption (and production), thereby reducing demand for labor within the regulated industry [;]
         The "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 additional labor;
         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 employment impact of environmental regulation into three subcomponents clarifies the conceptual relationship between environmental regulation and employment in regulated sectors, and permitted Morgenstern, et al. to provide an empirical estimate of the net impact. For present purposes, the net effect is of particular interest, and is the focus of our analysis.
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 necessarily cause economically significant employment changes. The conclusion is similar to Berman and Bui (2001) who found that increased air quality regulation in Los Angeles did not cause in large employment changes.
Since the Morgenstern, et al. parameter estimates are expressed in jobs per million ($1987) of environmental compliance expenditures, their study offers a transparent and simple way to transfer estimates for other employment analysis. 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 employment effects associated with the Transport Rule.
By applying 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 the directly affected sector with a central estimate of −;
         Cost effect:  + to + jobs in the directly affected sector with a central estimate of +; and
         Factor-shift effect:  + to + jobs in the directly affected sector with a central estimate of +.
         EPA estimates the net employment effect to range from -  to + jobs in the directly affected sector with a central estimate of +. , 
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 employment effects which are not considered in the Morgenstern et al. study. For example, employment in environmental protection industries may increase as firms purchase more pollution control equipment and services to meet the rule's requirements. EPA does provide such an estimate of employment change later in this section in a separate analysis. On the other hand, industries that use electricity will face higher electricity prices as the result 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 output in various manufacturing industries.  It is difficult, however, to extend these results to an estimate of employment effects across these many different industries; therefore, we feel we do not currently have sufficient information to quantify these impacts as potential employment 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 estimates to analyze the final rule. First, the Morgenstern et al. estimates presented in Table 8-3 and used in EPA's analysis represent the weighted average parameter estimates for a set of manufacturing industries (pulp and paper, plastics, petroleum, and steel). Morgenstern, et al. present those industries' estimates separately, 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 significantly 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, relying 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 additional dollar of regulatory burden affects a plant by 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 regulatory burden does not disproportionately fall on smaller or larger plants.
8.4	Employment Impacts of the Transport Rule - Environmental Protection Sector Approach, by 2014 
The Transport Rule will require additional pollution control equipment and services 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 employment 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 effective.  Revenue and employment in the environmental technology industry have grown steadily between 2000 and 2008, reaching an industry total of approximately $300 billion in revenues and 1.7 million employees in 2008.  While these revenues and employment 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 anything other than workers diverted from other productive employment as opposed to new additional employment.
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, employment goes up in regulated firms.  Of course, these firms may also reassign existing employees to do these activities.
Environmental regulations support employment in many basic industries. In addition to the increase in employment in the environmental protection industry (increased orders for pollution control equipment), environmental regulations also support employment in industries that provide intermediate goods to the environmental protection industry.  For 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 employment is positive."
The focus of this part of the employment analysis is on short-term jobs related to the compliance actions of the affected entities and includes estimates of the employment impacts due to the increased demand for pollution control equipment.   Results indicate that the Transport 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 job-years by 2014.
8.4.1	Overall Approach and Methodology for Environmental Protection Sector Approach
EPA commissioned ICF International to provide estimates for the Environmental Protection Sector, and the analysis utilizes a bottom-up engineering based methodology combined with macroeconomic data on industrial output and productivity, to estimate employment impacts in the environmental control sector of the economy.  It relies on projections from the IPM model and projections for new pollution control equipment 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 2002, which was updated in the Spring of 2011 and reflects more recent information.  The approach involves using IPM projected results from the Transport Rule analysis for the set of pollution control technologies expected to be installed to comply with the rule, along with data from secondary sources, to estimate the job impacts using this approach.  This includes the labor needed to design, manufacture and install the needed pollution control equipment over the years leading up to compliance in 2014.
For construction labor, the labor needs are derived from the 2002 EPA resource analysis for installing various retrofits (FGD  -  Flue Gas Desulfurization scrubbers, SCR- selective catalytic reduction, and DSI -  dry sorbent injection) and are further classified 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.
More detail on methodology, assumptions, and data sources can be found in Appendix D of this RIA - "Employment 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 needed 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
                             Newly 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 employment 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 roughly 2,230 one-time job-years 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
20
  

 8.4.3	Other Employment Impacts of the Transport Rule
We expect ongoing employment impacts on regulated and non-regulated entities for a variety 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 employment resulting from coal retirements, and reductions in other industries due to slight projected increases in the price of electricity and natural gas.  The most notable of the ones we are unable to estimate are the impacts on employment as a result of the increase in electricity and other energy prices in the economy.  Because of this inability to estimate all the important employment impacts, EPA neither sums the impacts that the Agency is able to estimate for the ongoing non-regulated group or make any inferences of whether there is a net gain or loss of employment for the non-regulated group. These other ongoing employment impacts are found in Table 8-6, and these employment impacts are not included in the Agency estimate of employment impacts for this Transport Rule for the reasons mentioned in this paragraph.
Table 8-6.	Employment Impacts for Entities Not Regulated by the Transport Rule
Employment  Changes for Ongoing  Annual Operation

  Employment  Changes from Changes to Demand in Materials

      1.	Limestone (FGD)
2,440
      2.	Ammonia (SCR)
30
      3.	Catalyst (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
230
8.5	Summary
The two approaches use different analytical techniques and are applied to different industries during different time periods, and they use different units of analysis.  These estimates should not be summed because of the different metrics, length and methods of analysis as mentioned in Section 8.4.  The Morgenstern estimates are used for the ongoing employment impacts for the regulated entities (the electric power sector).  The short term estimates for employment needed to design, construct, and install the pollution control equipment in the period leading up to the compliance date are also provided.  Finally some of the other types of employment impacts that will be ongoing are not included in the employment impacts estimated for the final Transport Rule.
Table 8-7 shows the employment impacts of the final Transport Rule as estimated by the environmental protection sector approach and by 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 Employment from Morgenstern et al. approach***
**+700
- 1,000 to +3,000****
Not Applicable
*These one-time impacts on employment are estimated in terms of job-years.
**This estimate is not statistically different from zero.
***These 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.