unskilled workers with no change for skilled workers. While this result depends in part on the fact that the fossil fuel-intensive part of the Spanish economy is not very labor intensive, it is important to note that, as in most studies, this model does not include a distinct sector for clean energy production which could get additional boost from such a permit scheme; further, the employment effects are increased when permit revenues are recycled via labor tax reductions, as found also in McNeill and Williams (2007). Similarly, Lutz and Meyer (2010) conduct a macro-econometric study for the European Union; under a variety of energy price, labor market, and revenue recycling scenarios, they simulate employment increases ranging from 0.02 to 0.77 percent.

In general, studies using macro econometric and CGE models persistently find that policies such as carbon permit sales or carbon taxes can have small, positive effects on employment when revenues raised are recycled via reductions in existing distortionary taxes. In some cases, employment gains can be realized even when tax revenues are returned lump sum to households. Effects on employment through substitution to cleaner fuels have gone largely unexamined. These substitution effects are likely to be nontrivial, however. Kammen, Kapadia, and Fripp (2006) report that “across a broad range of scenarios, the renewable energy sector generates more jobs than the fossil fuel-based energy sector per unit of energy delivered”.

There have been few empirical studies directly analyzing the impact of climate mitigation policies on employment. However, there is a rich literature on the employment effects of oil price shocks. Despite the fact that the effects of climate policy on energy prices is likely to be more permanent than past oil price shocks, this literature can reveal plausible transmission mechanisms between energy prices and the real economy, including employment. This strand of literature has focused on the mechanisms by which consumption and employment may be affected by energy price increases. On the one hand, higher energy prices are expected to reduce discretionary income, as consumers have less money to spend after paying their energy bills. Consumers may also increase their precautionary savings and delay or forgo purchase of energy-using durables (Bernanke, 1983, Pindyck, 1991). These effects imply a reduction in aggregate demand, output and the corresponding employment in response to an energy price increase. On the other hand, higher energy prices are also likely to cause reallocation of capital and labor away from energy intensive industries as consumers switch to more energy efficient durables and as firms also switch away from production technologies that are energy-intensive. In the presence of frictions in capital and labor markets, these sectoral shifts will cause resources to be unemployed, at least in the short term (Davis, 1987; Hamilton, 2008).

While most studies of oil shocks and economic activity focus on the United States, there are a few recent notable exceptions. Miguel, Manzano, and Martín-Moreno (2003) examine oil shocks and the Spanish economy. The study suggests an immediate 0.3 percent drop in hours worked in response to a onestandard deviation oil price shock. Cuñado and De Gracia (2003) compare macroeconomic responses to oil shocks among fifteen European countries. This study ignores effects on employment but instead considers effects on industrial production indexes; however, the study is useful for showing significant differences among some countries in economic responses to oil prices across Europe. For example, industrial production initially increases and then falls in the United Kingdom, but in Germany and several other countries the decline in production is immediate. Papapetrou (2001) considers oil shocks and the Greek economy and finds that oil price shocks explain a significant proportion of the fluctuations in 4