TODAY’S STUDY: ASSESSMENT OF THE ECONOMY-WIDE EMPLOYMENT IMPACTS OF EPA’S PROPOSED CLEAN POWER PLAN

Assessment of the Economy-wide Employment Impacts of EPA’s Proposed Clean Power Plan

April 14, 2015 (Industrial Economics, Inc. and Interindustry Economic Research Fund/University of Maryland Department of Economics)

Executive Summary

This document presents an economy-wide assessment of the employment impacts associated with the U.S. Environmental Protection Agency’s (EPA’s) proposed Clean Power Plan. This analysis expands upon the employment analysis included in EPA’s regulatory impact analysis (RIA) for the proposed Plan, as it captures several indirect effects not included in the EPA analysis. These include the employment impacts associated with changes in electricity and other energy prices (both positive and negative, depending on the year), the productivity impacts associated with heat rate improvements at power plants, households and businesses re-directing expenditures to other uses because of increased demand-side energy efficiency, expenditures crowded out by energy efficiency expenditures, and changes in investments for air pollution control devices. Based on these effects and those captured in EPA’s RIA for the proposed rule, this analysis estimates a net gain of 74,000 jobs in 2020, and projects that these annual employment gains will increase to 196,000 to 273,000 jobs between 2025 and 2040. These results represent a 0.1-0.2 percent increase in civilian employment.

On June 2, 2014, the U.S. Environmental Protection Agency issued a proposed rule for the Agency’s Clean Power Plan. Under this proposal, EPA would establish state-specific CO2 emission rate goals for the electric power sector and would also establish guidelines for the development, submission, and implementation of state plans to meet these goals. The proposal identifies four illustrative building blocks that EPA used to set the emission rate targets for each state, based upon existing measures for reducing CO2 emissions.

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These building blocks include:

Improvements in individual electricity generating units’ (EGUs’) emission rates;

Re-dispatch from affected steam power plans to affected natural gas combined cycle units;

Expanded use of low- or zero-carbon generating capacity (e.g., renewables); and

Expanded use of demand side energy efficiency.

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EPA identifies these building blocks to illustrate potential approaches that states may use to meet the state-specific carbon intensity targets included in the Clean Power Plan. In practice, states may use whatever approach they deem most appropriate.

With the U.S. economy still recovering from the Great Recession, policymakers and the public are keenly interested in the employment impacts associated with environmental and other regulations. Evaluating these employment impacts in the context of a particular rulemaking is a challenge, however, as various countervailing factors may influence a rule’s employment impacts. For example, environmental regulations increase abatement costs for polluting facilities, which may put upward pressure on prices and result in reduced sales, leading regulated firms to lay off workers. Offsetting this effect (at least partially), the installation of new abatement capital and compliance with environmental regulations requires additional labor, creating potential job gains. The issue is further complicated by the myriad other factors that affect employment.

EPA’s regulatory impact analysis (RIA) for the proposed Clean Power Plan generates estimates of the rule’s employment impacts, distinguishing between supply-side employment impacts for the power and fuel production sectors and demand-side effects associated with energy efficiency activities. The former reflects changes in labor demand associated with heat rate improvements, construction of new electricity generating units, changes in fuel use, and reductions in electricity generation due to demand-side energy efficiency activities, while the latter reflects the labor associated with energy efficiency expenditures projected to result from the rule. To estimate supply-side effects, the RIA uses a bottom-up engineering approach that combines data from EPA’s cost analysis with data on labor productivity within the power and fuel extraction sectors. For demand-side employment impacts, EPA estimates the relationship between expenditures and employment in the energy efficiency sector and applies this to the energy efficiency expenditures expected under the rule. Applying these methods, EPA estimates an employment loss of 77,900 job years on the supply side in 2025 and gains of 112,000 job years on the demand side.

While EPA’s analysis provides a reasonable first approximation of the proposed rule’s employment effects, its focus on direct employment impacts does not capture various indirect employment impacts that may be of interest to policymakers and the public. To provide a broader perspective on the rule’s employment impacts, this document provides an economy-wide assessment of the rule’s impact on employment. In broad terms, this analysis captures the employment impacts of the rule not only for directly affected industries (similar to EPA) but also for industries that may be indirectly affected by the rule. For example, changes in electricity prices associated with the rule affect production costs for manufacturers across the economy, potentially impacting their output and employment. To assess the proposed rule’s employment impacts on an economy-wide scale, this analysis relies upon the Long-term Interindustry Forecasting Tool (LIFT), a macro-econometric model developed and maintained by the Interindustry Forecasting Project (Inforum) at the University of Maryland.

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Our analysis of the proposed Clean Power Plan’s employment impacts proceeds as follows:

Approach:

In Chapter 2, we provide a detailed description of the methods employed in this analysis. This discussion identifies the overall structure of the analysis, describes the positive and negative employment impacts of the proposed rule as captured in this study, summarizes the macro-econometric model that we applied to estimate the proposed rule’s employment impacts, and documents the derivation of the data inputs that we incorporated into the macro-econometric model.

Results:

Based on the methods described in the previous chapter, Chapter 3 presents the results of the analysis. In addition to the estimated employment impacts of the rule, these results include estimated changes in GDP, consumption, and investment over time. Conclusions: To conclude, Chapter 4 discusses the implications of our results and highlights the insights that may be gained from our economy-wide methodology relative to more narrowly focused approaches.

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Discussion and Conclusions

This study has provided an economy-wide assessment of the employment impacts associated with EPA’s proposed Clean Power Plan. In addition to estimating employment impacts for directly affected firms, this study has examined how the proposed Plan might indirectly affect other industries and how these industries might change their use of labor. Our goal in performing this analysis was to capture the full range of effects that might influence the Plan’s employment impacts. As described earlier in this report, these effects are many; they do not all move employment in the same direction; and they may influence employment in complex ways (e.g., changes in electricity prices affecting firms’ production costs and thereby the prices they charge).

Thus, at the outset of this study, we did not have any a priori expectations regarding the overall direction of employment impacts.

After accounting for all of the various effects described above in Chapter 2, our analysis found that the proposed Clean Power Plan is likely to increase U.S. employment by up to 273,000 jobs. For perspective, this is roughly the equivalent of one month of healthy job gains.13 We emphasize, however, that this result is specific to the proposed Clean Power Plan. It does not imply that all greenhouse gas mitigation measures, or all emission control initiatives more broadly, will necessarily lead to an increase in employment. The direction and magnitude of employment impacts would depend on which of many factors affecting employment impacts are most significant. The relative strength of these factors would in large part reflect how the policy was structured. For example, the implementation of energy efficiency improvements at the retail level under the Clean Power Plan contributes to the estimated reduction in wholesale prices; the costs of these measures are not incurred by power producers but lead to a reduction in demand, causing wholesale prices to decline as well. This reduction in price would, all else equal, lead to increased employment, particularly for industrial electricity customers that purchase electricity on the wholesale market. Policy options that are structured differently, in the context of greenhouse gas regulation or conventional air pollutants, would not have this effect.

While employment is an important metric of regulatory impacts, we emphasize that it is but one of many metrics that provide useful information to policymakers and the public with respect to a rule’s impacts. Estimates of a rule’s employment impacts, therefore, should not be considered on their own but in conjunction with other impacts to gain a fuller understanding of a rule’s implications for the economy and the public at large.

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