CPR Perspective: Jobs and the Environment

The Trade-off Myth: Fact and Fiction About the Employment Effects of Environmental Policy

Background

The Issue Does environmental regulation cause job loss, damage the economy, or create “pollution havens” in the developing world?

From past battles over clean air and spotted owls, to the looming crisis created by global warming pollution, "jobs versus the environment" has been the principal political construct for public policy choices related to environmental quality. And after a 40-year media barrage, many Americans have come to share three related perceptions about jobs and the environment. First, at an economy-wide level, environmental protection has created long-run unemployment. Second, environmental protection has been responsible for large numbers of plant shutdowns and layoffs in the manufacturing sector. And third, environmental protection has led many U.S. firms to flee to developing countries with lax environmental regulations -- so-called "pollution havens."

This is one case in which the conventional wisdom is dead wrong. Economists who have studied the issue agree that the three propositions above are simply false. At the economy-wide level, in reality, there has simply been no trade-off between jobs and the environment. In fact, regulation-induced plant closings and layoffs are very rare. And, despite what one hears in the media and from some politicians, few firms are fleeing wealthy industrial countries like the United States to take advantage of lax environmental regulations in poor countries. Let’s look more closely at these three facts.

First, there is no economy-wide tradeoff. From 1990 to 2010, U.S. firms, consumers, and governments boosted their spending on environmental protection from 2.1 percent to over 2.8 percent of GDP. This spending created millions of “green jobs” from the installation of pollution control equipment in factories and catalytic converters in cars, to laboratory testing of new pesticides, the construction of municipal sewage plants, and the disposal of household garbage, to name just a few examples. Over the same period that environmental spending grew so dramatically, the U.S. economy also grew steadily. At a nationwide level, unemployment rates ultimately depend on the health of the macroeconomy, which has not been impaired by environmental regulation.

Second, it is a mistake to confuse costs of environmental protection with net job losses from environmental protection. Environmental costs translate into environmental spending, which also provides jobs. The great majority of studies that have examined this issue find that jobs created in the environmental and related sectors balance jobs lost as a result of higher regulatory costs—costs that are often overestimated to begin with (see CPR Perspective, Estimating Regulatory Costs).

But what about the quality of jobs? Environmental spending is heavily concentrated in the construction and manufacturing sectors. Compared to other types of spending, it generates more than twice the average number of jobs in construction (11 percent as compared to 4 percent) and a fourth again as great a proportion in manufacturing (20 percent as compared to 16 percent) as compared to other types of spending. And despite criticisms that environmental regulation only creates jobs for pencil-pushing regulators, less than 12 percent of environmentally induced employment was governmental, as compared to an economy-wide government employment rate of 16.5 percent. This last fact again reflects the reality that most environmental spending occurs in the private sector.

If there is simply no job trade-off at the national level, what about at the plant level? Again, in contrast to the conventional wisdom, environment-related shutdowns account for around one-tenth of one percent of all large-scale layoffs in a given year. Survey after survey has found that layoffs in the manufacturing sector resulting from environmental regulation have averaged one to three thousand jobs per year nationwide.

Academic analyses back up these survey results. One recent study of the steel, petroleum, plastics, and pulp and paper industries compared job losses from higher costs and reduced demand with the jobs created by direct spending on environmental protection within these industries. On balance, the net job losses in the heavily regulated industries were tiny. The study concluded: "[T]hese results cast considerable doubt on the existence of a jobs vs. the environment trade-off. While environmental spending clearly has consequences for business and labor, the idea that such spending reduces employment in key industries is at odds with the data."

The limited jobs impact of environmental regulation is the same even in two high-profile regulatory controversies: timber workers versus old growth forest in the Pacific Northwest, and coal miners versus clean air in the southern Appalachians. Even in these highly publicized examples, however, the number of direct employment reductions due to environmental protection averaged one to two thousand per year, in each case spread out over several years and across several states. In terms of the jobs lost, each of these events was comparable to a modest corporate downsizing. This is not to minimize the impact that any plant closing has on a community. Clearly in a world of increasing job instability, we need good plant closing legislation, expanded educational opportunities for laid off workers, and affordable health care coverage that stays with a worker when they lose their job. But the reasons for job losses have very little to do with environmental regulation, and much, much more to do with trade, technology, and corporate downsizing.

The final issue: Aren’t we losing manufacturing jobs to countries overseas because of their lax environmental standards? Once again, the answer is no. The overall competitiveness of U.S. firms has not been damaged by regulation. Moreover, very few firms are relocating to take advantage of lightly regulated "pollution havens" in poor countries. Economists have been looking quite hard for exactly these effects for some 30 years. But evidence supporting any widespread flight of dirty industry in particular, has simply not materialized.

Over the past three decades, manufacturing firms have been leaving the United States, but not because of “costly regulations.” They’re leaving in pursuit of low-wage workers. For most industries, environmental costs remain low -- on the order of 1 to 2 percent of total business costs. Moreover, much pollution control technology is now embedded in modern plant designs; that is, pollution control increasingly reflects fundamental process changes rather than end-of-the-pipe filters. This progress means that an oil refinery or chemical plant built by a multinational corporation in Seattle will in fact look similar to one built in South China. A second, intriguing answer comes from Harvard Business School Professor Michael Porter. Porter has argued that regulation, while imposing short run costs on firms, actually enhances their long run competitiveness (see CPR Perspective, Estimating Regulatory Costs). Such enhancement can happen if regulation favors forward looking firms, anticipates trends, speeds investment in modern production processes, encourages research and development, or promotes "outside-the-box" thinking.

Despite the lack of any evidence that regulation causes job losses, the opponents of regulation have not stopped making this claim. In the United States today, the most critical “jobs versus environment” debate relates to proposed cap-and-trade legislation for global warming (see CPR Perspective, Emissions Trading). One recent industry claim—from a study sponsored by the National Association of Manufacturers and the American Council for Capital Formation—is that global warming caps would, by 2030, lead to an economy with 2.7 percent lower GDP, and 4 million fewer jobs. Note that these are not layoffs, just slower long-run growth in employment. In the model, higher prices for fossil fuel based energy throws the U.S. economy onto a somewhat slower growth path, leading to marginally less economic activity 20 years from now.

By contrast, many academic and government studies of U.S. climate legislation, from MIT, Harvard’s Dale Jorgensen, the Energy Information Administration, Research Triangle Institute, and the Department of Energy’s Pacific Northwest National Lab,see very low short term costs, and negligible long-run impacts.

How can we judge these dueling economic forecasts?

To gain some perspective, it is instructive to back up a little bit, to the debates over the Clean Air Act Amendments of 1990. At that time, a proposal was on the table for a more than 50-percent reduction in the sulfur dioxide emissions that cause acid rain. Many job loss predictions were offered at the time. The U.S. Business Roundtable financed one such analysis: "[T]his study leaves little doubt that a minimum of 200,000-plus jobs will be quickly lost, with plants closing in dozens of states. This number could easily exceed 1 million jobs—and even 2 million jobs—at the more extreme assumptions about residual risk."

Another forecast, this one also paid for by the National Association of Manufacturers: "Initiatives such as the acid rain legislation would, in this respect, achieve only the dubious distinction of moving the United States towards the status of a second-class industrial power by the end of the century."

To gauge the accuracy of such predictions, consider the nation’s experience with the 1990 Clean Air Act Amendments, arguably the most ambitious environmental statute ever enacted. Did jobs drop as much as predicted—or even anywhere close? No. Between 1990 and 1997—a period of time in which substantial reductions in SO2 emissions were achieved—less than 7,000 workers in total were laid off as a direct result of the Clean Air Act Amendments. To put the 7,000 figure in perspective, over that same period of time, 10 million U.S. workers were laid off for non-environmental reasons.

Given this history, there is a good case to be made that the job impacts of any new global warming targets that are likely to be proposed—such as those of the Waxman-Markey Bill—will be relatively small. In the past, the United States has achieved quite ambitious reductions in conventional air pollutants over relatively short time frames. And all of this was achieved with minimal job loss—regulation-induced layoffs have varied from 1,000 to 3,000 nationwide per year over the last couple of decades.

Job losses from meeting any politically feasible global warming target will be of a comparable magnitude. The numbers will stay low because, in contrast to industry predictions and consistent with past experience, climate policy will not create a recession, nor will it spark a rush of manufacturing capital to the developing world. Finally, investments in energy efficiency and renewables will create jobs, and because energy efficiency investments are both more labor- and domestic-content- intensive than fossil fuel production, these investments will probably add more jobs nationwide than are lost in the fossil fuel industries.

With no recession and no capital flight, the primary jobs burden of reducing global warming pollution will fall on the shoulders of workers in fossil fuel related industries, primarily coal miners. Even in the absence of greenhouse gas controls, coal industry employment has been predicted to fall by 36,000 workers between 1995 and 2020. If carbon emissions are restricted, we are likely to see a further decline of an additional 36,000 job slots—about 1,500 per year. Recognizing that the biggest negative employment impacts are certain to be in this industry, then the total annual job losses from greenhouse gas policy are likely to number in the low thousands nationwide.

What will be new about climate policy is the cumulative, negative impact on coal communities. Eastern coal counties are likely to experience high unemployment rates over the next couple of decades, regardless of global warming pollution policy. Yet meeting serious global warming reduction targets will compound the hardships faced in these areas. The nation has a clear obligation to invest heavily in adjustment assistance—beyond the token funding for inadequate job retraining provided in the past—to help miners who lose from climate stabilization efforts.

A Progressive Perspective

Over the last 35 years we have repeatedly found ourselves at this same decision point, facing a new set of major environmental regulations. And each time that a new regulation is put in place, we have been able to gather more evidence that refutes claims that environmental progress will come at the cost of economic prosperity. Despite apocalyptic predictions from industry-sponsored models about the consequences of the SO2 control program, for example, not even a whiff of economic slowdown emerged from this highly successful clean-up program. The accumulated experience to date shows unambiguously that the job impacts from environmental regulation have been small and gradual and that job gains have balanced losses. Environmental protection has never induced or deepened a recession or led to widespread plant shutdowns, nor has it promoted significant capital flight to poor countries.

Reducing global warming emissions is likely to have a comparable impact on jobs as past environmental regulations. In contrast to industry predictions of job losses in the millions, the negative employment impacts from any new global warming legislation are likely to be 2,000 to 3,000 layoffs per year, nationwide. Comprehensive adjustment assistance for workers who do lose their jobs is something that we can easily afford. At the same time, new “clean energy” jobs will be created in industries ranging from the manufacturing of advanced vehicles to the installation of photovoltaic solar panels. The clear lesson from three decades of economic research is that job losses from environmental regulation tend to be small, gradual, and are balanced by job gains.

Interested in Learning More?

A more detailed discussion of the issues explored here, including complete references to factual information, can be found in Eban Goodstein The Trade-off Myth: Fact and Fiction About Jobs and the Environment (Island Press: 1999). www.islandpress.org/books/detail.html/SKU/1-55963-683-1. The four industry study cited is "Jobs Versus the Environment: An Industry-Level Perspective", Richard D. Morgenstern, William A. Pizer, and Jhih-Shyang Shih Journal of Environmental Economics and Management | May 2002 | Vol. 43, no. 3 | pp. 412-436. For details on the costs of proposed US climate policy, see “The Economics of 350,” Frank Ackerman et al. (2009), E3 Network, www.e3network.org.