Press Release

New RFF Modeling: How a Carbon Tax Might Affect Employment

May 13, 2016

WASHINGTON—Resources for the Future (RFF) has published a new blog post and related discussion paper that take up a commonly asked—but difficult to answer—question: How do environmental policies affect jobs?

The authors, RFF Fellow Marc Hafstead and Senior Fellow Rob Williams, note in the blog post that employment effects can play a central role in political debates over environmental policy. They summarize: Arguments about “green jobs” are heard from the left and “job killer” claims are heard from the right.

The challenge, as the authors note, is that existing models are not well suited to answering the question of how regulation affects jobs. In response to that challenge, Hafstead and Williams have spent the last two years building a new model designed specifically to study the effects of environmental regulation on employment and unemployment while avoiding issues that often have faced such assessments.

To simplify the analysis, they start with a two-sector model with a “clean” and a “dirty” industry (Their intention is to expand the model to 22 sectors in the near future).

According to the authors: The model estimates that a carbon tax of $20 per ton of CO2 emissions, with revenues from the tax rebated lump-sum to households, would increase unemployment by 0.26 percentage points. By comparison, the unemployment rate increased by 4.5 percentage points during 2007-2009. And the effect is much smaller if the revenues are used to finance reductions in the payroll tax: A carbon tax/payroll tax swap raises the unemployment rate by only 0.02 percentage points.

“These results,” they state, “suggest that the net effect of carbon pricing on unemployment is likely to be very small.”

However, they also note: “We find substantial job losses in the polluting sector—not via layoffs, but rather through natural attrition and a big drop in hiring in that sector. These are offset by a similarly sized gain in jobs in the clean sector (driven both by demand, as consumers shift away from pollution-intensive consumer goods and by reduced competition for workers from the dirty sector).”

Read the full post and paper:

Resources for the Future does not take intitutional positions. Please attribute any findings to the authors or the research itself. For example, use "According to research from RFF …" rather than "According to RFF …".

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Resources for the Future (RFF) is an independent, nonpartisan organization based in Washington, DC, that conducts rigorous economic research and analysis to improve environmental and natural resource policy.