Unemployment and Environmental Regulation in General Equilibrium
Environmental regulations are unlikely to significantly reduce jobs in the US economy, contrary to what some critics suggest. Instead, jobs will shift away from polluting industries toward cleaner ones. Policy design can smooth that transition.
- Imposing a pollution tax leads to substantial reductions in employment in the polluting sector of the economy, but those losses are offset by an employment increase of similar magnitude in nonpolluting sectors.
- Because of this offsetting effect on the nonpolluting (unregulated) industry, empirical studies that focus only on regulated firms can be misleading. And those that use nonregulated firms as controls for regulated firms will be even more misleading.
- A modest economy-wide carbon tax would likely cause a substantial shift in employment between industries, but would have little overall effect on unemployment, even in the short run.
- The magnitude of employment shifts between industry sectors is much smaller under a performance standard (a constraint on pollution emissions per unit of output) than under a pollution tax, but the overall effect on employment is similar.
- To the extent that policymakers want to minimize sectoral shifts in employment, performance standards (and related intensity-standard policies) may be attractive policy options.
Marc Hafstead is an RFF fellow and director of the Carbon Pricing Initiative and the Climate Finance and Financial Risk Initiative.
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