Jobs and the Environment

By Eban Goodstein

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, snail darters and spotted owls, to the looming crisis created by greenhouse gas emissions, "jobs versus the environment" has been the pivotal political issue challenging national efforts to improve our environmental quality. And after a 35-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 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, few firms are fleeing industrial countries like the U.S. 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. This reality is demonstrated by looking at U.S. economic performance in recent years. From 1990 to 2000, U.S. firms, consumers, and governments boosted their spending on environmental protection from round $138 to $219 billion -- from 2.1 percent to 2.8 percent of GDP. These expenditures financed the installation of pollution control equipment in factories, catalytic converters in cars, laboratory testing of new pesticides, the construction of municipal sewage plants, and the disposal of household garbage, to name just a few items. Over the same period of time that environmental spending grew so dramatically, the U.S. economy added a whopping 16 million new jobs. 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 which have examined this issue find that jobs created in the environmental and related sectors balance jobs lost as a result of higher regulatory costs.

But what about the quality of jobs? Environmental spending is heavily concentrated in the construction and manufacturing sectors. Spending on pollution control equipment, sewage treatment facilities or plastic liners for landfills promotes both direct and indirect job growth in traditional blue collar industries. Environmental spending -- as compared to other types of spending -- generates more than twice the average percentage number of jobs in construction (11 percent as compared to four 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 in spite of 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. Only about two percent of all environmental costs support the government's direct regulation and monitoring establishment.

If there is simply no job trade-off at the national level, what about 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 in the since the late 1970s.

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. Extrapolating their results to the manufacturing sector as a whole, the authors estimated that between 1984 and 1994, on average, environmental regulation may have directly reduced employment in all regulated industries nationwide by about 470 jobs per year. 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 recent high profile regulatory controversies: timber workers versus old growth forest in the Pacific Northwest, and coal miners versus clean air in the southern Appalachians. These cases received high media exposure because the jobs paid well, because re-employment opportunities were limited for many (but not all) laid off rural workers, and perhaps most importantly, because the industries in question were facing larger scale layoffs due to recession, automation, import competition and, in the timber case, a declining resource base.

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 this 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 U.S., but the reason is overwhelmingly low wages, not costly regulations. Why? The main reason is that, for most industries, environmental costs remain low -- on the order of one to two 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 reasonably 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. 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.

What People are Fighting About

Despite the lack of any evidence that regulation causes job losses, the opponents of regulation have not stopped making this claim. In the US today, this claim is regularly made by the political opponents of mercury control, anti-sprawl regulation, endangered species protection, and by those who support oil drilling in the Arctic National Wildlife Refuge. But the most critical jobs versus environment issue is global warming. In July 2005, President Bush charged that US participation in the Kyoto Global Warming treaty would have "wrecked our economy" leading to the loss of millions of jobs. The President based his statement on a series of mid 1990's analyses done by the big three private economic consulting firms: WEFA, Charles Rivers Associates, and DRI/McGraw Hill. WEFA's work on climate change was financed by the American Petroleum Institute, who, along with the American Association of Automobile Manufacturers also bankrolled CRA's modeling efforts. DRI/McGraw Hill's work was performed under contract to the Bituminous Coal Operators Association and the Mine Workers union. In these models, higher prices for energy throw the US economy into recession, leading to reductions in employment of up to four million.

What's at Stake
Whether policies protecting health, safety, and the environment – such as caps on global warming pollution--will be rejected because of unreasonable fears of potential job loss

In contrast, Janet Yellen, chair of President Clinton’s Council of Economic Advisors, summed up her agency’s 1998 analysis of the likely economic impacts of the Kyoto agreement quite differently: "[T]here may be job gains in some sectors and losses in others, we do not anticipate any significant aggregate employment effect."

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 more than a 50percent reduction in the sulfur dioxide emissions that cause acid rain. Many job loss predictions were offered at the time. The US Business Roundtable financed one analysis by a well-known conservative economist, Robert Hahn: "[T]his study leaves little doubt that a minimum of two hundred thousand (plus) jobs will be quickly lost, with plants closing in dozens of states. This number could easily exceed one million jobs -- and even two million jobs -- at the more extreme assumptions about residual risk."

Another forecast, this one based on numbers from DRI/McGraw Hill, and 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 seven thousand 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 US workers were laid off for non-environmental reasons.

At this point, the US clearly will not meet the Kyoto targets. But 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 the McCain-Lieberman Climate Stewardship Act -- will be relatively small. The US has achieved quite ambitious reductions in conventional air pollutants over relatively short time frames. As a consequence of the clean air regulations enacted in the mid 1970s, ten years later, particulate concentrations in the air were down well over 70 percent; lead over 95 percent; sulfur dioxide over 42 percent; and carbon monoxide over 57 percent. Between 1990 and 1994, concentrations of all of these pollutants fell at least another 10percent. And all of this was achieved with minimal job loss -- regulation-induced layoffs have varied from 1,000 to 3,000 nationwide 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 add in the fact that investments in energy efficiency and renewables will create jobs -- and because energy efficiency investments are both more labor and domestic-content intensive than is fossil fuel production -- these investments will probably add more jobs nationwide than are lost in the fossil fuel industries.

Decisions on the Table
Will caps on global warming pollution cause large-scale job loss?

Will clean energy investments lead to widespread job gains?

Can we afford comprehensive adjustment policies for workers who are laid off as a result of environmental policy?

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. This figure is indeed quite comparable in magnitude to the regulation-induced layoffs we have observed over the last 25 years.

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 and others who lose from climate stabilization efforts

CPR's Perspective

Over the last 35 years we have been at this same decision point-- facing a new set of major environmental regulations—several times. And each time that a new regulation is put in place, we have been able to gather more evidence that refutes such claims. In spite of 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, lead 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 two to three thousand 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 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.

 

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