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Environmental Economics Seminar: Unemployment and Environmental Regulation in General Equilibrium
August 12, 2014, 2 - 3:30 PM
Room 6124, William Jefferson Clinton West Building, 1301 Constitution Ave., NW, Washington, DC
Marc A. C. Hafstead (Resources for the Future) and Roberton C. Williams III (Resources for the Future and Department of Agricultural and Resource Economics, University of Maryland)
EPA Contact: Carl Pasurka, 202-566-2275
Abstract: Effects on employment have played a central role in the political debate over environmental regulations, especially during the recent economic downturn, with opponents deriding regulations as “job killers” and proponents touting “green jobs.” To analyze the effects of a carbon tax on the level of unemployment in the economy, we develop a new general equilibrium search model with two sectors, one clean and one dirty. A carbon tax in this model is characterized by a reallocation of workers from the dirty industry to the clean industry. We find significant drops in employment in the dirty industry, but nearly all of those declines are offset by increases in employment in the clean industry, so the effect on aggregate unemployment is very small.
These results suggest caution should be used in interpreting partial-equilibrium empirical studies of environmental regulation that focus on regulated industries: ignoring employment effects in the non-regulated industries (as is commonly done in EPA’s regulatory impact analyses, for example) can imply estimates of the overall employment effects of an environmental regulation that are off by a factor of 10 or more. In addition, the paper develops and demonstrates a tractable framework for bringing unemployment into computable general equilibrium models of environmental regulation, which should be useful for a wide range of other questions involving unemployment and environmental regulations.
We then apply that framework in a context with economic fluctuations, in order to answer questions about how environmental regulation should vary through the business cycle. Should a new carbon tax be implemented during a recession, or would it be more efficient to defer it until an economic upturn? We add productivity shocks to the model, and find that the welfare costs of new regulations across the business cycle depend on the flexibility of wages. If wages are fully flexible, the welfare cost during a downturn is essentially equal to the cost during a boom. However, if wages are less flexible, then there may be justification to phase in the tax during a recession.