In the debate over environmental regulations, a principal concern is the potential impact on the manufacturing sector’s output and employment.  While the academic literature and agency practice in regulatory impact analyses have illustrated the direct effect of manufacturing-sector environmental regulations on output and employment, these literatures have been largely silent on the indirect effects of environmental regulations on factor inputs to the manufacturing sector.  In particular, recent and upcoming power sector regulations could increase electricity rates manufacturing firms face.  This would increase domestic production costs for electricity and eventually prices charged to industrial customers must rise, in turn causing a decline in domestic manufacturing as well.  This production decline may reflect, in part, a shift of economic activity and jobs overseas to key trading partners, if they do not face comparable regulation.  However, the magnitude of this effect, and even the sign on the labor impact, remain an unanswered empirical question. 

            The purpose of this paper is to quantify the effect of power-sector regulation on U.S. manufacturing industries’ employment and to identify trade effects – that is, how much of any decline in production represents a shift overseas?  We do this in two parts.  First, we estimate a series of models of the relationship between electricity prices and employment, shipments, and trade for more than 400 manufacturing industries over 21 years.  Second, we use our estimated statistical models to simulate the impacts of two power sector regulations: a hypothetical carbon pricing regime and the 2011 Cross-State Air Pollution Rule (CSAPR).  For the climate change policy simulation, we focus on a carbon price of $15 per ton.  For the simulation of the CSAPR, we employ the 2.2% increase in 2012 electricity rates estimated by the EPA in its regulatory impact analysis.

In the first case, we find that higher electricity prices associated with $15/tCO₂ would lead to an average production decline of 1.3% but also a 0.6% decline in consumption (defined as production plus net imports).  In the case of CSAPR, we find that energy-intensive industries would witness experience employment impacts less than 0.5% under CSAPR, and competitiveness impacts would be less than 0.3%.