Association for Public Policy Analysis & Management

Environmental regulations have generated substantial benefits in terms of improvements in air and water quality, with future regulations expected to be even more ambitious in confronting challenges associated with transitioning to renewable energy sources. Opponents, however, argue that these benefits come at a high cost, particularly in terms of jobs and wages.

This paper investigates the impact of environmental regulations on labor market outcomes by exploiting a federal agreement among environmental ministries that established national ambient air pollution concentration standards. While the policy was implemented at the national level, it targeted geographical regions that had relatively more severe air pollution problems for greater reductions in pollution emissions. The primary instrument used to achieve pollution reductions included technology and performance standards, which mandated the adoption of specific pollution abatement technologies and set maximum emissions-intensity rates, respectively.

These regulations were imposed on polluters in industries that generated the specific pollutant wherein ambient concentrations needed to be brought down to the federal standard. We exploit features of the policy that generated exogenous variation in policy stringency both over time and across geographical regions, as well as within geographical regions based on industry. This paper therefore sheds light on the repercussions of environmental regulations on local labor market outcomes, as well as the repercussions within local labor markets according to regulated and unregulated industries.

To establish that the policy was effective at improving air quality, this paper investigates the effect of changes in the stringency of environmental regulations on ambient pollution concentrations. As expected, we find that increasing the stringency of regulations significantly reduces ambient pollution concentrations. We then estimate the effect of an increase in the stringency of regulations on employment, hours worked, and wages. By coupling the estimates on labor market outcomes with the policy effects on pollution concentrations, we can roughly compare the relative costs (in terms of employment loss and wage reductions) of various environmental policies with their benefits (in terms of reduced pollution).

While labor market outcomes are often emphasized as the primary adverse consequence of environmental regulations, we argue that this ratio represents a lower bound on the relative cost of environmental regulations for several reasons. First, the labor market impacts are likely to be understated as they focus on a narrow set of outcomes (e.g., wages and hours) as other outcomes, such as non-wage benefits, are difficult to measure. Second, because environmental regulations often target industries where demand is inelastic (e.g., energy), much of the cost of regulations is likely to burden consumers through higher prices and loss of variety.