Unemployment and Environmental Regulation in General Equilibrium
This paper analyzes the effects of environmental policy on employment (and unemployment) using a new general-equilibrium two-sector search model. We find that imposing a pollution tax causes substantial reductions in employment in the regulated (polluting) industry, but this is offset by increased employment in the unregulated (nonpolluting) sector. Thus the policy causes a substantial shift in employment between industries, but the net effect on overall employment (and unemployment) is small, even in the short run. An environmental performance standard causes a substantially smaller sectoral shift in employment than the emissions tax, with roughly similar net effects. The effects on the unregulated industry suggest that empirical studies of environmental regulation 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). The paper’s results also suggest that overall effects on employment are not a major issue for environmental policy, and that policymakers who want to minimize sectoral shifts in employment might prefer performance standards over environmental taxes.
We thank RFF’s New Frontiers Fund and Center for Energy and Climate Economics, Bo Cutter, Paul Balser, and the Linden Foundation for financial support for this work, and seminar participants at the AERE Summer Meetings, the University of Michigan, the National Center for Environmental Economics, Resources for the Future, and the World Congress of Environmental and Resource Economists for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Marc A.C. Hafstead & Roberton C. Williams, 2018. "Unemployment and environmental regulation in general equilibrium," Journal of Public Economics, vol 160 (April), pages 50-65. citation courtesy of