EPA’s Math: Coal Regs = Coal Jobs

The most absurd aspect of the Environmental Protection Agency’s War on Coal is their repeated denials that it’s happening. No matter how many onerous rules they release, each time they claim that the regulation will not only save the environment, but also create jobs in the industry. For example, EPA’s Regulatory Impacts Assessment (RIA) for their mercury regulation known as the Utility MACT—which was (until possibly this week) the most draconian of the coal regulations—argues that the regulation will create almost 10,000 coal jobs.

Specifically, EPA’s Utility MACT regulation requires plants to install “maximum achievable control technology” (MACT)—otherwise known as scrubbers—to remove mercury and other toxins from exhaust. The rule is one of the most expensive in history: EPA estimates it will cost almost $11 billion annually to implement. Already, these compliance costs have led to the shutdown of dozens of coal-fired power plants. Yet, EPA supporters parrot EPA’s claim that this regulation will create thousands of jobs as if it had scientific authority.

EPA’s science is based on a Resources for the Future (RFF) study (Morgenstern, et al) of environmental expenditures in four industries in the 1980s—pulp and paper, plastics, petroleum, and steel—which found “a net gain of 1.55 jobs per $1 million in additional environmental spending” in those industries. EPA then took this formula and just multiplied times the estimated cost of the Utility MACT—$10.9 billion adjusted for inflation—to get their result. They show their work in this footnote on page 9-8 of the RIA:

Highly scientific! In other words, EPA took someone else’s paper, which studied environmental expenditures over three decades old (1971-1991), and applied them to a totally unrelated sector of the economy, the coal industry, and then utilized the old “plug and chug” method. This work wouldn’t survive peer review in a kindergarten class.

Nonetheless, the proposition that industry employment might increase as the result of environmental regulation isn’t totally asinine. The Morgenstern RFF study notes two reasons why environmental regulation might increase employment. First, “environmental regulation raises production costs. As production costs rise, more input, including labor, is used to produce the same amount of output.” Second, “environmental activities may be more labor intensive than conventional production.”

There’s some truth in this analysis. The Utility MACT would require coal plants to hire new workers to install scrubbers and would increase total production costs, one of which will be labor. RFF notes that “less competitive industries with inelastic demand may be less concerned about cost increases associated with regulation.” But coal isn’t a “less competitive industry with inelastic demand.” It, in fact, isn’t an industry at all, as Morgernstern defines it. It is a subsection of an industry, the electricity-generation industry.

Coal is in constant competition with an immediately presentable substitute good in natural gas, while industries like petroleum, for example, have no substitute. Further, Morgenstern writes that “most plants should not be worried about losing business to other plants facing the same regulation,” yet natural gas generators aren’t included under the Utility MACT rule, which gives them an advantage. One study by Exxon Mobile Corp. has found that natural gas will have replaced coal as the leading electricity generator by 2025 due in part to environmental regulation.

Given these facts, it’s hard to see how the Morgenstern study is applicable to the coal industry, and anecdotal evidence about plant closures throughout the U.S. is already supporting the conclusion that RFF’s model doesn’t fit the facts at least in this case. American University professor Michael Hazilla and RFF’s Raymond Kopp have found that in at least some industries, environmental regulation can have a dramatic influence on employment. “All industries experienced declines in labor productivity,” they conclude, “and some sectors experienced declines in employment. These impacts can also be substantial; for example, employment falls 7.6 percent in the motor vehicle sector.”

All this analysis, of course, obscures the more important issue of what the employment and economic impact will be on the rest of the economy, and this, of course, ignores the most important issue of all, which is whether the Utility MACT is necessary at all. As my colleague William Yeatman has pointed out many times in the past, all these economic impacts have been imposed by EPA in order to protect pregnant subsistence-level fisherwomen who consume more than 300 lbs of self-caught fish from the most polluted streams in the United States.

Not only will the children of these theoretical women be saved, says EPA, but they will have jobs at coal plants twenty years from now. Not likely, I’m afraid.