The Effect of Environmental Regulation on Employment: An Examination of the 1990 Clean Air Act Amendments and its Impact on the Electric Power Sector

The effect of regulation on employment is of particular interest to policy-makers in times of high sustained unemployment. In this paper we use a panel data set of fossil fuel fired power plants to examine the impact of Phase I of the SO2 trading program created by Title IV of the 1990 Clean Air Act Amendments (CAAA) on employment in the electric utility sector and a two-stage estimation technique that pairs propensity score matching with a difference-in differences estimator. Overall, we find little evidence that power plants subject to Phase I of the SO2 trading program had significant decreases in employment during Phase I of the program relative to non-Phase I power plants. We also find that accounting for utility-level fixed effects is important when examining how electric utilities chose to comply. For instance, when using plant-level fixed effects we find significant negative employment effects for power plants that chose to comply by switching to low sulfur coal. However, utilities took advantage of the flexibility offered under the trading program by switching to low sulfur coal at a subset of the power plants they owned to generate excess allowances to meet compliance needs at other power plants. When we include utility-level fixed effects in this case, we find that the negative employment effect is no longer statistically significant, offering some evidence that utilities used the flexibility of the regulations to minimize the overall impact on employment. When we control for a more traditional NOX rate-based standard that partially overlaps with Phase I of the SO2 trading program, we find that employment effects associated with the SO2 program continue to be insignificant.