Employment Effects of Environmental Policies – Evidence From Firm-Level Data

IMF Working Papers, May 14, 2021

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Examines the effect of increasing the stringency of environmental policy across a broad set of policies on firms’ labor demand.
Uses Worldscope data from 31 countries on firm-level CO2 emissions.
Sample: as many as 5300 firms over 15 years.
Policy measure: OECD environmental policy stringency (EPS) index.

High emission-intensity firms reduce labor demand upon impact as EPS is tightened.
Low emission-intensity firms increase labor demand as EPS is tightened.
Net effect indicates a reallocation of employment from high-emission to low-emission firms.
Tightening EPS during economic contractions appears to have a positive effect on employment, other things equal.
The employment effects of EPS are not persistent.

Market-based policies: quantification exercises show modest positive net changes in employment.
Non-market policies (mainly emission quantity regulations): quantification exercises show modest negative net changes in employment.
Combined aggregate EPS: modest negative net changes in employment.
Within market-based policies: the percent decline in employment in high-emission firms (and correspondingly the increase in low-emission firms) for a unit change in a policy index is smallest (largest) for trading schemes (“green” certificates, and “white” certificates)—note that stringency is not comparable across indices.

Environmental policy tightening induces firm-level reallocation of labor from high-emission-intensity to low-emission-intensity firms.
Market-based instruments are associated with modest positive net employment changes, while non-market instruments are associated with modest negative net employment changes.
Timing of policy tightening matters: during economic contractions tighter EPS may support employment outcomes, other things equal.