The Heterogeneous Regional Employment Effects of Environmental Policies

This paper examines the effects of Environmental Policies-measured by the OECD Environmental Policy Stringency Index (EPS)-on employment in 349 regions across 26 countries from 1990 to 2020. We find that more stringent EPS have short-term negative effects on regional employment, which disappear in the medium term. However, the magnitude of these effects is economically modest: a one standard deviation increase in EPS reduces employment by about 0.14% at its peak, corresponding to roughly 8% of typical annual regional employment fluctuations. The impact varies depending on the type of policy implemented, with market-based instruments having a greater and more persistent effect. Importantly, while average effects are limited, employment costs are highly concentrated in specific regions-particularly those with higher emissions, larger industrial sectors and lower human capital. Regions in countries with stronger active labour market policies experience less short-term negative effects, while lower employment protection leads to reallocation and job creation in the medium term.