The Heterogeneous Regional Employment Effects of Environmental Policies

ABSTRACT 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.