The impact of energy efficiency regulation on employment in India’s pulp and paper industry

This paper examines the employment effects of India’s Perform, Achieve, and Trade (PAT) scheme, a market-based energy efficiency regulation, focusing on the pulp and paper sector. While existing research on PAT has primarily emphasized energy savings and cost efficiency, its labor market implications remain largely unexplored, particularly in labor-abundant developing economies. Using firm-level panel data from 2002 to 2019 and a difference-in-differences framework with firm- and year-fixed effects, we estimate the causal impact of PAT participation on employment outcomes. The results indicate that PAT participation is associated with a statistically significant decline in employment, averaging around 13% relative to non-participating firms. To interpret these findings, we draw on the framework of Morgenstern, Pizer, and Shih, which highlights cost, factor substitution, and demand channels as key mechanisms through which environmental regulation affects labor demand. Consistent with this framework, the analysis suggests that PAT-induced efficiency improvements reduce production costs and affect sales dynamics, contributing to lower employment levels. These findings highlight potential trade-offs between environmental regulation and employment in the short run. They underscore the importance of complementary policies, such as skill development programs, labor-supportive incentives, and employment-sensitive policy design, to ensure a more balanced transition toward energy efficiency in developing economies.