I was able to find several different news articles discussing this topic:
The most thorough treatment I found comes from an MIT study*, referenced by The Guardian: "Life Cycle Assessment of Hand Drying Systems" (executive summary (pdf) and full report (pdf)).
The study includes this graphic:
From the full report, the key drivers of environmental impact from paper towels are:
- Manufacturing. The manufacture of paper towels makes up half the GHG emissions, and half the water consumption, for the total life-cycle.
- Materials production and transportation. The sourcing, processing, and transport of wood and wood products which are used in the manufacture of paper towels also result in significant water use and GHG emissions.
- Waste disposal. Because used paper towels are sent to landfills and not recycled, they result in additional GHG emissions, as the paper bio-degrades in landfills releasing CO2 to the atmosphere.
All three of these areas are obviously on-going issues for paper towels, whereas an electric hand-dryer only needs to manufactured and transported once, and doesn't produce on-going waste material.
*The study was commissioned by Dyson, so I would be a bit skeptical (without spending more time reviewing the paper in depth) about the conclusions when comparing Dyson hand dryers to their competitors. However the authors do note that Dyson and Xlerator dryers have similar impact when the time constraints are relaxed, unlike Dyson's (expected) assertion that their product is always better.