Short answer: Air dryers are far better for the environment.
It takes a certain amount of dirty (coal/oil/gas) energy to power the blowers, but paper towel production, even from recycled paper, is a dirty process in itself and energy intensive as well. Recycled pulp is typically mixed with fresh pulp, requiring continued use of tree plantations (which replace natural forests) and most used towels end up in landfills.
Life Cycle of the Paper Towel:
1. Natural forest - life sustaining, high biodiversity, structural diversity:
2. Logged. Trunks cut/sold for lumber, scraps sold to become paper pulp:
3. Former forested land planted with a fast-growing, pulp species. A tree plantation is born - as species-poor and chemicalized as a cornfield:
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4. Pulp mill - pours effluent into sky and water:
5. Paper bleached and rolled into towels:
6. Discarded towels go to landfill: