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Costs of Air Quality Regulation
July 1999
Working Paper Number:
CES-99-09
This paper explores some costs associated with environmental regulation. We focus on regulation pertaining to ground-level- ozone (O) and its effects on two manufacturing industries - industrial organic chemicals (SIC 2865-9) and miscellaneous plastic products (SIC 308). Both are major emitters of volatile organic compounds (VOC) and nitrogen oxides (NO), the chemical precursors to ozone. Using plant-level data from the Census Bureau's Longitudinal Research Database (LRD), we examine the effects of regulation on the timing and magnitudes of investments by firms and on the impact it has had on their operating costs. As an alternative way to assess costs, we also employ plant-level data from the Pollution Abatement Costs and Expenditures (PACE) survey. Analyses employing average total costs functions reveal that plants' production costs are indeed higher in (heavily-regulated) non-attainment areas relative to (less-regulated) attainment areas. This is particularly true for younger plants, consistent with the notion that regulation is most burdensome for new (rather existing) plants. Cost estimates using PACE data generally reveal lower costs. We also find that new heavily-regulated plants start out much larger than less-regulated plants, but then do not invest as much. Among other things, this highlights the substantial fixed costs involved in obtaining expansion permits. We also discuss reasons why plants may restrict their size.
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Manufacturing Plant Location: Does State Pollution Regulation Matter?
July 1997
Working Paper Number:
CES-97-08
This paper tests whether differences across states in pollution regulation affect the location of manufacturing activity in the U.S. Plant-level data from the Census Bureau's Longitudinal Research Database is used to identify new plant births in each state over the 1963-1987 period. This is combined with several measures of state regulatory intensity, including business pollution abatement spending, regulatory enforcement activity, congressional pro-environment voting, and an index of state environmental laws. A significant connection is found: states with more stringent environmental regulation have fewer new manufacturing plants. These results persist across a variety of econometric specifications, and the strongest regulatory coefficients are similar in magnitude to thos4e on other factors expected to influence location, such as unionization rates. However, a subsample of high-pollution industries, which might have been expected to show much larger impacts, gets similar coefficients. This raises the possibility that differences between states other than environmental regulation might be influencing the results.
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Are We Overstating the Economic Costs of Environmental Protection?
May 1997
Working Paper Number:
CES-97-12
Reported expenditures for environmental protection in the U.S. are estimated to exceed $150 billion annually or about 2% of GDP. This estimate is often used as an assessment of the burden of current regulatory efforts and a standard against which the associated benefits are measured. This makes it a key statistic in the debate surrounding both current and future environmental regulation. Little is known, however, about how well reported expenditures relate to true economic cost. True economic cost depends on whether reported environmental expenditures generate incidental savings, involve uncounted burdens, or accurately reflect the total cost of environmental protection. This paper explores the relationship between reported expenditures and economic cost in a number of major manufacturing industries. Previous research has suggested that an incremental $1 of reported environmental expenditures increases total production costs by anywhere from $1 to $12, i.e., increases in reported costs probably understate the actual increase in economic cost. Surprisingly, our results suggest the reverse, that increases in reported costs may overstate the actual increase in economic cost. Our results are based a large plant-level data set for eleven four-digit SIC industries. We employ a cost-function modeling approach that involves three basic steps. First, we treat real environmental expenditures as a second output of the plant, reflecting perceived environmental abatement efforts. Second, we model the joint production of conventional output and environmental effort as a cost-minimization problem. Third, we calculate the effect of an incremental dollar of reported environmental expenditures at the plant, industry, and manufacturing sector levels. Our approach differs from previous work with similar data by considering a large number of industries, using a cost-function modeling approach, and paying particular attention to plant-specific effects. Our preferred, fixed-effects model obtains an aggregate estimate of thirteen cents in increased costs for every dollar of reported incremental pollution control expenditures, with a standard error of sixty-one cents. This single estimate, however, conceals the wide range of values observed at the industry and plant level. We also find that estimates using an alternative, random-effects model are uniformly higher. Although the higher, random-effects estimates are more consistent with previous work, we believe they are biased by omitted variables characterizing differences among plants. While further research is needed, our results suggest that previous estimates of the economic cost associated with environmental expenditures have been biased upward and that the possibility of overstatement is quite real. Key words: environmental costs, fixed-effects, translog cost model
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Evaluation And Use Of The Pollution Abatement Costs And Expenditures Survey Micro Data
January 1996
Working Paper Number:
CES-96-01
The Pollution Abatement Costs and Expenditures Survey (PACE) is an annual survey of manufacturing establishment=s operating costs and capital investment expenditures for pollution abatement purposes. This paper provides a description and evaluation of the PACE micro data available at the Center for Economic Studies (CES). The paper provides an overview of the survey, how the sample is drawn, how the survey questionnaire has changed over time, an assessment of the data quality, and suggestions for the use of the data, as well as its limitations. Also included are suggestions for modifying the survey design and data processing procedures. The PACE data series, linked to the economic data in CES= Longitudinal Research Database (LRD), covers the years 1979-1993, excluding 1983 and 1987.
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Pollution Abatement Costs, Regulation And Plant-Level Productivity
December 1994
Working Paper Number:
CES-94-14
We analyze the connection between productivity, pollution abatement expenditures, and other measures of environmental regulation for plants in three industries (paper, oil, and steel). We examine data from 1979 to 1990, considering both total factor productivity levels and growth rates. Plants with higher abatement cost levels have significantly lower productivity levels. The magnitude of the impact is somewhat larger than expected: $1 greater abatement costs appears to be associated with the equivalent of $1.74 in lower productivity for paper mills, $1.35 for oil refineries, and $3.28 for steel mills. However, these results apply only to variation across plants in productivity levels. Estimates looking at productivity variation within plants over time, or estimates using productivity growth rates show a smaller (and insignificant) relationship between abatement costs and productivity. Other measures of environmental regulation faced by the plants (compliance status, enforcement activity, and emissions) are not significantly related to productivity.
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Cross Sectional Variation In Toxic Waste Releases From The U.S. Chemical Industry
August 1994
Working Paper Number:
CES-94-08
This paper measures and examines the 1987 cross sectional variation in toxic releases from the U.S. chemical industry. The analysis is based on a unique plant level data set of over 2,100 plants, combining EPA toxic release data with Census Bureau data on economic activity. The main results are that intra-industry variation in toxic releases are as great as, or greater, than inter-industry variation, and that plant, firm, and regulatory characteristics are important factors in explaining observed variation in toxic releases. Even after controlling for primary product and plant characteristics, there are some firms that generate significantly lower toxic waste due to managerial ability and/or technology differences.
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Environmental Regulation And Manufacturing Productivity At The Plant Level
March 1993
Working Paper Number:
CES-93-06
This paper presents results for an analysis of plant-level data from three manufacturing industries (paper, oil, and steel). We combine productivity data from the Longitudinal Research Database ( LRD ) with pollution abatement expenditures from the Census Bureau's Pollution Abatement Cost and Expenditures (PACE) survey, as well as regulatory measures taken from datasets maintained by the Environmental Protection Agency. We use data from 1979 to 1985, considering both labor and total factor productivity, both levels and growth rates, and both annual measures and averages over the period. We find a strong connection between regulation and productivity when regulation is measured by compliance costs. More regulated plants have significantly lower productivity levels and slower productivity growth rates than less regulated plants. The magnitude of the impacts are larger than expected: a $1 increase in compliance costs appears to reduce TFP by the equivalent of $3 to $4. Thus, commonly used methods of calculating the impact of regulation on productivity are substantially underestimated. These results are generally consistent across industries and for different estimation methods. Our other measures of regulation (compliance status, enforcement activity, and emissions) show much less consistent results. Higher enforcement, lower compliance, and higher emissions are generally associated with lower productivity levels and slower productivity growth, but the coefficients are rarely significant.
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