The Cost of Environmental Regulations

The environment has taken a back seat to the economy this election season. But timely new research looks at the intersection of politics, economics and the environment: the actual cost of environmental regulations.  

A new working paper (abstract; PDF) by Michael Greenstone, John List, and Chad Syverson analyzes the economic cost of air-quality regulations. From the abstract:

The economic costs of environmental regulations have been widely debated since the U.S. began to restrict pollution emissions more than four decades ago. Using detailed production data from nearly 1.2 million plant observations drawn from the 1972-1993 Annual Survey of Manufactures, we estimate the effects of air quality regulations on manufacturing plants’ total factor productivity (TFP) levels. We find that among surviving polluting plants, stricter air quality regulations are associated with a roughly 2.6 percent decline in TFP. The regulations governing ozone have particularly large negative effects on productivity, though effects are also evident among particulates and sulfur dioxide emitters. Carbon monoxide regulations, on the other hand, appear to increase measured TFP, especially among refineries. The application of corrections for the confounding of price increases and output declines and sample selection on survival produce a 4.8 percent estimated decline in TFP for polluting plants in regulated areas. This corresponds to an annual economic cost from the regulation of manufacturing plants of roughly $21 billion, about 8.8 percent of manufacturing sector profits in this period.

The authors go on to conclude that “At least in the case of the Clean Air Act and the manufacturing sector, it seems reasonable to conclude that the claim that environmental regulations are costless or even beneficial for the regulated is contradicted by the available data.”  


Bill

But on a happier note, we're still here.

John

Of course the costs are just one half of the overall equation. What are the benefits of the regulation? Unfortunately they are only addressed in a final footnote:

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It is tempting to use these results to conduct a cost-benefit analysis of the CAAAs, however there are several missing pieces that prevent a complete accounting. For example, the costs of the CAAAs in other industries, notably the electricity sector (noting that the incidence may be on households and businesses), remain largely unknown. On the other side of the ledger, the CAAAs has led to tremendous improvements in air quality: this has reduced rates of mortality and morbidity, made many cities in the United States more appealing places to live, and reduced purchases of drugs that protect people from the harms of air pollution (e.g., Chay and Greenstone 2003 and 2005; Sieg et al. 2004; Currie and Neidell 2005; Tra 2010; and Deschenes, Greenstone, and Shapiro 2012). These efforts have shed light on the CAAAs’ benefits, but more research is necessary for a full accounting.

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Scott

So the cost benefit analysis only analyzed cost?

In that case - yes cost outweighs benefit.

Seminymous Coward

By "the cost benefit analysis" do you mean the paper referred to in the post and quoted in the comment to which you replied? If so, perhaps you should reread the quotation, which disavows the use of the paper's results as even the cost side of a cost-benefit analysis?

It's not like publishing a result on aspirin production costs means you have to also include research on aspirin's effectiveness in the prevention of heart attacks (or its other beneficial uses).

In any case, a cost benefit analysis that only analyzes cost wouldn't just draw conclusions as though the benefit were 0. 0 is the not the same thing as unknown; refusing to look at a number doesn't magically make it 0.

Daniel

As someone who works in the petroleum industry I know that a lot of the EPA rules actually FORCE us to make less environmentally friendly decisions. A small leak in a tank seal for example might release a few thousand pounds of emissions over a few years until the tank needs to be cleaned and repaired. To stop the leak, we have to clean the tank earlier which releases even more emissions over the course of a few days in addition to the cleaning for repairs which we will still need to do a few years down the road.

Clancy

The sad thing is that conservatives will seize on points like this as proof that regulations are BAD BAD BAD and that they should all be scrapped. And liberals will summarily dismiss them as just more right-wing talking points. Leaving no one actually interested in solving the problem by making the regulations better and more aligned with the best practices.

Daniel

Well the even larger problem is the regulators are entirely clueless. We can show them a violation and say that is standard practice and they will overlook it and then they will ding us on the smallest recommendation that wasn't followed in a report from a decade ago. The whole industry is a crap shoot. Nowadays we do our best to comply (it's kinda like doing taxes, no one can fully understand all the rules). But at the end of the day, the regulators find a way to ding you so they look useful.

Regulations have been and can be useful, but they need to be logical, easy to understand, and enforced by knowledgeable regulators.

Clancy

Whoa! Stop the presses! Limits on pollution impose a cost on polluting industries!
What would we do if we didn’t have economists to tell us these things?
Seriously, did anyone ever make the argument that there would be no cost (or even negative cost) to polluters that apparently needed rebutting? The important question is whether the regulations are beneficial to society at large. It seems to me that $21B would be easily dwarfed by the lost worker productivity and medical costs NOT incurred because so many fewer people are suffering from chronic lung disease, not to mention other benefits tangible, and intangible of clean air and water.

Seminymous Coward

Let's all just agree to never check our assumptions. Why have evidence-based positions when you can just conclude the same things without ever confirming them?

Impossibly Stupid

Here's an initial assumption to check: polluting the environment is free, free, FREE!

I absolutely *abhor* the common practice of externalizing costs, and then pretending that bearing their burden in the future is somehow a productivity loss.

If these companies are so eager to pollute, they should just pump their waste into the homes/neighborhoods of their shareholders and employees. Fair is fair.

JAM

Given that the environment is central to everyone’s quality of life (in many ways) and has poorly defined property rights associated with it, it is one of those sticky areas where externalities are common.

One of the hardest things to do in drafting environmental regulation is to properly weigh the costs and benefits of a regulation. Many companies do not want to share information on production methods, inputs and outputs known as trade secrets for understandable competitive reasons. Health risks can take years or decades to detect in populations directly exposed to pollutants. Both costs and benefits can be associated with many unknowns and quantities whose values are hard to predict over time. Many times the costs and benefits are not shared evenly by society.

That being said, I think it is welcome when anyone endeavors to finds new ways of looking at environmental regulation cost benefit analysis and offering up new analytical tools. In the end, these efforts will likely help to generate more positive outcomes for society.

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Jonathon

Any explanation for how CO regulations increase productivity?

Impossibly Stupid

Employees who can breathe tend to be more productive than employees who cannot.

Dre

Please explain one thing to me: Why are cost/benefit studies such as this one useful to modern societies? (Except for keeping economists in business of course ;-))

I couldn't care less if any company, or even the entire society loses or gains some billions of dollars. It's just money --- There is enough of it around in modern societies, because e.g. humans can be happy with far less money and luxury than Western countries have. To be concrete, I couldn't care less about the rich people having one more yacht, about middle class having one more vacation, and about the poor having $50 more handout (which they're going to put to good use with the same low efficiency as the handouts thay already receive). Also I couldn't care less about having hundreds of F-15s instead of tens.

What I do care about, and what therefore should be analyzed, studied, and improved, is the application of common sense in all human activity, and the absolute dedication to responsible behavior towards health and sustainability of human life for generations to come. To achieve this, maximizing money, which is driven by greed, and rationalized as a 'universal value", is basically irrelevant.

I'm not some "dirty hippie" at all. Exactly the opposite, I want to live in a civilization where sacrificing a fancy car and a big house, giving up a drug habit, etc. is easy, but in return the society values and provides infrastructure, transport, urban organization, schools, art, curiosity driven science, tolerance, social liberty, common sense in local politics, altruity, etc.. In such a society, having a smaller end-year bonus because your oil company has millions of profit less will leave the employee unphased, because he/she knows that the company is not a disgusting monster with profit as only self-imposed objective, and ALSO letting some leak be there for another year will not cause fake outrage or draconic punishment, since government committies and inspections and local policy makers are zealous and anal about common sense solutions.

The only Western societies that demonstrate at least a possibility and an existing drive to achieve such an enlightened existence I have experienced in some small Western European countries.

Unfortunately for you guys, individualism and materialism (which is driven on by material success) is hard-wired in the US mentality. That will always be the pitfall --- too much individuality and a wild boiling pot of opinions where idiots and driven sociopaths are equally valued as broad-minded intelectuals, and money from profit driven 'entities' is equal to money of human beings. Only in the US the selfish and zealous sociopaths are practically guaranteed a ladder towards the top (anyone admiring Ayn Rand as an ultimate life guide should be committed to shock therapy). I am NOT proposing any kind of censure, and I am not throlling, I am just claiming that this basic fact is the ultimate pitfall of the USA society. It's dynamic and adaptable nature can hardly absorb this ultimate failure, in my pessimistic viewpoint.

Therefore, the US will continue revering 'data' about 'cost and benefit' for all fundamental topics of our time, while quality of life is something that is an outcome of balancing your dollars and an imagined cost of human life and human organs and limbs. That's a failure. Human life is what is valuable, and it is protected by common sense behavior, where cost-benefit analysis of oil companies is just an unimportant sidekick helping you avoid extreme economic moves, instead of being a basis of any truly important decision (i.e. how to handle pollution).

Best of luck to us all.

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Enter your name...

While I oppose anyone imposing their waste and pollution upon a third party, you have to have some metric to determine the extent of the damage of the offender and to help establish the best remedy to deter future transgressions.

A cost-benefit analysis is an attempt to do this. There is difficulty in establishing values, but without a transparent metric showing all assumptions, what else do we have to guide us?

Hopefully you aren't simply asking us all to put our faith in edicts handed down from some moral authority based upon unmeasurable value decrees.

P.K Ghosh

There are enough of studies, which were validated, to show the improve in air quality and subsequent reduction of medical cases. SECA (Sulphur Emission Control Area) regulations force the equipment manufacturers to use cleaner energy, which is a good thing.
However amongst technologies use of scrubbers is not comprehensible to me. After all, all that we are doing is putting the pollutants in water instead of air.