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.”