New research measures the cost of getting cleaner air

Oct 02, 2012 by William Harms
Environmental regulations in the United States cost manufacturing companies about $21 billion annually, according to a study by economists at the University of Chicago and MIT. Credit: Lloyd DeGrane

(Phys.org)—Extensive environmental regulations have brought cleaner air and health improvements to the United States, but they also have increased the cost of manufacturing and reduced industrial productivity, according to a study by economists at the University of Chicago and MIT.

Some economists have suggested that the regulations encouraged companies to become more efficient, thus reducing costs at upgraded plants. But in a paper published by the National Bureau of Economic Research, three contend that the regulations led to a 4.8 percent decline in productivity and reduced profits by nearly 9 percent from 1972-93.

The annual cost to companies was about $21 billion, according to the paper, "The Effects of Environmental Regulations on the Competitiveness of U.S. Manufacturing," by Michael Greenstone, the 3M Professor of at MIT; John List, the Homer J. Livingston Professor of Economics at the University of Chicago; and Chad Syverson, professor at the University of Chicago Booth School of Business.

"There are good reasons to think environmental regulations might increase production costs, but we didn't know how large the effect might be," said Syverson. "We are not saying that the regulations are a bad idea, but we wanted to know the cost." The paper examined how the total factor productivity (TFP) of manufacturing plants was impacted by the regulations, which went into effect as a result of the Clean Air Act of 1970.

"This paper demonstrates that can plan an important role in shaping TFP," List said. "To date, we have little credible on the magnitude of such policy effects, with our study providing among the first such estimates for ."

The provides a stringent intervention for companies that are found to be polluting. The EPA can dictate installation of pollution abatement technologies on manufacturing plants.

"The equipment is part of the plant's measured capital stock, but in itself is neither necessary nor useful for producing the plant's commercial output," Greenstone said. "A labor-input example of the same concept is the hiring of an environmental compliance officer for the plant."

Because not all communities are impacted equally by air pollution, the Environmental Protection Agency each year designates counties as either being in attainment of the standards for air quality or in a nonattainment status. The standards cover ozone, total suspended particulates, sulfur dioxide and carbon monoxide. The manufacturing plants in nonattainment counties are subject to strict enforcement.

In order to determine the economic impact of the regulations, the scholars compared changes in the productivity of high-emissions in noncompliant counties to those of low-emissions plants in those counties as well as high-emissions plants in compliant counties.

They based their work on data gathered by the U.S. Census Bureau of company expenditures and profits. The study found that the regulations impacted different kinds of manufacturers quite differently.

"The largest declines in TFP are associated with ozone nonattainment, which incidentally is one of the most commonly emitted pollutants among our industries," the scholars point out.

The researchers found that the organic chemical industry—companies that produce turpentine or benzene, for instance—are the most impacted by the regulations. They experienced a 17 percent reduction in productivity during the study period in non-attainment counties. The industry is only regulated for ozone, but had an annual loss of $9.2 billion during the study period when measured in 2010 dollars.

The scholars also looked at how companies increased their prices in order to compensate for their increased costs and studied the ready-mixed concrete industry specifically because it was a specialized industry that dealt with one common product. The study estimated that companies increased their prices by about one percent in response to the regulations.

The approach used to studying the impact of regulations brought on by laws could possibly be expanded to study in the impact of other regulations, the scholars said.

"In principle, this approach can be applied to the costs of regulations that govern firm behavior in a wide range of contexts," the paper says. "We envision similar exercises being fruitful in areas that regulate work and labor conditions, health and safety legislation."

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ScooterG
3.2 / 5 (9) Oct 02, 2012
Environmental costs have forced many companies to move production to other countries...I wonder if this study accounted for this?

Imposing extra costs on business often-times results in lower wages. As costs increase, employers look for expense areas to cut, and hourly earnings seems to always take a dis-proportionate hit.
Service provider-type personnel (eg plumbers helper) make less per hour today than they did 30 years ago - and that does not factor in todays dollar vs then dollars.

Environmental regulations are necessary, but unless the balance of the world is somehow made to bear the same expense, the playing field is out of level, and Americans hourly earnings will suffer. The same could be said of other government-imposed burden on business such as child labor laws, EEOC compliance, payroll burdens such as social security and unemployment benefits...the list goes on and on.

It's difficult to be a conservative capitalist and a non-protectionist at the same time :)
GSwift7
3.7 / 5 (6) Oct 02, 2012
This story brings up a good point about regulations that add cost to something. The effects are always felt more by some people than others. If your goal is not to harm the people most affected by a regulation, then it's probably a good idea to subsidize the cost of the regulation. For example, the government could help coal companies pay for expensive filter systems. The downside of that is that it doesn't encourage anyone to design a cheaper/better filter system.

I have no problem with regulations, but it's a bit frightening when an agency like the FDA, EPA, FCC, etc. can impose rules without direction from Congress. When the potential cost is so large, perhaps there should be some kind of limit to what they can do without an actual law passed by Congress.

I wonder how these results compare to similar studies done by the EPA itself? I'll look it up and do a follow up post.
Meyer
3 / 5 (4) Oct 02, 2012
It's difficult to be a conservative capitalist and a non-protectionist at the same time :)

It wouldn't be that hard if "non-protectionist" included the free movement of labor as well as goods and capital.
ScooterG
2.5 / 5 (8) Oct 02, 2012
then it's probably a good idea to subsidize the cost of the regulation.


The problem I see with government subsidy (of any sort): the government has no means of making money- they can only take money from someone else.

Obama took money from you and I and gave it to General Motors. I swore-off GM vehicles in 1983 and I resent like Hell 1) money being taken from me by force and 2) any of it going to GM.
ScooterG
1.8 / 5 (5) Oct 02, 2012
It's difficult to be a conservative capitalist and a non-protectionist at the same time :)

It wouldn't be that hard if "non-protectionist" included the free movement of labor as well as goods and capital.


Meyer, you lost me somewhere...please clarify what you mean by "free movement of labor". Thx
Meyer
3 / 5 (2) Oct 02, 2012
Meyer, you lost me somewhere...please clarify what you mean by "free movement of labor". Thx

Those components all migrate to correct imbalances. Movement of labor may mean immigration or just moving to a new city. If labor movement is forbidden but capital is not, capital flows to the labor.

It's uncomfortable for those who were getting $50 for a $5 job, but balance provides greater productivity and stability overall, raising that $5 tier over time. The US is large with free internal movement of all three, which helped growth in the past, but protectionist (including labor) policies prevent that sort of efficiency in the global economy.

It's not just a US issue, so no I'm not saying we should suddenly open up the borders. It needs to be done in cooperation with other countries. People can still wave their flags and cheer for the home team, but the "aliens steal jobs" mentality is destructive. We don't say Iowan immigrants "steal" jobs from Texans, for example.
tpb
3 / 5 (6) Oct 03, 2012
My problem with the alphabet soup of government agencies is that they don't balance costs and benefits. Also these agencies invent new roles as needed to grow. TVA, EPA , and the DOE's are examples of agencies that have failed or have exceeded their purpose.
TVA's mandate was rural electrification, after they finished, they diversified and reinvented themselves and are larger than ever. OVERREACHING
EPA's mandate was to clean air and water, now they have rules requiring air and water to be cleaner than it exists naturally. OVERREACHING
DOE's mandate was to reduce dependence on foreign oil. The dependence has grown continuously along with their budget. FAILED
DOE's mandate was to improve education. FAILED
CapitalismPrevails
3 / 5 (4) Oct 03, 2012
I have no problem with regulations, but it's a bit frightening when an agency like the FDA, EPA, FCC, etc. can impose rules without direction from Congress. When the potential cost is so large, perhaps there should be some kind of limit to what they can do without an actual law passed by Congress.

Amen to that. The FDA, EPA, FCC, SEC, FTC, FBI, FAA, IRS, DOE, DOE, USDA, NASA and whatever other 3 letter alphabet agency are LEGAL MONOPOLIES in effect. This is what happens when you have A central bank to facilitate the political support bloated government power.

JoeBlue
2.8 / 5 (4) Oct 03, 2012
Not to worry the mal-investment and misuse of of resources can only last for so long. Empires crumble and Freedom prevails in the end.
rjsc2000
1 / 5 (2) Oct 03, 2012
If there was no money , the 21 Billion would have no meaning, and we were all healthier... no need to send the production off-shore
ScooterG
1 / 5 (2) Oct 03, 2012

Those components all migrate to correct imbalances. Movement of labor may mean immigration or just moving to a new city. If labor movement is forbidden but capital is not, capital flows to the labor.

It's uncomfortable for those who were getting $50 for a $5 job, but balance provides greater productivity and stability overall, raising that $5 tier over time. The US is large with free internal movement of all three, which helped growth in the past, but protectionist (including labor) policies prevent that sort of efficiency in the global economy.

It's not just a US issue, so no I'm not saying we should suddenly open up the borders. It needs to be done in cooperation with other countries. People can still wave their flags and cheer for the home team, but the "aliens steal jobs" mentality is destructive. We don't say Iowan immigrants "steal" jobs from Texans, for example.


Thanks for taking the time to clarify that.
GSwift7
3 / 5 (2) Oct 04, 2012
My problem with the alphabet soup of government agencies is that they don't balance costs and benefits. Also these agencies invent new roles as needed to grow.


Actually, they are required by law to do cost analysis. They don't ever do a very good job at it, but predicting the future is hard, so I don't blame them. In the case of the Clean Air Act, the EPA estimate of cost before they implemented it appears to have been too high. Technology advancements after the rules were put in place made it MUCH chaeper to do than they thought. That's one way that the government does indirectly subsidise the cost of complying with these regulations; they use government labs and university grants to do the research needed to make compliance affordable and find alternatives.
GSwift7
1 / 5 (2) Oct 04, 2012
Also these agencies invent new roles as needed to grow. TVA, EPA , and the DOE's are examples of agencies that have failed or have exceeded their purpose


What gets me upset is when multiple agencies are duplicating the same, or nearly the same functions, and each of them has their own administration. They should be consolidated to save on admin costs.

Another thing that gets me is when you see them doing things that are way outside their normal function. For example, if the Highway Department did a study on back pain (fictional example, but they do stuff like that). The State Department does all kinds of silly things. The military spends money on things that make me wonder too.
Howhot
5 / 5 (3) Oct 07, 2012
New research measures the cost of getting cleaner air "is getting more expensive"
So says the coal industry.

But in a paper published by the National Bureau of Economic Research, three "Conservative" economists
says so.

Environmental regulations in the United States cost manufacturing companies about $21 billion annually
A small price to pay for clean water, clean air and a life worth living!

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