Business executives regularly grumble about the costs of meeting environmental regulations. Manufacturers alone claim to spend almost $30 billion per year to comply with environmental regulations-costs that put them at a competitive disadvantage in the world economy and result in the loss of tens of thousands of U.S. jobs. Economists rarely have been able to confirm these impacts. A new study by Michael Greenstone (2002), however, paints a compelling picture that the business firms are right. His extraordinarily detailed and comprehensive examination of the impact of the U.S. Clean Air Act reveals a substantial toll on employment and capital accumulation in those parts of the country where the regulatory burden has been the greatest.
The Clean Air Act imposes a broad array of regulations on U.S. firms. Following the 1970 amendments (which set the framework for today’s national policy) the Environmental Protection Agency (EPA) established national ambient air quality standards for four key pollutants: carbon monoxide (CO), ozone (O3 ), sulfur dioxide (SO2 ), and total suspended particulates (TSPs). Under EPA rules, every county in the United States is either in “attainment” for a pollutant (that is, ambient concentrations are below the federal standard) or “nonattainment” (concentrations exceed the standard). Polluters in nonattainment counties are subject to stricter regulations than are polluters in attainment counties.
Because of these tighter controls, polluting firms in nonattainment counties should face significantly higher operating costs than firms in attainment counties. Greenstone has found persuasive evidence that this is the case.
The centerpiece of his work is the assembly of a set of data that dwarfs anything else in existence in the pollution arena. For example, he has compiled annual data on the four pollutant- specific attainment/nonattainment designations for each of the 3,070 counties in the United States. This is something that not even the Environmental Protection Agency has ever done. Greenstone then merges these data with 1.75 million plant-level observations on the characteristics and behavior of firms across the country. These include plants’ locations, character- istics, input usage (including capital and labor), and output. By matching regulatory data with firm behavior data, Greenstone can precisely measure the impact of EPA regulations on employment, investment, and industrial production by every manufacturing firm in every corner of the land.
Greenstone finds that the Clean Air Act amendments substantially retarded the growth of those firms in nonattainment counties that have had to reduce emissions to meet EPA standards. Focusing on the effects of the law during the years 1972 to 1987, he finds that nonattainment counties suffered employment losses of approximately 590,000 jobs compared with attainment counties. Moreover, these companies reduced output by some $105 billion in today’s dollars and invested less, resulting in a loss of capital stock in nonattainment counties of roughly $52 billion. Although these losses are modest compared to the size of the entire manufacturing sector, which does $1.7 trillion in business a year, they had a substantial impact on the counties where the companies were located.
There are limits to Greenstone’s work. For example, some of those 590,000 people who didn’t get employed in nonattainment counties presumably found jobs elsewhere. Similarly, although investment fell significantly in nonattainment counties, much of that capital likely found a home elsewhere. Still, this is not much consolation to the workers or owners of capital. On average, the other jobs to which people moved were not as good, or else the individuals would have chosen them from the outset. Similarly, the capital that had to move can be expected to earn lower returns, for otherwise it would have been located elsewhere prior to the regulations.
Greenstone also does not attempt to measure the benefits that might have been produced by the Clean Air Act amendments. It is entirely possible that, although costly, the amendments cleaned the air so well that we as a nation are better off. As it turns out, Greenstone is currently investigating exactly these sorts of questions: How have we benefited from the Clean Air Act and has it been worth it? Stay tuned.
Michael Greenstone. 2002. The Impacts of Environmental Regulations on Industrial Activity: Evidence from the 1970 and 1977 Clean Air Act Amendments and the Census of Manufactures. Journal of Political Economy 110(6): 1175–219.
Daniel K. Benjamin is a PERC senior associate and professor of economics at Clemson University. His regular column, “Tangents-Where Research and Policy Meet,” investigates policy implications of recent academic research. He can be reached at: firstname.lastname@example.org