Environmental Regulation and the Competitiveness of U.S. Manufacturing

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Environmental regulations have reduced total factor productivity by approximately 4.8 percent for manufacturing plants in non-attainment counties.

The economic costs of environmental regulations have been widely debated since the United States began to restrict pollution emissions more than four decades ago through the Clean Air and Water Acts. Some claim that stricter environmental standards raise polluting firms' costs of production, weakening U.S. firms' position in international markets and raising the prices that consumers face. Others argue that more stringent regulations enhance productivity growth by causing firms to rationalize their operations.

In The Effects of Environmental Regulation on the Competitiveness of U.S. Manufacturing (NBER Working Paper No. 18392), authors Michael Greenstone, John List, and Chad Syverson analyze detailed production data covering nearly 1.2 million plant observations that come from the 1972-1993 Annual Survey of Manufactures. They find that the economic costs of air quality regulations are substantial. Among surviving polluting plants, the EPA's non-attainment designation is associated with a decline in total factor productivity (TFP), or a reduction in output for a given set of inputs (that is capital, labor, and materials). Ozone regulations have particularly large negative effects on productivity, although there are negative effects on productivity for emitters of particulates and sulfur dioxide, too. On the other hand, carbon monoxide non-attainment appears to increase measured TFP, especially among refineries. They also find that the impacts of one year's non-attainment designation on a plant's TFP are detectable two years later.

After allowing for the effect of regulation-induced price increases and associated output declines, and for the selective survival of firms that face regulation-induced cost increases, the authors conclude that environmental regulations have reduced TFP by approximately 4.8 percent for manufacturing plants in non-attainment counties. This translates to an economic cost of about $21 billion per year (in $2010) for manufacturing plants, or about 8.8 percent of manufacturing sector profits.

--Lester Picker