Environmental Regulation and Productivity: Evidence from Oil Refineries

We examine the effect of air quality regulation on productivit y in some of the most heavily regulated manufacturing plants in the United States, the oil reŽ neries of the Los Angeles (South Coast) Air Basin. We use direct measures of local air pollution regulation to estimate their effects on abatement investment. ReŽ neries not subject to these regulations are used as a comparison group. We study a period of sharply increased regulation between 1979 and 1992. Initial compliance with each regulation cost $3 million per plant and a further $5 million to comply with increased stringency. We construct measures of total factor productivity using Census of Manufacturer s output and materials data that report physical quantities of inputs and outputs for the entire population of reŽ neries. Despite high costs associated with the local regulations, productivity in the Los Angeles Air Basin reŽ neries rose sharply between 1987 and 1992, which was a period of decreased reŽ nery productivit y in other regions. We conclude that abatement cost measures may grossly overstate the economic cost of environmenta l regulation as abatement can increase productivit y.