Effects of Air Quality Regulations on Polluting Industries

This paper investigates the effects of air quality regulation in the USA on firm decisions concerning plant locations, births, sizes, and investment patterns, in major polluting industries. The intent of the Clean Air Act [CAA] and its Amendments from 1970 on is to induce/coerce plants to limit source emissions that lead to air pollution, so localities meet national air quality standards. In general, the national strategy is to have plants invest in “greener” production equipment and to devote resources to containing and limiting emissions from day-to-day operations. While regulation has generally been very successful in curbing many forms of emissions, it has had other unintended and potentially costly impacts on firm decisions, which we explore in this paper. Unintended effects include relocation of polluting industries from more to less polluted areas, relative poliferation of small-scale enterprises in some industries altering industrial structure, and changes in investment patterns — the timing and phasing of investments. Unintended effects have occurred because the extent of regulatory activity varies intentionally across space, by plant size, and by firm size, as well as effectively over time. Thus regulatory effects are rather different than if regulatory activity were uniform across space, Support of NSF (grant SBR 9422440) is gratefully acknowledged, as well as the Alfred Sloan Foundation through a grant to the NBER project on Industrial Technology and Productivity. This work was carried out at the Boston Research Data Center of the U.S. Bureau of the Census. We thank Arnie Reznek and Joyce Cooper for their help and cooperation. Tim Dunne also provided early advice on the use of the LRD. We are indebted to Leslie Papke and Jeff Wooldridge (1991) for use of their program to calculate robust standard errors in conditional Poisson models. The work has benefited from insightful comments by Arik Levinson, as well as Wayne Gray, Karen Palmer, Gib Metcalf, and participants in seminars at British Columbia, Brown, Harvard, Mannheim, NBER, and RFF and presentations at the AEA, NTA, RSA, and Western Economic Association meetings. The opinions and conclusions expressed in this paper are those of the authors and do not necessarily represent those of the U.S. Bureau of the Census. All papers are screened to ensure that they do not disclose confidential information.