Pollution abatement expenditures and plant-level productivity: A production function approach

By Ronald J. Shadbegian, Wayne B. Gray. 2005

232 citations recorded by the source corpus.

In this paper we investigate the impact of environmental regulation on productivity using a Cobb-Douglas production function framework. Estimating the effects of regulation on productivity can be done with a top-down approach using data for broad sectors of the economy, or a more disaggregated bottom-up approach. Our study follows a bottom-up approach using data from the U.S. paper, steel, and oil industries. We measure environmental regulation using plant-level information on pollution abatement expenditures, which allows us to distinguish between productive and abatement expenditures on each input. We use annual Census Bureau information (1979-1990) on output, labor, capital, and material inputs, and pollution abatement operating costs and capital expenditures for 68 pulp and paper mills, 55 oil refineries, and 27 steel mills. We find that pollution abatement inputs generally contribute little or nothing to output, especially when compared to their ‘productive’ equivalents. Adding an aggregate pollution abatement cost measure to a Cobb-Douglas production function, we find that a $1 increase in pollution abatement costs leads to an estimated productivity decline of $3.11, $1.80, and $5.98 in the paper, oil, and steel industries respectively. These findings imply substantial differences across industries in their sensitivity to pollution abatement costs, arguing for a bottom-up approach that can capture these differences. Further differentiating plants by their production technology, we find substantial differences in the impact of pollution abatement costs even within industries, with higher marginal costs at plants with more polluting technologies. Finally, in all three industries, plants concentrating on change-in-production-process abatement techniques have higher productivity than plants doing predominantly end-of-line abatement, but also seem to be more affected by pollution abatement operating costs. Overall, our results point to the importance using detailed, disaggregated analyses, even below the industry level, when trying to model the costs of forcing plants to reduce their emissions.

Subfields: Economics and Econometrics, Environmental Engineering

View Paper: https://www.semanticscholar.org/paper/d44700f2ea6c2316f27a4c8906a1bffc062f6497

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Citations in the corpus

Do EPA regulations affect labor demand? Evidence from the pulp and paper industry (2013, background): “Among the studies using plant-level data, many have examined the effect of EPA regulations on productivity [see Färe, Grosskopf and Pasurka (1986), Boyd and McClelland (1999), Berman and Bui (2001b), and Shadbegian and Gray (2005, 2006)].”
Environmental policies and productivity growth: a critical review of empirical findings (2015, background): “Hamamoto (2006) tests different lag-structures in several models and shows that the specification of the six year lag fits better in terms of explained variability than for example a three-year lag structure.”
The innovation effects of environmental policy instruments — A typical case of the blind men and the elephant? (2011, methodology): “For environmental regulation, the most common proxy employed in econometric analysis is PAC (pollution abatement cost) that measures the expenditures for achieving compliance (used inter alia by Höglund Isaksson, 2005; Lanjouw and Mody, 1996; Shadbegian and Gray, 2005).”
Does the stock market value the inclusion in a sustainability stock index? An event study analysis for German firms (2013, unknown): “Furthermore, activities aimed at increasing corporate sustainability performance can also be considered non-productive (e.g., Shadbegian and Gray, 2005) and thus only serve societal goals (e.g., environmental protection).”
Exporters and the environment (2016, unknown): “Shadbegian and Gray (2005) show that abatement capital expenditures within industries vary within industry and do not increase measured productivity.”
Do environmental regulations hamper productivity growth? How accounting for improvements of plants' environmental performance can change the conclusion (2007, background): “2 Gray and Shadbegian (2003) is related to Gray and Shadbegian (1993, 2002) and the results indicate a negative relationship between compliance costs and productivity (see also e.g. Shadbegian and Gray, 2005, 2003; Boyd and McClelland, 1999).”