Measuring the Costs of

Environmental Protection

The Engineering Approach

Engineering approach to measuring costsAdd up all the expected expenditures by firms

plus state, local, and federal governmental on pollution control and regulatory efforts

By far the most widespread method in useRequire making assumptions about future

behavior

EPA Cost Estimates

Engineering Costs: Climate Stabilization

Source: McKenzie

Opportunity Cost

The value that resources generate in their next best available use

Only opportunity costs measure the true cost of environmental protection

Overstatement of True Costs

Engineering cost estimates will overstate true social opportunity costs to the extent that environmental policiesIncrease productivity Reduce structural unemployment

Understatement of True Costs

Engineering cost estimates will understate true social opportunity costs to the extent that environmental policyLowers productivity growthInduces structural unemploymentIncreases monopoly power in the economy

Productivity Impacts of Regulation The biggest unknown in estimating the

costs of environmental protection is its impact on productivity

Some argue that environmental regulations have been a major contributor to the productivity slowdown

Others argue that pollution control efforts spur productivity growth by forcing firms to become more efficient

Pro-Productivity Effects of Regulation

1. Improving the short-run efficiency of resource use, saving money for firms

2. Encouraging firms to invest more, or invest “smarter” for the long run

○ Porter Hypothesis: regulation, enhances long-run competitiveness

○ Regulation may play a technology-forcing role.

3. Reducing health-care costs or improving ecosystem services , which frees up capital for long-run investment

Anti-Productivity Effects of Regulation

Regulation imposes direct costs on regulated firms that may crowd out investment in conventional capital

Slowdown in new investment may occur when regulation is more stringent for new sources of pollution (“grandfathering”)

Regulation will cause higher prices for important economy-wide inputs, further crowding out investment

Regulation may frustrate entrepreneurial activity– too much “red tape”

The Cost of Regulation: Productivity Studies

Some data: (Barbara and McConnel)

10% to 30% of the productivity decline in heavily industries could be accounted for by environmental regulation

Less than 10% to 20% of the post 1970 slowdown can be attributed to environmental regulation

Employment Impacts of Regulation

Is a “hidden cost” of environmental protection job loss?

Objections to the 1990 Clean Air Act Amendments:

“A minimum of 200,000 jobs will be quickly lost; this number could easily exceed one or two million”

It would “move the United States towards the status of a second-class industrial power by the end of the century”

Actual Job Loss: About 5,000 spread out over several states, and several years.

Lessons Learned About Job Impacts1. At the economy-wide level there is no

trade-off between jobs and the environment

2. Green Jobs: Environmental Protection spending can boost net job growth when the economy is not at full employment.

3. Actual layoffs from environmental protection have been small (about 2,000-3,000 jobs per year)

4. Pollution intensive firms are not fleeing rich countries in large numbers to escape environmental regulation

Economy-wide Effects

Regulations may contribute to localized structural unemployment, but this diminishes in the long run as displaced workers find new jobs elsewhere in the economy

Regulation does not create long-run unemployment; instead, it will contribute to a shift in the type of jobs the economy creates

A Jobs-Environment Trade-off?

Jobs Dependent on Environmental Spending

Green Jobs The bulk of environmental spending

remains in the private sector, generating a demand for workers, primarily in manufacturing and construction

This money could have been spent on other things--health care, travel, investment, imported goods--so net job creation could have been higher or lower without environmental regulation

Job Creation As a rule, money spent on sectors that

are both more labor-intensive and have a higher domestic content will generate more American jobs in the short run

Environmental spending is often either labor intensive or has a high domestic content

If the economy is not at full employment, then green spending can lead to more job growth than other types of spending.

Jobs-Environment Trade-Off?

Most of the time, if you hear a sentence that begins with “All economists agree,” you should head for the door

But in this case, there is an agreement that at the economy-wide level there is simply no such thing as a jobs-environment trade-off

What about layoffs from Regulation?

Layoffs Due to Regulation Employer estimates: environmental

regulation accounts for less than one tenth of one percent of all mass layoffs nationwide

7 plants per year closed primarily as a result of environmental problems

On average, 2,000-3,000 lost positions each year are due in part to environmental regulation

40 times more layoffs are due to ownership changes than to regulation

Pollution Havens?

Does new investment occur in poor countries with less stringent regulation—”pollution havens”—due to environmental regulation?

Very little evidence to suggest that the competitiveness of U.S. manufacturing firms have been hurt by environmental regulation

Why the Small Effects?

Pollution control costs are a small portion of total business costs

Costs are only one factor influencing business decisionsFactors as diverse as access to markets and the

quality of life are important components of business location decisions

Much pollution control technology is embedded in modern plant designsChemical plant built in South China will look like

one built in West Virginia

The Maquiladora Case

Plants within 100 kilometers of the U.S. border in Mexico, known as maquiladoras, may import and export products freelyThese plants are required to meet U.S.

environmental standard but in practice, the Mexican government has not rigorously enforced the law

The Maquiladora Case○ Mexico may attract investment that would occur in the

U.S. had it not been for environmental regulations due to its:Close proximity to the U.S.Low wagesLax environmental regulation

○ BUT: industries moving to Mexico are not heavily regulated dirty industries, but instead relatively “clean”, labor intensive assembly plants. Little evidence of “Pollution Haven” effects.

○ One Exception: Furniture Manufacturing

Monopoly Costs?

Regulation can impose high fixed costs on firms

High fixed costs generate economies of scale which can cause smaller firms to be squeezed out of business

Thus, one potential cost of environmental regulation is an increase in monopoly power in the economy

General Equilibrium Effects The last important area in which there may

be “hidden” costs (or benefits) of regulation lies in what economists call general equilibrium (GE) effects--the effects of regulation felt throughout the economy

General equilibrium effects might raise or lower costs by altering labor supply

This argument has loomed large in the debate over the so-called “double dividend hypothesis”

The Double-Dividend Hypothesis A shift to pollution taxes would not only

reduce pollution, but by using the revenue to cut taxes on capital and labor, would make the whole economy operate more efficiently: thus two dividends to green taxes.

Lower taxes on work, for example, might cause people to work more hours, raising output.

The Debate

On the other hand: Taxes on pollution lead to higher prices for dirty goods, which means that an hour of work buys fewer goods

In other words, the real wage falls and people substitute labor for leisure, and work less

Economists are debating whether these general equilibrium effects lower or raise the net costs of regulation.

Producer and Consumer Surplus

Efficiency Gains from Environmental Taxes

A Double Dividend in the Labor Market?

True Costs of Environmental Protection

Engineering costs +/-

Productivity ImpactsEmployment ImpactsMonopoly CostsGeneral Equilibrium Effects =

+/- 2.8% of GDP in 2010