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Estimating the Hidden Costs of Environmental Regulation

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  • Satish Joshi
  • Ranjani Krishnan
  • Lester Lave

Abstract

This paper examines whether accounting systems identify all the costs of environmental regulation. We estimate the relation between the “visible” cost of regulatory compliance, i.e., costs that are correctly classified in firms’ accounting systems, and “hidden” costs i.e., costs that are embedded in other accounts. We use plant-level data from 55 steel mills to estimate hidden costs, and we follow up with structured interviews of corporate-level managers and plant-level accountants. Empirical results show that a $1 increase in the visible cost of environmental regulation is associated with an increase in total cost (at the margin) of $10-11, of which $9-10 are hidden in other accounts. The findings suggest that inappropriate identification and accumulation of the costs of environmental compliance are likely to lead to distorted costs in firms subject to environmental regulation.

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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 02-10.

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Date of creation: May 2002
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Handle: RePEc:cen:wpaper:02-10

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Keywords: CES; economic; research; micro; data; microdata; chief; economist;

References

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  1. Wayne B Gray & Ronald J Shadbegian, 1993. "Environmental Regulation And Manufacturing Productivity At The Plant Level," Working Papers 93-6, Center for Economic Studies, U.S. Census Bureau.
  2. Barbera, Anthony J. & McConnell, Virginia D., 1990. "The impact of environmental regulations on industry productivity: Direct and indirect effects," Journal of Environmental Economics and Management, Elsevier, vol. 18(1), pages 50-65, January.
  3. Gray, Wayne B, 1987. "The Cost of Regulation: OSHA, EPA and the Productivity Slowdown," American Economic Review, American Economic Association, vol. 77(5), pages 998-1006, December.
  4. Jorgenson, D.W., 1992. "Tax Reform and the Cost of Capital : An International Comparison," Harvard Institute of Economic Research Working Papers 1621, Harvard - Institute of Economic Research.
  5. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
  6. Adam B. Jaffe et al., 1995. "Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 132-163, March.
  7. Byron, Ray P & Bera, Anil K, 1983. "Least Squares Approximations to Unknown Regression Functions: A Comment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 255-60, February.
  8. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
  9. Guilkey, David K & Lovell, C A Knox & Sickles, Robin C, 1983. "A Comparison of the Performance of Three Flexible Functional Forms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 591-616, October.
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Citations

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Cited by:
  1. Ronald J. Shadbegian & Wayne B. Gray, 2003. "Pollution Abatement Expenditures and Plant-Level Productivity: A Production Function Approach," NCEE Working Paper Series 200305, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Aug 2003.
  2. Vanassche, Stella & Vranken, Liesbet & Vercaemst, Peter, 2009. "The impact of environmental policy on industrial sectors: empirical evidence from 14 European Countries," Working Papers 2009/20, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
  3. Michael Gallaher & Cynthia Morgan & Ronald J. Shadbegian, 2008. "Redesign of the 2005 Pollution Abatement Costs and Expenditure Survey," NCEE Working Paper Series 200801, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Jan 2008.
  4. Alina-Mihaela Babonea & Andreea Paula Dumitru, 2012. "Performance Indicators In Csr In Romania - A Link To The Green Economy," Anale. Seria Stiinte Economice. Timisoara, Faculty of Economics, Tibiscus University in Timisoara, vol. 0, pages 410-416, November.
  5. Ragasa, Catherine & Thornsbury, Suzanne & Joshi, Satish, 2013. "Sustainability of EU Food Safety Certification: A survival analysis of firm decisions:," IFPRI discussion papers 1296, International Food Policy Research Institute (IFPRI).
  6. Rich Iovanna & Kelly Maguire & Al McGartland, 2003. "The Pace of PACE at the Environmental Protection Agency," NCEE Working Paper Series 200307, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Aug 2003.
  7. Teresa Eugénio & Isabel Costa Lourenço & Ana Isabel Morais, 2010. "Recent developments in social and environmental accounting research," Social Responsibility Journal, Emerald Group Publishing, vol. 6(2), pages 286-305, July.
  8. Collins C. Ngwakwe, 2009. "Justifying Environmental Cost Allocation in a Multiple Product Firm: A Case Study," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 7(4), pages 403-420.
  9. Simon Alcouffe & Nicolas Berland & Benjamin Dreveton & Moez Essid, 2010. "An Empirical Study Of Environmental Cost Drivers," Post-Print hal-00479538, HAL.

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