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

  • Shadbegian, Ronald J.
  • Gray, Wayne B.

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 det

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Article provided by Elsevier in its journal Ecological Economics.

Volume (Year): 54 (2005)
Issue (Month): 2-3 (August)
Pages: 196-208

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Handle: RePEc:eee:ecolec:v:54:y:2005:i:2-3:p:196-208
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolecon

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  1. Boyd, Gale A. & McClelland, John D., 1999. "The Impact of Environmental Constraints on Productivity Improvement in Integrated Paper Plants," Journal of Environmental Economics and Management, Elsevier, vol. 38(2), pages 121-142, September.
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  7. Mary E. Deily & Wayne B. Gray, 1989. "Enforcement of pollution regulations in a declining industry," Working Paper 8912, Federal Reserve Bank of Cleveland.
  8. 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.
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  12. Gray, Wayne B. & Shadbegian, Ronald J., 2003. "Plant vintage, technology, and environmental regulation," Journal of Environmental Economics and Management, Elsevier, vol. 46(3), pages 384-402, November.
  13. Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," NBER Working Papers 5067, National Bureau of Economic Research, Inc.
  14. Frank R Lichtenberg & Donald Siegel, 1989. "The Effects Of Leveraged Buyouts On Productivity And Related Aspects Of Firm Behavior," Working Papers 89-5, Center for Economic Studies, U.S. Census Bureau.
  15. Michael Greenstone, 1998. "The Impacts of Environmental Regulations on Industrial Activity: Evidence from the 1970 and 1977 Clean Air Act Amendments and the Census of Manufacturers," Working Papers 787, Princeton University, Department of Economics, Industrial Relations Section..
  16. Lichtenberg, Frank R & Siegel, Donald, 1991. "The Impact of R&D Investment on Productivity--New Evidence Using Linked R&D-LRD Data," Economic Inquiry, Western Economic Association International, vol. 29(2), pages 203-29, April.
  17. Satish Joshi & Ranjani Krishnan & Lester Lave, 2002. "Estimating the Hidden Costs of Environmental Regulation," Working Papers 02-10, Center for Economic Studies, U.S. Census Bureau.
  18. Fare, Rolf, et al, 1989. "Multilateral Productivity Comparisons When Some Outputs Are Undesirable: A Nonparametric Approach," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 90-98, February.
  19. Robert H Mcguckin & George A Pascoe, 1988. "The Longitudinal Research Database (LRD): Status And Research Possibilities," Working Papers 88-2, Center for Economic Studies, U.S. Census Bureau.
  20. Mary L Streitwieser, 1996. "Evaluation And Use Of The Pollution Abatement Costs And Expenditures Survey Micro Data," Working Papers 96-1, Center for Economic Studies, U.S. Census Bureau.
  21. Eric J. Bartelsman & Wayne Gray, 1996. "The NBER Manufacturing Productivity Database," NBER Technical Working Papers 0205, National Bureau of Economic Research, Inc.
  22. Barbera, Anthony J & McConnell, Virginia D, 1986. "Effects of Pollution Control on Industry Productivity: A Factor Demand Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 35(2), pages 161-72, December.
  23. Gollop, Frank M & Roberts, Mark J, 1983. "Environmental Regulations and Productivity Growth: The Case of Fossil-Fueled Electric Power Generation," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 654-74, August.
  24. Viscusi, W Kip, 1983. "Frameworks for Analyzing the Effects of Risk and Environmental Regulations on Productivity," American Economic Review, American Economic Association, vol. 73(4), pages 793-801, September.
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