Assessing the productivity and abatement effects of the 1990 Clean Air Act Amendment

How does environmental regulation affect productivity and emissions? Measuring these disparate effects is important for effective eco-policy design, but these channels have been difficult to disentangle. We leverage a new methodology to model the joint production of output and multiple pollutants at the plant level. Exploiting variation from the 1990 Clean Air Act Amendment, our novel and versatile Generalized By-production approach allows us to conduct the first evaluation of the policy that explicitly models efficiencies of output (electricity), as well as efficiencies of NOx and SO2 reductions for coal-fired power plants. Our analysis highlights not only the production-pollution trade-off plants face, but also complementary effects of pollution abatement across pollutants. We show that the 1990 announcement of the policy induced anticipatory responses despite the regulation not requiring strict compliance until 1995. Plants forced to comply with the policy’s Phase I SO2 reductions (i.e. assigned nonattainment designation), on average, suffered greater efficiency losses in productivity and showed larger improvements in both pollutant reductions, relative to lightly regulated (attainment) plants. Regulation-induced impacts vary by plant vintage, state environmental quality, and eco-friendly behaviors. Crucially, improvements in pollutant reductions outweigh the countervailing contractions in electricity generation.