Impacts of the Clean Air Act on the Power Sector from 1938-1994: Anticipation and Adaptation

This paper provides the first assessment of the plant-level productivity impacts of the 1970 Clean Air Act (CAA) that accounts for anticipatory responses. A simple theoretical framework is used to illustrate how credible signals of future regulatory actions can induce firms to make anticipatory investments in cleaner technologies, mitigating the subsequent impacts of environmental regulation. Drawing on newly digitized data on virtually every fossil-fuel power plant in the United States from 1938-1994, the paper uses a difference-in-differences approach to examine the impacts of the Act's nonattainment designations on coal-fired power plants. We find that nonattainment designation led to a 20% reduction in productivity among plants built before 1963, but had no effect on plants built after the passage of the 1963 CAA. The 1963 CAA resulted in minimal regulatory enforcement but served as a strong signal of impending federal air pollution regulation. Empirical and historical evidence suggests that electric utilities made anticipatory investments following the passage of the 1963 CAA. As a result, plants that opened after 1963 were better able to adapt to subsequent regulatory enforcement under the 1970 CAA. The aggregate productivity losses from the 1970 CAA were also substantially mitigated by the reallocation of output away from older, less productive power plants. These productivity losses would be substantially underestimated without utilizing data that extends well before the 1970 CAA.