The Effects of Environmental Regulation on the Competitiveness of U.S. Manufacturing

Whether and to what extent environmental regulations influence the competitiveness of firms remains a hotly debated issue. Using detailed production data from tens of thousands of U.S. manufacturing plants drawn from Annual Survey of Manufactures, we estimate the effects of environmental regulations - captured by the Clean Air Act Amendments’ division of counties into pollutant-specific nonattainment and attainment categories - on manufacturing plants’ total factor productivity (TFP) levels. We find that among surviving polluting plants, a nonattainment designation is associated with a roughly 2.6 percent decline in TFP. The regulations governing ozone have particularly discernable effects on productivity, though effects are also seen among particulates and sulfur dioxide emitters. Carbon monoxide nonattainment, on the other hand, appears to increase measured TFP, though this appears to be concentrated among refineries. When we apply corrections for two likely sources of positive bias in these estimates (price mismeasurement and sample selection on survival), we estimate that the total TFP loss for polluting plants in nonattaining counties is 4.8 percent. This corresponds to an annual lost output in the manufacturing sector of roughly $14.7 billion in 1987 dollars ($24.4 billion in 2009 dollars). These costs have important implications for both the intensity and location of firm expansions