Carnegie Mellon University Heinz College
“Short-Run and Long-Run Impacts of Environmental Regulations on Firm Productivity: Evidence from the U.S. Electricity Sector, 1938-1999”
Abstract: Although economic costs of environmental regulations are widely debated, there is limited empirical evidence on the magnitude of these economic costs and the extent to which these costs persist over time. This paper quantifies the short-run and long-run efficiency costs of air quality regulations on the U.S. electricity production sector. The analysis draws on newly digitized annual, plant-level data on the vast majority of U.S fossil fuel fired power plants from 1938-1999. This sample allows us to examine the U.S. electricity industry both before and after the implementation of the National Ambient Air Quality Standards (NAAQS) in 1972. To estimate the economic costs, we utilize a difference-in-differences framework where counties face different environmental regulations as they move in and out of attainment with NAAQS over time. We find that plants located in non-attainment counties experienced declines in TFP and production of 6.3\% and 7.0\%. The effects of nonattainment on TFP and generation are persistent over time. This suggests that existing plants did not adapt to environmental regulations such as NAAQS even in the long run.