Consequences of Environmental Regulation: Evidence from Clean Air Act Thresholds

This award funds a research project that studies economic and environmental consequences of policies that apply stricter environmental regulation to larger firms; a type of environmental regulation commonly used in most industrialized countries to control air, water, and other types of pollution. The researchers will use the US Clean Air Act Amendments, which apply stricter regulation to firms that have predicted pollution emissions exceeding statutory thresholds for their analysis. The researchers will collect detailed data on plant design from construction permits and link them to measures of regulatory enforcement, firm revenues and costs data, and observed pollution emissions and use this data set to analyze how the Clean Air Act’s tighter regulations for larger firms affect patterns of pollution, regulatory enforcement, and output. The researchers will then develop an economic model of how this type of environmental regulation affects the environment and economy. The economic model will then be used to assess how alternative environmental policies, such as policies that apply the same regulatory rules to large and small firms, would affect the environment and the economy. The results of this research would provide inputs into the formulation of more efficient environmental regulation policies. This award funds a research project that studies the Clean Air Act’s “major source” designations, which specify that firms with maximum possible pollution emissions exceeding a threshold must comply with stricter regulations. The PIs will build a model that combines canonical approaches from the macro-labor and environmental economics literatures to analyze bunching of firm density around major source thresholds, and assess how enforcement and firm revenues, costs, and productivity vary around these thresholds. Using the model, the PIs derive closed-form analytical results describing the costs of being a major source and calibrate the model using firm permit data merged with several administrative data sets. The PIs then use the estimates to quantify the regulatory cost of being a major source and the environmental and economic impacts of counterfactual policies, such as a Pigouvian tax. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.