Transcript will overstate true social opportunity costs

Measuring the Costs of
Environmental Protection
The Engineering Approach

Engineering approach to measuring costs
 Add up all the expected expenditures by firms
plus state, local, and federal governmental on
pollution control and regulatory efforts
 By far the most widespread method in use
 Require making assumptions about future
behavior
EPA Cost Estimates
Engineering Costs:
Climate Stabilization
Source: McKenzie
Opportunity Cost
 The value that resources generate in their
next best available use
 Only opportunity costs measure the true
cost of environmental protection
Overstatement of
True Costs

Engineering cost estimates will overstate
true social opportunity costs to the extent
that environmental policies
 Increase productivity
 Reduce structural unemployment
Understatement of
True Costs

Engineering cost estimates will understate
true social opportunity costs to the extent
that environmental policy
 Lowers productivity growth
 Induces structural unemployment
 Increases monopoly power in the economy
Productivity Impacts
of Regulation
The biggest unknown in estimating the
costs of environmental protection is its
impact on productivity
 Some argue that environmental regulations
have been a major contributor to the
productivity slowdown
 Others argue that pollution control efforts
spur productivity growth by forcing firms to
become more efficient

Pro-Productivity Effects of Regulation
1. Improving the short-run efficiency of resource
use, saving money for firms
2. Encouraging firms to invest more, or invest
“smarter” for the long run
○ Porter Hypothesis: regulation, enhances long-run
competitiveness
○ Regulation may play a technology-forcing role.
3. Reducing health-care costs or improving
ecosystem services , which frees up capital
for long-run investment
Anti-Productivity Effects of
Regulation
 Regulation imposes direct costs on regulated
firms that may crowd out investment in
conventional capital
 Slowdown in new investment may occur
when regulation is more stringent for new
sources of pollution (“grandfathering”)
 Regulation will cause higher prices for
important economy-wide inputs, further
crowding out investment
 Regulation may frustrate entrepreneurial
activity– too much “red tape”
The Cost of Regulation:
Productivity Studies

Some data: (Barbara and McConnel)
 10% to 30% of the productivity decline in heavily
industries could be accounted for by
environmental regulation
 Less than 10% to 20% of the post 1970
slowdown can be attributed to environmental
regulation
Employment Impacts
of Regulation

Is a “hidden cost” of environmental protection
job loss?
Objections to the 1990 Clean Air Act
Amendments:
 “A minimum of 200,000 jobs will be quickly lost;
this number could easily exceed one or two
million”
 It would “move the United States towards the
status of a second-class industrial power by the
end of the century”
 Actual Job Loss: About 5,000 spread out over
several states, and several years.
Lessons Learned About Job Impacts
At the economy-wide level there is no
trade-off between jobs and the
environment
2. Green Jobs: Environmental Protection
spending can boost net job growth when
the economy is not at full employment.
3. Actual layoffs from environmental
protection have been small (about 2,0003,000 jobs per year)
4. Pollution intensive firms are not fleeing
rich countries in large numbers to escape
environmental regulation
1.
Economy-wide Effects
Regulations may contribute to localized
structural unemployment, but this diminishes
in the long run as displaced workers find new
jobs elsewhere in the economy
 Regulation does not create long-run
unemployment; instead, it will contribute to a
shift in the type of jobs the economy creates

A Jobs-Environment Trade-off?
Jobs Dependent on Environmental Spending
Green Jobs
The bulk of environmental spending
remains in the private sector, generating a
demand for workers, primarily in
manufacturing and construction
 This money could have been spent on
other things--health care, travel,
investment, imported goods--so net job
creation could have been higher or lower
without environmental regulation

Job Creation
As a rule, money spent on sectors that
are both more labor-intensive and have
a higher domestic content will generate
more American jobs in the short run
 Environmental spending is often either
labor intensive or has a high domestic
content
 If the economy is not at full employment,
then green spending can lead to more
job growth than other types of spending.

Jobs-Environment
Trade-Off?
Most of the time, if you hear a sentence
that begins with “All economists agree,”
you should head for the door
 But in this case, there is an agreement
that at the economy-wide level there is
simply no such thing as a jobsenvironment trade-off

What about layoffs from
Regulation?
Layoffs Due to Regulation
Employer estimates: environmental
regulation accounts for less than one tenth
of one percent of all mass layoffs
nationwide
 7 plants per year closed primarily as a
result of environmental problems
 On average, 2,000-3,000 lost positions
each year are due in part to environmental
regulation
 40 times more layoffs are due to ownership
changes than to regulation

Pollution Havens?
Does new investment occur in poor
countries with less stringent regulation—
”pollution havens”—due to environmental
regulation?
 Very little evidence to suggest that the
competitiveness of U.S. manufacturing
firms have been hurt by environmental
regulation

Why the Small Effects?
Pollution control costs are a small portion of
total business costs
 Costs are only one factor influencing
business decisions

 Factors as diverse as access to markets and the
quality of life are important components of
business location decisions

Much pollution control technology is
embedded in modern plant designs
 Chemical plant built in South China will look like
one built in West Virginia
The Maquiladora Case

Plants within 100 kilometers of the U.S.
border in Mexico, known as maquiladoras,
may import and export products freely
 These plants are required to meet U.S.
environmental standard but in practice, the
Mexican government has not rigorously enforced
the law
The Maquiladora Case
○ Mexico may attract investment that would occur in the
U.S. had it not been for environmental regulations due
to its:
 Close proximity to the U.S.
 Low wages
 Lax environmental regulation
○ BUT: industries moving to Mexico are not heavily
regulated dirty industries, but instead relatively “clean”,
labor intensive assembly plants. Little evidence of
“Pollution Haven” effects.
○ One Exception: Furniture Manufacturing
Monopoly Costs?
 Regulation can impose high fixed costs on
firms
 High fixed costs generate economies of scale
which can cause smaller firms to be squeezed
out of business
 Thus, one potential cost of environmental
regulation is an increase in monopoly power in
the economy
General Equilibrium Effects
The last important area in which there may
be “hidden” costs (or benefits) of regulation
lies in what economists call general
equilibrium (GE) effects--the effects of
regulation felt throughout the economy
 General equilibrium effects might raise or
lower costs by altering labor supply
 This argument has loomed large in the
debate over the so-called “double dividend
hypothesis”

The Double-Dividend Hypothesis
A shift to pollution taxes would not only
reduce pollution, but by using the revenue
to cut taxes on capital and labor, would
make the whole economy operate more
efficiently: thus two dividends to green
taxes.
 Lower taxes on work, for example, might
cause people to work more hours, raising
output.

The Debate
On the other hand: Taxes on pollution lead to
higher prices for dirty goods, which means
that an hour of work buys fewer goods
 In other words, the real wage falls and
people substitute labor for leisure, and work
less
 Economists are debating whether these
general equilibrium effects lower or raise the
net costs of regulation.

Producer and Consumer Surplus
Efficiency Gains from
Environmental Taxes
A Double Dividend in the Labor
Market?
True Costs of Environmental
Protection
Engineering costs +/Productivity Impacts
Employment Impacts
Monopoly Costs
General Equilibrium Effects =
+/- 2.8% of GDP in 2010