The economic impact of environmental protection: the myth of the job killing environmental regulation

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On June 24th, President Obama visited the Carnegie Mellon National Robotics Engineering Center in Pittsburgh’s Lawrenceville neighborhood. Obama chose the Robotics Center as the backdrop for a speech promoting the Advanced Manufacturing Partnership (AMP), a collaboration between the Obama administration, engineering universities, like Carnegie Mellon University, and industry, such as Allegheny Technologies. The goal of AMP, as the President put it, is to revitalize the U.S. manufacturing sector.

Then, on September 2nd, Obama ordered EPA Administrator Lisa Jackson to halt her agency’s efforts to revise the 2008 health standard for ground-level ozone. The 2008 standard, created by the Bush-led EPA, has been widely criticized as inadequate to protect the public health and contrary to the requirements of the Clean Air Act. Administrator Jackson has described the 2008 standard as “not legally defensible.” Obama’s stated reason for halting the ozone reconsideration was “the importance of reducing regulatory burdens and regulatory uncertainty.”

How do we reconcile these statements? In June, Obama suggested the reinvigorated domestic manufacturing sector resulting from his AMP initiative would ensure a bright future for America. Then in September the President stated that an ozone standard that is protective of public health and consistent with the requirements of the Clean Air Act would be too burdensome for industry to bear. Does a strong domestic manufacturing sector depend on our willingness to continue to breathe unhealthy air?

The answer is no, but one of the biggest impediments to improving the environment is the pervasive misconception that a healthy environment and a healthy economy are incompatible. You don’t have to look far to find evidence to counter this misconception. Just eight blocks from the CMU Robotics Center is the McConway and Torley (M&T) steel foundry. This foundry has operated since the 1860s, producing steel castings for railcars. A few weeks prior to Obama’s visit, M&T and GASP reached an agreement which will reduce the foundry’s emissions of particulate matter and manganese, a toxic heavy metal, by 25% or more. The agreement addresses GASP’s health concerns while allowing M&T to carry out a proposed facility expansion. It’s good for the economy and the environment.

While the improved pollution controls will likely create additional costs for M&T, the company still plans to operate and expand its Lawrenceville foundry. Common wisdom states that when confronted with the costs of complying with tougher environmental standards, companies like M&T shut down their U.S. facilities, put Americans out of work, and move operations to places with weaker environmental standards. If Obama had stopped by McConway and Torley after the robotics lab speech, maybe he wouldn’t have been so quick to conclude that environmental regulations like the revised ozone standard are excessively burdensome.

Admittedly, M&T’s decision to improve its environmental performance in Lawrenceville rather than pack it up and head to Ciudad Juárez is just one case. But when economists look for evidence that U.S. manufacturers are running for the border to evade U.S. environmental regulations—often called the “pollution haven hypothesis”— they have a hard time finding it. While some studies suggest environmental regulations do have a negative effect on domestic industry, some find no statistically significant effect, and some find an economic benefit. After decades of study, publications on the issue still contain observations like, “despite anecdotal evidence and the predictions of theoretical studies, little empirical verification for the existence of pollution havens has been found.”[Cole & Elliot page 530] If it’s safe to conclude anything from the conflicting research and ongoing debate, it’s that if the pollution haven effect does exist it’s either very small or very well hidden in confounding data.

It seems logical that if environmental regulations impose costs on industry, industry would try to evade those costs by doing things like moving their operations to countries with weaker environmental regulations. But then why is this effect so hard to find? First, regulated entities often derive benefits from environmental regulations which offset some of the costs of regulatory compliance. These include benefits to society as a whole that industry also receives; for example, improved air quality might result in an industry experiencing fewer employee sick days and increased productivity. There are also benefits that are more unique to the regulated entities themselves; for instance, when a coal-fired power plant installs a sulfur dioxide (SO2) scrubber, the plant might be able to reduce costs by switching to a cheaper, higher sulfur content coal and still meet its SO2 emission limits. In the case of M&T, the pollution controls required under the agreement with GASP may provide the foundry with more operational flexibility in the future by allowing the facility to maintain a safe level of emissions while operating at a higher production rate.

Another reason it’s not clear that the pollution haven effect exists is that the costs of complying with environmental regulations are just one of many factors relevant to industry location decisions. Other factors include tax rates, prevailing wages, currency exchange rates, levels of corruption or insecurity, workforce education levels, transportation infrastructure, access to natural resources, and proximity to markets. Given this multitude of other considerations, the cost of complying with environmental regulations is often too insignificant to merit consideration, let alone influence the location decision.

Consider the decline of the American steel industry. The cost of complying with environmental regulations is sometimes implicated as a cause of the industry’s collapse. A closer examination reveals that environmental regulations had little, if anything, to do with the decline of domestic steel production. First, if the steel collapse were in fact due to a competitive disadvantage created by environmental regulation, we would expect the steel producers who undercut U.S. prices to be operating heavily polluting facilities located in impoverished nations with nonexistent environmental regulations. Instead, the U.S. industry’s biggest rivals in the 1970s and 80s were Japan and countries in Western Europe, [CBO page 13] relatively prosperous nations whose pollution control expenditures per ton of steel produced were similar to, if not greater than, those of the U.S. [CBO page 48].

Second, the timelines of the American steel decline and the rise in U.S. environmental regulations don’t match up. With the exception of a few state and local air pollution control agencies, U.S. environmental regulation did not begin in earnest until the 1970s, the decade which saw the creation of the EPA and the enactment of most of the federal environmental laws we are familiar with today.  [EPA created (1970), the Clean Air Act amendments (1970, 1977), the National Environmental Policy Act (1970), the Clean Water Act (1972), the Endangered Species Act (1973), the Safe Drinking Water Act (1974), and the Resource Conservation and Recovery Act (1976). ] Further, it often takes many years after the enactment of a law for it to be implemented and enforced. As of 1977 not a single U.S. steel mill was in full compliance with the Clean Air Act, [Reitze page 12] meaning no mill was burdened with whatever competitive disadvantage those regulations might have created. While U.S. environmental regulation increased in the 1970s, clear evidence of the U.S. industry’s growing inability to compete with foreign rivals is evident as far back as the late 1950s (see tables)—a time when the U.S. industry’s average annual expenditure on pollution abatement projects was shrinking [Kim & Howse Appendix 1, Table 3]

U.S. Percentage of World Steel Production [NAS 1985 page 71]

 

U.S. iron & steel industry percentage rate of return on equity (ROE) after taxes relative to all other U.S. manufacturing [NAS 1985 page 113]

A more plausible explanation for the American steel industry’s decline is that the industry made a series of strategic missteps, starting back as far as the 1950s, such as the late adoption of the basic oxygen furnace, the inability to take advantage of inexpensive imported ore due to the industry’s resistance to abandoning the vertical integration model, and inaccurate demand growth projections [see e.g.  John P. Hoerr, And the Wolf Finally Came, pages 93-100 (University of Pittsburgh Press, 1988)]

So why, despite a lack of convincing evidence, is the belief that environmental regulations are bad for the economy so widely held? Especially given that adherents of this belief must also accept the ridiculous notion that environmental policymakers are either oblivious or indifferent to the resulting economic harm, or are actively motivated to destroy the U.S. economy? The primary goal when developing public policy is, of course, to ensure that the policy will accomplish what it is intended to, but this doesn’t mean policymakers are blind to the value of crafting policies in a manner which minimizes costs and maximizes benefits. In fact, industry can be counted on to make policymakers aware of costs or technical challenges a proposed rule might impose on them—just look at the industry comments in the docket for any significant proposed environmental rule. Office of Management and Budget analyses of the costs and benefits of major federal rules show that the benefits of EPA rules typically exceed the costs, often by a great margin [OMB 2011, Appendices A, B, & D].

Back to the revised air quality standard for ozone: While policymakers typically try to minimize costs and maximize benefits, the national ambient air quality standards are a bit of an exception. In 2001 the U.S. Supreme Court held that the Clean Air Act does not permit the EPA to consider costs as a factor in setting these air quality standards. So one might expect the costs of air quality standards like the revised ozone standard would be an exceptional case where the costs do exceed the benefits. However, despite the prohibition on letting cost influence the final ambient air quality standards, EPA did prepare estimates of the costs and benefits of setting the ozone standard at a variety of levels, ranging from the 2008 standard of 75 parts per billion (ppb) down to 55 ppb. The analysis found that if the standard were set as low as 65 ppb the projected economic benefits would still likely exceed the costs. In late September Lisa Jackson told the House Energy and Commerce Committee the final rule would have set the revised standard at 70 ppb.

(By the way, if you’re wondering how it could be permissible for EPA to prepare cost benefit analyses of various ozone air quality standards if the agency prohibited from considering costs, the answer is EPA promised they wouldn’t let those cost-benefit analyses affect their ultimate decision. . . )

If revising the ozone standard to 70 ppb would likely produce a net economic benefit, why did it provoke such controversy? Why were politicians, media personalities, and industry representatives insisting it would lead to financial ruin? Even when a policy change would create a net economic benefit, that rising tide may not lift all boats. Much of the opposition to the revised standard originated with captains of industry who feared that in the rising regulatory tide, their boats would be among the unlucky ones to sink. However, keep in mind the profits those industry players would stand to lose are profits they currently enjoy only because they are placing some costs of their operations on the general public in the form of environmental damage, asthma, heart attacks, respiratory illnesses, and shorter lifespans. Without the regulation, the costs industry places on the general public exceed the costs the rule would impose on industry. By failing to revise the ozone standard, the public suffers more than the industry benefits.

But let’s pretend for a moment that the industry talking points are right, and environmental regulations have made U.S. industry less competitive and have caused more economic harm than good. Generations of Americans fought for the safer workplaces, better wages, and cleaner environment these “burdensome” regulations provide. These protections are part of America’s history and values. If they also make American businesses less competitive, it’s because we’re competing with countries that don’t share these values. Those who attack regulations on the belief they place U.S. industry at a competitive disadvantage fail to realize that the alternative is to let foreign nations that don’t share our respect for the environment and workers dictate how clean our air, safe our workplaces, and high our wages should be.

If a company does suffer a competitive disadvantage as a result of efforts to reduce its environmental impact or improve working conditions, they ought to be rewarded for making that sacrifice, not penalized because the price of their product is now 2% higher than a rival product made in a sweatshop or a smoke-belching factory overseas. The solution to any competitive disadvantage U.S. industry might suffer as a result of operating responsibly is to eliminate that competitive disadvantage. We could accomplish this through our personal buying decisions and our trade policies, or we could do this by eliminating the regulations that encourage safe workplaces, fair pay, and environmental protections.

Obama said the goal of the AMP plan was to create “a renaissance of American manufacturing.” If we want a renaissance, we pursue this goal with respect for workers and the environment. If we discard these values, the result will look less like a renaissance and more like a return to the abuses and injustice of the gilded age.

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