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Short- and Long-Run Impacts of Environmental Regulations on Firm Productivity: Evidence from the U.S. Electricity Sector, 1938-1999

Date and Time

Tuesday 10/16/2018 2:00PM to 3:30PM EDT
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Room 1426, William Jefferson Clinton West Building
1301 Constitution Ave., NW
Washington, DC 20001


Contact: Carl Pasurka, 202-566-2275

Presenter:  Akshaya Jha (John Heinz III School of Public Policy and Management, Carnegie Mellon University)

Description:  The economic costs of environmental regulations are widely debated. However, there is limited empirical evidence on either the magnitude of these economic costs or the extent to which these costs persist over time. This paper quantifies the short-run versus long-run efficiency costs of air quality regulations on the U.S. electricity production sector. We use annual, plant-level data on the vast majority of U.S fossil fuel fired power plants from 1938-1999; this sample period gives us the unique opportunity to examine long-run trends in the U.S. electricity industry both before and after the implementation of the National Ambient Air Quality Standards (NAAQS) in 1972. We utilize a difference-in-differences framework based on counties facing less strict versus stricter environmental regulations due to moving in versus out of attainment with the NAAQS over time. Our empirical findings indicate that plants located in non-attainment counties incur roughly: (1) an 8.5% decrease in total factor productivity (TFP), (2) a 3.2% increase in fuel costs and (3) a 2.2% increase in heat rate (BTUs of heat energy per MWh of electricity production). The effects of nonattainment on TFP, fuel costs, and heat rate are due primarily to plants built before 1970 and are persistent over time. This suggests that existing plants are unable to cost-effectively adapt to environmental regulations such as the NAAQS even in the long run.