Essays on the Economics of Environmental Regulations

Abstract

Title of Document: ESSAYS ON THE ECONOMICS OF ENVIRONMENTAL REGULATIONS Fanqing Ye, Doctor of Philosophy, 2012 Directed By: Professor Erik Lichtenberg Department of Agricultural and Resource Economics Understanding the potential link between environmental regulations and economic activities is crucial to both the regulated industries and policy makers. This dissertation explores three key questions in order to understand environmental regulations and their impacts. 1) How to measure environmental regulatory burden? 2) What are the impacts of environmental regulations on competitiveness? 3) What are the determinants of regulatory stringency? The theory of the Pollution Haven Effect (PHE) predicts that tightening up environmental regulations will affect regulated industries’ competitiveness and trade flows. In the first part of this dissertation, I construct a measure from pollution abatement costs (PAC) to quantify the changes in regulatory stringency and empirically test PHE while controlling for firm dynamics and industry composition. Previous studies have used PAC as a measure for environmental regulations. I build a theory model to show that regulation-induced changes in abatement costs contain an extensive margin (i.e. cost change due to changes in industry composition) in addition to the intensive margin (i.e. cost change for a fixed set of firms). Results from decomposition analysis confirm that, compared to the intensive margin, overall changes in PAC underestimate changes in regulatory stringency and may further lead to overestimated PHE. I then use the two margins as separate explanatory variables to explain the US’s net imports from Canada, Mexico and the rest of the world. Estimation results indicate that PHE driven by the intensive margin is smaller than that estimated previously, which corrects the overestimation of using overall abatement costs. The second part of this dissertation empirically explores the determinants of regulatory stringency in the context of the US water pollution regulations. I argue that state regulators use facilities’ compliance performance to infer their abatement efforts and technology in order to implement the technology-based and water quality-based control of the National Pollutant Discharge Elimination System (NPDES) permits. Results from econometric analyses confirm that regulators make permitting decisions based on information inferred from compliance history as well as that discovered during inspection activities. Self-disclosed violations are regarded as a signal for cooperation (i.e. adequate abatement effort under technology constraint) and will be rewarded with relaxed future permits. Non-cooperating behaviors, such as absent monitoring reports, improper operation and maintenance as detected during inspections and violations that lead to high penalties will likely result in more stringent future limit. In addition, regulators will also modify the limit levels in response to local water quality. Taken together, these results indicate that the regulators aim to ensure a certain water quality standard by inducing higher abatement efforts within the constraint of best available technology.

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