Do Environmental Regulations Retard Productivity? Evidence from U.S. Electric Utilities

Abstract

A controversy exists among economists who have found, based on aggregate data analysis, that environmental regulations tend to retard productivity, and business strategists who maintain, based on case analysis, that environmental regulations can enhance productivity. A key point often overlooked in this controversy is that all parties agree that environmental regulations are more likely to enhance productivity if they are well designed. Among the attributes that business strategists associate with well-designed regulations is flexibility and granting firms compliance latitude. Based on data for all major investor-owned electric utilities in the United States, we evaluate the impact that different categories of environmental-related plant investments have on these utilities' productive efficiencies, which are calculated using data envelopment analysis. Our results, which are based on analysis of firm-level data, empirically demonstrate that regulatory design does make a difference. Our findings suggest that locally-based and administered regulation such as those relating to waste pollution which gives companies more latitude has a more positive influence on productivity than national requirements with inflexible technology-forcing guidelines related to air and water pollution which we find have a negative impact on utilities' productivity.

JEL Classification: Q28, Q38, O47