Air Pollution, Externalities, and Decentralized Environmental Regulation
59 Pages Posted: 19 May 2016
Date Written: November 20, 2015
Abstract
This paper investigates the extent to which interjurisdictional spillovers -- transboundary pollution and the so-called 'race to the bottom' -- distort decentralized environmental regulation in practice. To that end, I develop a model in which local jurisdictions set regulations by trading-off air quality against attracting mobile firms. In equilibrium, local regulations are interdependent, creating a challenging identification problem, which I address using exclusion restrictions derived from the physics of air pollutant transport. Specifically, for short-lived pollutants, transboundary pollution is regional instead of global, and exogenous factors that disperse pollution (such as persistent local wind patterns) can shift neighbors' policies through transboundary pollution but not the policies of distant or upwind jurisdictions. I estimate the model using a new panel dataset covering a unique institutional setting, namely the endogenous decentralization of air pollution standards from the U.S. federal government to states during 1971-1990, along with ambient particulate matter concentrations, the location of regulated industry, and weather patterns. I find that the transfer of regulatory authority to a state increases the number of firms there by 3%, decreases firms in nearby states by nearly 2%, and increases air pollution in neighboring downwind states by 1%. The evidence implies that states seek regulatory authority to attract firms and export pollution, thereby making decentralized regulation of air pollution inefficient.
Keywords: Decentralization, air pollution regulation, transboundary pollution, race to the bottom
JEL Classification: H73, Q53, Q58
Suggested Citation: Suggested Citation