Impacts of the Clean Air Act on the Power Sector from 1938-1994: Anticipation and Adaptation
98 Pages Posted: 28 Jun 2021 Last revised: 19 Feb 2022
Date Written: June 2021
The passage of landmark government regulation is often the culmination of evolving social pressure and incremental policy change. During this process, firms may preemptively adjust behavior in anticipation of impending regulation, making it difficult to quantify the overall economic impact of the legislation. This study leverages a theoretical framework and newly digitized data on the operation of virtually every fossil-fuel power plant in the United States from 1938-1994 to examine the impacts of the 1970 Clean Air Act (CAA) on the power sector. We exploit the extended pre-regulation benchmark to account for anticipatory behavior by electric utilities in the years leading up to the Act's passage, and the long post-regulation period to allow for reallocative effects of the CAA across plant vintages. We find that the CAA led to large and persistent decreases in output and productivity, but only for plants that opened before 1963. This timing aligns with the passage of the original 1963 CAA, which provided the federal government with limited authority to “control” air pollution, but primarily served as a signal of impending federal regulation. We provide empirical and historical evidence of anticipatory responses by utilities in the design and siting of plants that opened after 1963. Finally, we show that the aggregate productivity losses of the CAA borne by the power sector were substantially mitigated by the reallocation of output away from older less productive power plants.
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