The Unintended Externalities of an Environmental Regulation: Evidence from the NOx Budget Trading Program

Abstract

Exploiting NOx Budget Trading Program (NBP) implementation, we show that such a regional environmental regulation has unintended effects on the emission policies of manufacturing plants unregulated by the NBP via the pass-through of higher electricity prices. High energy-consuming manufacturers with tighter constraints or stronger incentives to maintain high earnings cut corners by reducing costly abatements to absorb the NBP-induced increase in energy input cost. The increased emissions worsen air quality within the 1-mile radius of manufacturing plants, which are mainly neighborhoods of underprivileged communities. While the NBP improves overall air quality, it also yields negative externalities along the supply chain.

Keywords: Emissions; Unintended Externalities; Supply Chain; Managerial Short-termism; NOx Budget Trading Program; Pass-through; Pollution Inequality.

JEL Classification: D63, G31, J15, L11, M14, Q52, Q56.