The Impacts of Environmental Regulations on Industrial Activity: Evidence from the 1970 and 1977 Clean Air Act Amendments and the Census of Manufacturers

Abstract

Previous empirical studies have uncovered little evidence that environmental regulations reduce industrial activity. This paper presents new evidence on the effects of these regulatory interventions by using the 1970 and 1977 Clean Air Act Amendments’ division of counties into “high” and “low” regulation categories. Polluting manufacturers in the high regulation counties were subject to substantially stricter regulations than those in low regulation counties. The evaluation strategy is to assign the more than 1.75 million plant observations from the microdata underlying the 1967-1987 Census of Manufacturers to precisely defined “regulated” and “unregulated” groups, based on their county’s regulatory status, their emissions of the regulated pollutants, and the year. After controlling for a wide variety of factors including plant level characteristics, unrestricted industry shocks, and unrestricted county shocks, the estimates suggest that in the first 15 years after the Amendments became law (1972-1987), high regulation counties (relative to low regulation ones) lost approximately 100,000 jobs, $50 billion in capital stock, and $30 billion (l987$) of output in pollution intensive industries. Although substantial in affected counties, the “lost” manufacturing activity associated with these regulations was relatively modest when compared to the size of the entire manufacturing sector. These estimated “losses” are larger than those found in the previous literature. This difference can be explained by the previous literature’s inability to control for unobservable factors that are correlated with regulation and the Amendments’ simultaneous regulation of multiple pollutants.