Environmental Regulations and Technological Change

Environmental regulations often provide incentives for polluting firms to improve upon current technology and to develop new technologies in order to meet standards and reduce the costs of complying with regulation.  This study measures how regulation-induced technological change has impacted the marginal abatement cost (MAC) of reducing emissions over time in the Portland cement industry.  We use environmental directional distance functions to model the joint production of good and bad outputs, where bad outputs are emissions. 

Our sample consists of a balanced panel of approximately 60 cement establishments from 1990 to 2002.  The technology modeled in this study consists of in producing one good output (tons of Portland cement, jointly with emissions of NO_x, SO₂, and VOCs. The two principal sources of data for our sample of plants are the U.S. Census Bureau’s Longitudinal Research Database (LRD) and the U.S. Environmental Protection Agency’s National Emissions Inventory (NEI). The LRD contains annual information on a large sample of U.S. manufacturing establishments from the Census of Manufactures and Annual Survey of Manufacturers. The LRD includes data on the value of shipments, total employment, materials and energy usage, and the capital stock for each establishment.  The NEI, collected by the EPA every three years starting in 1990, contains estimates of emissions of criteria air pollutants and their precursors, as well as hazardous air pollutants, for individual sources. 

Using the joint production model we calculate the shadow prices (MAC) associated with reducing bad output production for our sample over time.   We then decompose these changes in MAC into: (1) changes in MAC related to technical change, (2) changes in MAC related to input changes, and (3) changes in MAC related to changes in pollution abatement intensity.  Determining the relative contribution of each of these factors to changes in MAC will let us isolate the regulation-induced changes in technology that have impacted productivity and pollution abatement costs over time.