The impact of environmental regulations on industry productivity: Direct and indirect effects

The paper develops an approach to measuring the impact of environmental regulations on total factor productivity growth which is less restrictive than a simple growth accounting approach. Environmental regulations have a direct impact on productivity growth due to the diversion of resources toward required abatement capital. There can be a further indirect effect, however, as conventional inputs and production processes are changed in response to requirements to purchase abatement capital. We estimate this indirect effect using a flexible functional form cost function. Total factor productivity and the direct and indirect productivity effects of environmental regulations are presented for five polluting industries. We find that the indirect effect can be either positive or negative, and in all industries is energy using. The net impact of environmental regulations on total factor productivity growth is fairly small, given that these are the most polluting industries. They account for about 10–30% of the productivity decline of the 1970s in these industries.