Clean Air Act Decreased Output, Productivity Only for Power Plants Opened Before 1963
A new study used new data on the operation of almost every U.S. fossil-fuel power plant for more than 50 years in the middle of the 20th century to quantify the overall economic impact of the Clean Air Act (CAA) of 1970 on the power sector. The study found that the CAA led to large and persistent declines in output and productivity, but only for plants that opened before 1963. The effects of the CAA on plants that opened after 1963 were small. The first version of the CAA was enacted in 1963, signaling that environmental regulations were on the horizon and affecting subsequent behavior (e.g., changes in plant design, locations) to lower the economic costs of the 1970 CAA, the study suggests.
The study, by researchers at Carnegie Mellon University (CMU) and the University of Montreal, appears as a National Bureau of Economic Research working paper.
“Landmark policies like the Clean Air Act, which is the centerpiece of local air pollution regulation in the United States and a model for environmental policy worldwide, have fundamentally changed major sectors of the U.S. economy,” says Edson Severnini, associate professor of economics and public policy at CMU’s Heinz College, who coauthored the study. “Our study provides the first causal estimates of the impacts of the legislation that account for anticipatory behavior.”
Government regulation permeates all aspects of the modern economy, affecting a range of outcomes. The CAA emerged after an extended period of incremental policy change, during which polluting plants may have preemptively adjusted behavior since the legislation’s passage was largely foreseeable in the years leading up to its enactment. But anticipatory behavior makes it difficult to estimate the full effects of regulations like the CAA.
In this study, researchers used annual plant-level data for the vast majority of fossil fuel-fired power plants in the United States from 1938 to 1994. The Federal Power Commission, later renamed the Federal Energy Regulatory Commission (FERC), began publishing detailed plant-level information in 1948. The initial volume included retrospective data beginning in 1938. For this study, researchers digitized the data for 1938 to 1981 and used similar data collected by the FERC for 1982 to 1994.
The newly available data allowed the researchers to account for both anticipatory behavior by electric utilities in the years preceding the CAA’s passage and reallocative effects of the CAA across plants. The researchers also used the geographic and temporal variation in environmental regulation built into the CAA, which designated counties to be in attainment or out of attainment based on standards set forth by the National Ambient Air Quality Standards (NAAQS). They compared the changes in outcomes of plants located in counties in attainment to those in counties that were out of attainment, before and after enforcement went into effect.
The study found that county nonattainment designations under the CAA had negative effects on output and productivity, but only for plants built before 1963. The productivity losses incurred by plants built before 1963 were economically large and persistent, suggesting that these plants could not adapt to environmental regulation even in the long run. In contrast, the effects of the CAA on plants that opened between 1963 and 1971 were small and statistically insignificant.
The timing of these patterns aligns with the passage of the original CAA in 1963, which gave the federal government the authority to control air pollution and signaled coming environmental regulations, the study concluded. Plants that opened after that key year were largely unaffected by subsequent regulatory requirements.
“Our findings point to anticipation playing a key role in the eventual costs of complying with the CAA,” suggests Karen Clay, professor of economics and public policy at CMU’s Heinz College, who coauthored the study. “Firms may have been able to acquire information during the process leading up to the passage of the CAA of 1970 and preemptively take actions to reduce the costs of regulatory compliance.”
The study also found that the aggregate productivity losses of the CAA borne by the power sector were mitigated substantially by the reallocation of output from older, less efficient power plants to newer plants. In particular, approximately half of the aggregate long-run losses were offset by the relocation of production across plants.
“The historical U.S. experience highlights the challenge for environmental policy design in developing countries, where policymakers often must balance the need to curb extreme levels of air pollution with the objective of promoting widespread access to affordable energy services,” notes Akshaya Jha, assistant professor of economics and public policy at CMU’s Heinz College, who coauthored the study.
The research was funded by the Center for Electricity Industry Studies, Heinz College, the Berkman Fund at Carnegie Mellon University, the National Science Foundation, and the University of Montreal.
Summarized from an NBER Working Paper, Impacts of the Clean Air Act on the Power Sector From 1938-1994: Anticipation and Adaptation by Clay, K (Carnegie Mellon University), Jha, A (Carnegie Mellon University), Lewis, JA (University of Montreal), and Severnini, ER (Carnegie Mellon University). Copyright 2021 The Authors. All rights reserved.
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