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Environmental Regulation, Investment Timing, and Technology Choice

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  • Wayne B. Gray
  • Ronald J. Shadbegian

Abstract

We began this project interested in collecting real-world' insight about how environmental regulation affects the paper industry. Based on conversations with people in the industry and visits to paper mills, we formulated several hypotheses related to technology choice in new mills and the investment decision for existing plants. We tested these hypotheses using technology choice data for 686 paper mills and annual investment data for 116 mills. Technology choice is influenced by environmental regulation. New mills in states with strict environmental regulations are less likely to employ the more polluting technologies involving pulping. Differences between air and water pollution regulations also emerge, with the dirtiest technology in each medium avoiding those states with the strictest regulations. The magnitudes of the impacts are sizable, with a one standard deviation increase in stringency associated with several percentage point reductions in the probability of choosing a dirty technology. State regulatory stringency and plant technology have little or no effect on annual investment spending at existing plants. However, pollution abatement investment is significantly related to productive (non-abatement) investment. Plants with high abatement investment spend less on productive capital. The magnitude of the impact corresponds to nearly complete crowding out of productive investment by abatement investment. Examining investment timing, we find that abatement and productive investment tend to be concentrated in the same years, consistent with the high cost of shutting down a paper mill for renovations.

Suggested Citation

  • Wayne B. Gray & Ronald J. Shadbegian, 1997. "Environmental Regulation, Investment Timing, and Technology Choice," NBER Working Papers 6036, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6036
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    References listed on IDEAS

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    1. Wayne B. Gray, 1997. "Manufacturing Plant Location: Does State Pollution Regulation Matter?," NBER Working Papers 5880, National Bureau of Economic Research, Inc.
    2. Deily, Mary E. & Gray, Wayne B., 1991. "Enforcement of pollution regulations in a declining industry," Journal of Environmental Economics and Management, Elsevier, vol. 21(3), pages 260-274, November.
    3. Eric J. Bartelsman & Wayne Gray, 1996. "The NBER Manufacturing Productivity Database," NBER Technical Working Papers 0205, National Bureau of Economic Research, Inc.
    4. Gray, Wayne B, 1987. "The Cost of Regulation: OSHA, EPA and the Productivity Slowdown," American Economic Review, American Economic Association, vol. 77(5), pages 998-1006, December.
    5. John Haltiwanger & Russell Cooper & Laura Power, 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps," American Economic Review, American Economic Association, vol. 89(4), pages 921-946, September.
    6. Gollop, Frank M & Roberts, Mark J, 1983. "Environmental Regulations and Productivity Growth: The Case of Fossil-Fueled Electric Power Generation," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 654-674, August.
    7. Wayne B Gray & Ronald J Shadbegian, 1994. "Pollution Abatement Costs, Regulation And Plant-Level Productivity," Working Papers 94-14, Center for Economic Studies, U.S. Census Bureau.
    8. Barbera, Anthony J & McConnell, Virginia D, 1986. "Effects of Pollution Control on Industry Productivity: A Factor Demand Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 35(2), pages 161-172, December.
    9. Timothy J. Bartik, 2002. "The Effects of Environmental Regulation on Business Location in the United States," Book chapters authored by Upjohn Institute researchers, in: Wayne B. Gray (ed.),Economic Costs and Consequences of Environmental Regulation, pages 129-151, W.E. Upjohn Institute for Employment Research.
    10. Robert H Mcguckin & George A Pascoe, 1988. "The Longitudinal Research Database (LRD): Status And Research Possibilities," Working Papers 88-2, Center for Economic Studies, U.S. Census Bureau.
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    More about this item

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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