When the regulator goes home: The effectiveness of environmental oversight

The U.S. EPA designates areas as in non-attainment with National Ambient Air Quality Standards (NAAQS) if ambient air concentrations of certain pollutants exceed standard levels. Stationary sources located in these areas are required to significantly reduce emissions through technological and other requirements; these sources are also subjected to greater regulatory oversight. However, non-attainment is not a permanent designation and regulatory oversight subsides once an area moves out of non-attainment. In this paper we examine whether the additional regulatory oversight of non-attainment designation is successful (and necessary) at reducing emissions from stationary sources. We estimate the effects of an area moving out of non-attainment on emissions at coal-fired power plants located in these areas. We first model the actions of utility managers subjected to emission reduction requirements. The model suggests that firms under additional scrutiny via non-attainment designation intentionally lower emissions. However, when areas exit non-attainment, i.e., direct regulatory oversight subsides, firms under-utilize clean strategies-including technology-which results in emission increases. Empirical analysis results show that boilers with abatement technology installed as a result of non-attainment increase NO x emissions and emission rate by 16% and 9%, respectively, when exiting non-attainment. Extended model results present evidence that regulated firms are less likely to use fully emission control methods in the absence of direct regulatory oversight. Specifically, the emission increases of exiting non-attainment are driven by the under-utilization of abatement technology inputs and the switch to lower quality fuel.