The Cost of Environmental Protection

Abstract

Expenditures for environmental protection in the U.S. are estimated to exceed $150 billion annually or about 2% of GDP. This estimate, based on largely self-reported information, is often cited as an assessment of the burden of current regulatory efforts and a standard against which the associated benefits are measured. Little is known, however, about how well reported expenditures relate to true costs. The potential for both incidental savings and uncounted burdens means that actual costs could be either higher or lower than reported expenditures. A significant literature supports the notion that increases in reported environmental expenditures probably understate actual economic costs. Estimates of the true cost of a dollar increase in reported environmental spending range from $1.50 to $12. This paper explores the relationship between reported expenditures and economic cost in the manufacturing sector in the context of a large plant-level data set at the four-digit SIC level. We use a cost function modeling approach which treats both environmental and non-environmental production activities as distinct, unrelated cost minimization problems for each plant. We then explore the possibility that these activities are, in fact, related by including reported regulatory expenditures in the cost function for non-environmental output. Under the null hypothesis that reported regulatory expenditures accurately measure the cost of regulation, the coefficient on this term should be zero. In ten of eleven industries studied, including all of the heavily regulated industries, this null hypothesis is accepted using our preferred fixed-effects model. Our best estimate, based on an expenditure weighted average of the four most heavily regulated industries, indicates that an incremental dollar of reported environmental expenditure reduces non-environmental production costs by eighteen cents with a standard error of forty-two cents. This is equivalent to saying that total costs rise by eighty-two cents for every dollar increase in reported environmental expenditures. Using an alternative pooled model we find uniformly higher estimates. Although consistent with previous results, we believe these higher estimates are biased by omitted variables characterizing differences among plants. Summarizing, our results enable us to reject claims that environmental spending imposes large hidden costs on manufacturing plants. In fact, our best estimate indicates a modest though statistically insignificant overstatement of regulatory costs.

Fat tails and truncated bids in contingent valuation: an application to an endangered shorebird species

“…12 These calculations were made using budgets from environmental-related agencies and include a Resources for the Future estimate of regulatory compliance cost (2% of GDP), which is the highest component of the value (Morgenstern et al, 1998 contingent valuation data and not a separate, isolated issue to be dealt with on its own. Fat tails is consistent with many of the issues surrounding CV: yea-saying, treating the survey as hypothetical, anchoring, voting simply to show support for a program, treating the good as some broader environmental purpose, and so on.…”

Dynamics of EU food safety certification: a survival analysis of firm decisions

“…Literature in strategic management identifies managerial hubris as a major cause of adverse firm performance, especially in explaining the failure of major strategic moves, such as mergers and acquisitions, or decreases in firm profitability (Roll 1986;Jiang et al 2011). Other studies suggest that firms often misestimate costs of regulations including those for food safety (Joshi et al 2001;Morgenstern et al 2001;Ragasa et al 2011b. Prior to certification, the actual costs and benefits to a firm are not known.…”

Improving Environmental Risk Management through Historical Impact Assessments

“…19,20 In addition, during economically stressed periods, environmentally related projects are generally among the first to be eliminated in the capital budgets of major U.S. companies because of several factors that include: (1) lack of detailed cost-benefit analysis; (2) difficulty in quantifying cost savings, such as liability reduction; (3) the perception that environmental projects hinder production; and (4) traditional accounting principles that place environmental cost savings projects into aggregate overhead accounts. 3 Case Study: Environmental Risk Reduction at a U.S.-Based Firm This chain of events has occurred at a U.S.-based firm since this study was initiated in 2001. First, a Powerpoint summary presentation was made to senior management of results.…”

“…Overall, environmental spending in the United States continues to increase and represents ϳ2% of the gross national product or ϳ150 billion dollars per year. 3,4 Of this total, only 25% is associated with compliance-related expenditures, whereas the remaining 75% is related to other expenses, such as investigation and remediation of existing or historical contamination. 1,4 In 2004, U.S. Environmental Protection Agency (EPA) estimated that there were 350,000 sites of environmental contamination in the United States requiring remediation within the next 30 yr.…”