Economic Growth and Environmental Regulations: A Simultaneous Equation Estimation

Article excerpt

This study employs a four-equation regional growth model to examine the simultaneous relationships among changes in population, employment, per capita income, and environmental regulations for the 420 counties in Appalachia. The results reveal that initial conditions for environmental regulations are negatively related to regional growth factors of change in population, per capita income, and total employment. From this, it is inferred that the diversion of resources from production and investment activities to pollution abatement is inadvertently transmitted to other sectors of the economy, thereby resulting in a slowdown of regional growth. It also finds robust evidence that shows that changes in environmental regulations positively influence changes in population, total employment and per capita income. Thus, it is parsimoniously concluded that in the long run, environmental regulations are not detrimental to economic growth.

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Introduction

The debate over the impact of environmental regulations on economic growth has a long history. Generally, the belief is that environmental regulations are detrimental to economic growth; therefore, their implementation has been controversial among economists and environmental policy makers. The debates over the past three decades have been over how to design environmental regulations that promote environmental quality without slowing down economic growth. The general consensus, however, is that many environmental problems such as climate change, water quality degradation, air quality problems, land degradation, habitat loss, and others are attributable to human activities.

To this end, concern over air quality problems in the US culminated with the passage of the Clean Air Act (CAA) in 1970, which was amended in 1977 and 1990. The 1970 CAA set National Ambient Air Quality Standards (NAAQS) for six major air pollutants: tropospheric ozone (O3), Total Suspended Particulates (TSP), carbon monoxide (CO), sulfur dioxide (SO2), nitrogen dioxide (NO2), and lead (Pb). The NAAQS are a set of standards that represent the maximum permissible ambient concentration of the six pollutants. To promote public health and welfare, the CAA has assigned the primary responsibility for air pollution regulation to state and local governments. Thus, state and local governments administer the CAA by developing State Implementation Plans (SIP) which outline how states are going to comply with federal pollution standards. This means that the US states retain considerable flexibility in the implementation and enforcement of environmental regulations; this is reflected in the variation of regulatory intensity among states (Levinson, 2001). Areas within a state that fail to meet the NAAQS for the six criteria pollutants established by the EPA are designated as non-attainment areas.1

Earlier studies examining the economic impacts of environmental regulation produce mixed results. Several researchers, including Gray and Shadbegian (1993), List and Co (1999), and Fredriksson and Millimet (2002a), find evidence that show that environmental regulations negatively affect economic growth. On the other hand, Bartik (1985), McConnell and Schwab (1990), and Levinson (1996) find little or insignificant evidence in this regard. Moreover, the focus of these earlier studies has been exclusively on affected industries in the manufacturing sector (Duffy, 1992; Jaffe and Palmer, 1996; and List and Co, 1999). The justification for this is that many of the environmental policies are directed at manufacturing industries, and therefore, aggregate changes in employment and firm expansion or contraction will directly affect polluting firms (Bartik, 1985).

However, manufacturing is not isolated from the rest of the national economy and as such, the effects of environmental regulations on manufacturing industries may have spinoffeffects on other sectors of the economy which supply goods and services to the manufacturing sector, and consequently affect the pattern of regional growth. …