**ENVIRONMENTAL PROTECTION: IS IT BAD FOR THE ECONOMY?**

**A Non-Technical Summary of the Literature**

by Frank S. Arnold

Applied Microeconomics Incorporated

with the assistance of

Anne S. Forrest and Stephen R. Dujack

Environmental Law Institute

July 9, 1999

Prepared under EPA Cooperative Agreement CR822795-01 with the Office of
Economy and Environment, U.S. Environmental Protection Agency,
Washington, D.C. 20460\
\
Project Officer Alan Carlin\
Office of Economy and Environment, Office of Policy\
U.S. Environmental Protection Agency, Washington, D.C. 20460\
\
Environmental Law Institute\
1616 P Street, NW, Washington, D.C. 20036

**Disclaimer**

Although the information in this report has been funded wholly or in
part by the United States Environmental Protection Agency under
Cooperative Agreement No. CR822795-01 with the Environmental Law
Institute, it does not necessarily reflect the views of the Agency and
no official endorsement should be inferred. Mention of trade names or
commercial products does not constitute endorsement or recommendation
for use.

**ENVIRONMENTAL PROTECTION: IS IT BAD FOR THE ECONOMY?**

**A Non-Technical Summary of the Literature**

**Summary**

Environmental regulation in the United States stands accused of causing
a broad array of undesirable economic consequences. It is said that
environmental regulation is too expensive, reduces economic growth,
hurts international competitiveness, and causes widespread layoffs and
plant closures. Sometimes, it is said, it even forces businesses to flee
to more accommodating countries. The view that environmental regulation
seriously harms the U.S. economy is so firmly established that it has
become the centerpiece in the series of attempts over the last few years
to roll back the very rules that have produced such dramatic
improvements in environmental quality.

This article reviews the evidence that can be brought to bear to verify
or refute these accusations. In all cases, these assertions do not stand
up to a careful examination of the facts. First, we do indeed spend a
considerable amount on environmental protection, but not as much as we
do on health care and national defense -- activities that may be of
similar significance to many people. Second, we spend about the same
amount in terms of GDP as do other nations at similar levels of
development. Third, we gain enormous benefits from pollution control, so
the issue is not really the cost of environmental protection, but the
net benefits we receive. Finally, there is no evidence that U.S.
environmental regulation causes large-scale plant closures and job
losses, that it impairs our international competitiveness, or that it
encourages companies to flee to nations with more lax environmental
protection requirements.

**ENVIRONMENTAL PROTECTION: IS IT BAD FOR THE ECONOMY?**

**Introduction**

Environmental regulation in the United States stands accused of causing
a broad array of undesirable economic consequences. It is said that
environmental regulation is too expensive, reduces economic growth,
hurts international competitiveness, and causes widespread layoffs and
plant closures. Sometimes, it is said, it even forces businesses to flee
to more accommodating countries. The view that environmental regulation
seriously harms the U.S. economy is so firmly established that it has
become the centerpiece in the series of attempts over the last few years
to roll back the very rules that have produced such dramatic
improvements in environmental quality.

These are important charges. Even though they are usually put forward by
interested partisans, they should not be taken lightly. If they are
true, even partially true, some serious rethinking of environmental
policy would seem to be in order. But if not, it might be helpful to
explain, once and for all, why not. At the same time, we can see if some
of these criticisms nonetheless still have something of significance to
say about our environmental policies.

This article examines a variety of claims about the costs of
environmental regulations by bringing to bear what accepted economic
research has to say about these issues. The following analysis is not
about conflicting experts; these are areas in which economists are in
substantial agreement. What is available from the literature may not
always be conclusive, but as we will see, it certainly is an improvement
over scary anecdotes and apocalyptic assertions. In addition, this
article does not depend on dueling numbers - where economists have
produced different numbers, they do not significantly change the
conclusions drawn from them. Instead, this analysis explains what the
numbers mean to economists, and more important, what they mean - or
should mean - to citizens and policymakers, who want both environmental
protection and a strong economy.

While the claims about supposed damage to the economy can mostly be
attributed to misinformed advocates or simple exaggeration - plus a few
headline‑making events like the spotted owl controversy - in truth the
majority of the fault lies in a lack of accurate communication of
economists\' findings about the effects of environmental regulation to
the general public, a lack to which regulators, the regulated, and the
economics profession all have contributed. In the contentious area of
environmental policy, what does get communicated is sometimes
misinterpreted or taken out of context. For example, worst‑case economic
impact scenarios for a regulation - say, potential increases in
unemployment and plant closures - are reported not as low probability
possibilities, but as very real looming threats. If the probability of
being stuck by a meteor streaking to earth was presented in the same
way, many people might never venture outdoors.

**What Do We Spend on Environmental Protection?**

All claims that environmental regulatory costs do significant economic
damage to the U.S. economy rest on the assumption that those costs are
large. After all, relatively minuscule environmental costs couldn\'t
affect anybody or anything in ways that would give rise to the negative
consequences attributed to them. But, there are several possible
meanings of the term \"large regulatory costs\" depending on the
context.

One definition of the term is compliance costs that are high enough to
result in unemployment, plant closures, and impairment of international
competitiveness. This definition requires only that regulatory costs are
significant compared with the economic sizes of plants and firms. Before
we get to that, let\'s focus exclusively on costs in a macroeconomic
sense - as a percentage of the U.S. gross domestic product. In other
words, how much does environmental protection cost American society?
Critics frequently declare that regulatory costs are too large in this
sense, diverting enormous national economic resources from productive
pursuits into complying with environmental rules.

To evaluate this claim, we first need to know how much we as a nation
spend on environmental protection each year. Fortunately, we have a
comprehensive assessment of this question - EPA\'s 1990 report
*Environmental Investments: The Cost of a Clean Environment \[1\].* This
landmark study found that the cost to comply with federal environmental
regulations was 2.1 percent of gross domestic product in 1990, and a
projected 2.6 percent of GDP in 1997. This works out to about \$210
billion in 1997 dollars.

Is this too much? First, we need to determine how accurate this often
cited estimate is. If there is serious doubt about whether the \$210
billion figure is even close to the truth, any debate about whether it
is too large would be pointless. The fact that the *Cost of Clean*
numbers are widely cited does not mean that they are universally
accepted by everyone as precisely correct.

First, here\'s how EPA came up with its numbers. Following statutory
mandates to assess the cost of compliance with the Clean Air Act and the
Clean Water Act, it expanded the scope of *Cost of Clean* to include
expenditures mandated under RCRA, CERCLA, TSCA, and FIFRA as well. In
addition, the agency included state and local expenditures and a host of
environmental costs that are not necessarily mandated by EPA
regulations, such as a variety of solid waste management and water
provision expenditures. EPA also projected future costs for new
regulations and for regulations being phased in over time. In other
words, the agency went out of its way to be as complete as possible.

Still, some economists feel that the \$210 billion figure is too low.
For example, according to some researchers \[2\], the *Cost of Clean*
estimates omit a number of more subtle environmental regulatory costs,
such as reductions in agricultural yields that arise due to restrictions
on pesticide, the costs of complying with noise restrictions at
airports, voluntary efforts for litter removal, diverted management
focus and inefficient resource use, and legal and other transaction
costs. In addition, others \[3\] argue that the data EPA used to develop
the majority of its estimates, which came from the Commerce
Department\'s periodic surveys of private sector pollution control
expenditures \[4\], understate the full social costs of regulation. The
idea is that the pollution control costs reported by industry do not
include the indirect effects on production these regulatory mandates
entail. If pollution control measures render the entire production
process less efficient, their full cost to American society exceeds the
amounts that companies report.

But there are other arguments suggesting that the *Cost of Clean*
estimate is too high. In preparing the report, for instance, EPA
supplemented the Commerce Department\'s industry pollution control
expenditures survey with cost estimates drawn from its own regulatory
impact analyses of specific environmental regulations. These studies are
based on anticipated future compliance costs as predicted by EPA using
the best available information at the time. However, industries and
consumers almost invariably find cheaper ways to comply with
environmental regulations once they are actually subject to the rules
\[5\].

Another reason for suspecting that the *Cost of Clean* figure might be
too high again has to do with the accuracy of the Commerce Department\'s
survey. When queried by the government, firms have an incentive to
overstate their pollution control costs as a way of reducing the
possibility that they will be saddled with additional regulatory costs
in the future. Furthermore, firms face honest difficulties in
distinguishing actual mandated pollution control costs from other
capital expenditures. For example, some pollution control measures
involve entire process changes, so determining what portion of the total
cost is specifically for environmental protection is difficult and
potentially arbitrary.

Finally, it is possible that the compliance costs reported in the
Commerce survey exceed the actual social costs of these expenditures,
because some pollution control measures might actually increase, rather
than decrease, the efficiency of production processes \[6\]. In this
case, the social costs of these requirements will be less than the
reported amounts.

Perhaps the correct figure is double or half the \$210 billion, but no
one really knows. The important point is that, despite all of the
controversy surrounding this estimate, the arguments are mostly about
making marginal adjustments, not radical revisions, to this figure.
Economists are not saying the number is so far off that it would change
their conclusions about whether the answer represents \"large regulatory
costs,\" the question we began with and the assertion made by many
critics of regulation. It therefore seems justified to take the *Cost of
Clean* estimate as at least a point of departure for deciding whether we
spend too much on environmental protection.

**Regardless of the Cost of Environmental Protection, Is It Still Money
Well Spent?**

Given this estimate, a simple, straightforward way to evaluate the claim
that our nation\'s environmental compliance costs are too high is to ask
how they compare with similar national priorities. In 1997, the United
States spent 10.6 percent of GDP for health care and about 4.3 percent
for national defense\[7\]. If it is worth nearly 15 percent of our
domestic income to protect our personal health and the security of our
nation, is it worth 2.6 percent of GDP to have clean water to drink and
air to breathe and to maintain the health of the ecosystems upon which
the economy really depends - not to mention our aesthetic interests in
nature and the opportunities it provides for enjoyment and recreation?

This is not really an issue for economics to decide, but for people to
decide. Many would probably agree that most Americans would find this a
very reasonable investment - even if it turned out to be twice the
amount EPA estimated (or half). Further, what the United States spends
each year on environmental protection is similar to what the other
nations in the Organization for Economic Cooperation and Development
devote to pollution control. The OECD has developed estimates of
environmental expenditures for various nations using a consistent
methodology, although somewhat different from EPA\'s\[8\]. According to
these figures, the United States is smack in the middle of four European
nations. In 1990, the OECD calculates that the United States spent 1.5
percent of GDP, a figure in line with the *Cost of Clean* estimate.
France (1.2 percent) and the United Kingdom (1.4) were lower, West
Germany (1.6) and the Netherlands (1.7) were higher. So the U.S.
experience certainly does not seem out of line.

But while comparisons of environmental costs to expenditures on other
national priorities, and to what other countries spend on pollution
control, are interesting and illuminating, from an economics perspective
they are ambiguous. Whether we spend too much on environmental
protection depends not only on what we spend on other things, but also
on the value of what we receive from these expenditures. If we get
environmental improvements of, say, \$10 billion as a result of spending
\$210 billion, we may indeed be spending too much. But if the
environmental benefits amount to \$500 billion, then these expenditures
would appear to be good investments.

If all of the benefits of all environmental regulations were quantified
and quoted in monetary terms, determining whether the aggregate benefits
exceed costs, and by how much, would be a simple matter of comparison.
But there is only a partial *Benefits of Clean* report, and for a good
reason. The environmental benefits of many regulations are not
quantifiable, while those for other regulations can be quantified but
are hard to value in monetary terms. Indeed, regulations for which all
benefits are quantified and monetized are the exception rather than the
rule. Nevertheless, several factors strongly suggest that environmental
regulation in the United States provides positive net benefits.

First, a substantial amount of the *Cost of Clean -* about a third -
comes from activities that clearly would be undertaken without being
mandated by EPA regulations. For example, the costs of solid waste
collection and disposal, as well as all of the costs of water
purification, are included in the \$210 billion figure. But since most
of these costs would be incurred voluntarily in the absence of
regulation, the benefits associated with those activities equal or
exceed the costs by definition.

Second, the Office of Management and Budget has summarized the ranges of
costs and benefits of a large number of environmental regulations
(mostly EPA rules, although a few other agencies also issue
environmental regulations) as part of their larger effort to summarize
the costs and benefits of all Federal regulations \[9\]. OMB relied on
one comprehensive academic study of the costs and benefits Federal
regulation (itself based on some 25 academic articles) and on regulatory
assessment documents prepared by the Federal agencies issuing
regulations costing \$100 million or more per year. OMB\'s report shows
that the aggregate annual benefits of all of these environmental
regulations totaled \$162 billion (1996 dollars), while their total
annual costs were \$144 billion. Another study \[11\] of the total
annual benefits and costs environmental regulations estimated the
aggregate annual benefits and costs at \$253.8 billion and \$206.7
billion respectively (1994 dollars).

Probably more convincing is that in a comprehensive study of the costs
and benefits of the entire Clean Air Act from 1970 to 1990\[10\], total
benefits for this time period ranged from \$5.6 trillion to \$49.4
trillion (1990 dollars), while total costs were \$523 billion (1990
dollars). This implies that we are getting nearly roughly \$10 to \$100
of benefits for every \$1 spent on air pollution abatement. Indeed, for
one set of regulations - the Montreal Protocol and other early
regulations to protect stratospheric ozone -- the benefits provided were
orders of magnitude greater than the costs. And even for many EPA
regulations that do not value human health benefits in terms of dollars,
the implied cost‑per‑life‑saved is frequently well within the generally
accepted range from the economics literature\[12\].

Finally, EPA and the Office of Management and Budget have long conducted
some form of analysis of the economic effects of environmental
regulation, dating back to the \"quality of life review\" process set up
by President Nixon in 1970. Presidents Ford and Carter had similar
processes, and President Reagan formalized it with Executive Order
12291, issued in 1981. And President Clinton has further refined the
process in Executive Order 12866. These agencies have adhered to a
regulatory development process that has had as one of its goals
maximizing net benefits, and making regulations cost‑effective and
sensitive to economic feasibility. This is true even in cases for
statutes EPA administers that do not permit an explicit weighing of
costs against benefits. Given this level of scrutiny, it is unlikely,
taken as a whole, that EPA regulations impose costs higher than their
benefits.

Of course, one is bound to find the occasional regulation whose costs
are decidedly larger than the benefits. After all, there is more to
environmental policymaking than purely economic costs and benefits. But
these exceptions acknowledged, it is unlikely that, as an entire body,
EPA regulations would cost more than their benefits.

So what should one conclude from all of this? Are environmental
protection costs large? Yes, they are. Environmental protection is a big
enterprise. Large‑scale undertakings of every kind involve large sums of
money. But they are not nearly as large as what we spend on other,
similarly important national priorities. Okay, but are they *too* large,
draining vast resources into complying with regulations that otherwise
could have been put to productive use elsewhere?

Probably not, because these regulations collectively provide very large
offsetting benefits to society. It would be nice, of course, if
pollution control were free. That way we would enjoy lots of
environmental benefits at no cost. But the same can be said for
anything. We might not like spending almost 11 percent of our national
income on medical care or over 4 percent on defense, but we do. Of
course, in environmental protection, as in health and defense, there are
ways to improve efficiency and save money. And we should do just that.
But inefficiency does not mean they are entirely bad investments.

Finally, characterizing these admittedly large environmental protection
costs as a drain on the economy, siphoning off resources that could be
used productively elsewhere, is off the mark as well. It is closer to
the truth to say that these costs are the results of demands for
environmental quality improvements by citizens. We should no more
characterize the costs of environmental protection as a drain on the
economy as we should the costs of providing food and shelter. Allocating
resources to produce things nobody wants is a drain. Environmental
quality is something the public demands in the classic economic sense.

**Does Environmental Protection Cause Unemployment, Plant Closures, and
Reduce International Competitiveness?**

Another commonly held belief is that environmental regulations cause
widespread layoffs and plant closures, and reduce the competitiveness of
U.S. industries in the global marketplace. The star witness for this
view is the unemployment caused by logging restrictions in the Pacific
Northwest to protect habitat for the spotted owl, which indeed put a
significant number of unfortunate people in the local timber industry
out of work. But looking at the entire nation, it turns out that in
reality few layoffs and plant closures occur as a result of
environmental regulations. And, for several important reasons,
environmental protection is unlikely to impair international
competitiveness in any significant way.

One reason why this popular perception is not accurate is that
environmental regulatory costs for most industries are actually quite
small. In fact, according to Census Bureau data, total 1991 pollution
control expenditures as a percentage of value added - a good measure of
the economic size of businesses - in manufacturing industries amounted
to only 1.72 percent \[13\]. Costs of this size are simply not large
enough in most cases to cause layoffs and shut down plants. Of course, a
few industries face somewhat larger environmental protection costs, but
these are highly capital‑intensive industrial sectors where competitors
face similar regulatory costs and whose plants are large, expensive, and
unlikely to be closed because of these costs.

Employment data back this claim. According to the Department of Labor
\[14\], mass layoffs during the period 1987‑90 that are attributable to
environmental and safety regulations (a far larger universe of rules
than EPA\'s regulations alone) were responsible for only a fraction of
one percent of the total. In fact, of 2,546 layoff events during that
period, only 4 were traced to environmental and safety regulations.
Workers were about 500 times more likely to be laid off as a result of
seasonal and other work slow‑downs and contract completions than because
of environmental and safety rules. Model changes alone account for 50
times the layoffs caused by environmental and safety regulations.

In addition, the pollution control sector itself is relatively
labor‑intensive compared with the rest of the economy, according to
studies of the labor intensity of different industrial sectors in the
U.S. economy \[15\]. Thus, increased demand for environmental
protection, if anything, tends to increase the demand for labor in the
long run. As a result, contrary to the conventional wisdom, and
excepting the misfortune of the few who are temporarily dislocated,
environmental regulation is probably labor\'s friend, not its enemy.

Finally, environmental protection costs appear not to affect the
competitiveness of U.S. industries in the global marketplace. Strong
support for this conclusion is provided in a recent *Journal of Economic
Literature* article \[16\] surveying numerous academic studies of the
possible effects of environmental regulation using various measures of
those impacts. The authors conclude that there is no evidence at all
that the stringency of environmental protection in the United States
significantly affects our competitiveness relative to other nations
either positively or negatively.

At 1.72 percent of value added, these costs are not very large in the
scheme of things. Moreover, many of the major trading partners of the
United States have similar environmental protection regulations and
practices, so their industries face comparable pollution-control costs.

Even more convincing are studies indicating that environmental
regulations in different countries around the world (and in different
regions of the United States) are far less important than other factors
that affect decisions regarding the location of investments in new plant
and equipment \[17\]. Multinational companies do not shop around for
countries with particularly lax or nonexistent environmental regulations
in order to cut costs by polluting more. Given the relatively small cost
of regulation as a percentage of value added, it wouldn\'t make economic
sense to move a plant overseas to avoid environmental protection
requirements.

If anything, multinationals are keenly sensitive to charges of
exploiting the environment in developing countries, and generally put in
place practices that compare favorably with those in their U.S.
facilities. Where plants do move overseas, it is for market reasons,
usually to gain easier access to raw materials or cheaper labor, or to
serve their foreign customers more efficiently. There might be a rogue
corporation here or there that actually did move to avoid environmental
regulatory cost, but otherwise the image of numerous companies setting
up shop in places where they can pollute at will and then undercut
everyone else is a fantasy.

Of course, none of this means that specific regulations in particular
instances do not result in unemployment, plant closings, or impaired
international competitiveness. There are outliers in every data set. But
these consequences are the exception.

**Does Environmental Protection Decrease U.S. Economic Growth?**

Yet another popular view is that environmental regulations reduce the
growth of our economy over the long run. The charge here is more or less
that expenditures on environmental protection displace other productive
investments. Over time, these cumulative decreases in investment geared
toward \"productive\" economic pursuits start to add up to a large
enough sum to affect macroeconomic conditions, such as the size of the
capital stock, labor productivity and wages, and employment.

A number of economic researchers have investigated these long run
impacts of environmental regulatory costs \[18\]. In doing so, they use
modeling techniques very different from the simpler ones normally used
to compute the compliance costs of individual regulations. Estimating
long-run effects for an entire economy is a much more complex exercise.

Methods for evaluating the short-term costs of individual environmental
regulations focus on the specific markets and activities directly
affected by the rule. For example, to calculate the costs of a
regulation requiring air pollution control for cement kilns, the
analysis would examine economic conditions in the market for cement,
such as the characteristics of supply, the level and elasticity of
demand, and the direct costs of complying with the rule. But this method
cannot possibly shed light on whether the typical environmental
regulation will have a negative long run impact on nationwide economic
growth, which actually depends on many factors throughout the economy
and on the combined impacts of many different environmental and other
regulations.

The technique economists have developed for assessing the long run,
nationwide consequences of environmental rules is called \"computable
general equilibrium modeling.\" CGE models usually contain several dozen
industry sectors, including households who supply labor and consume
outputs. They have several features that make them attractive for
evaluating long run effects of various policies. One is that they allow
extensive substitution among industry sectors. For example, if
environmental protection costs increase in one sector, the more
expensive output that results both increases the demand for substitutes
and produces higher costs for sectors that continue to use this
sector\'s output. Also, in CGE models the rate of capital formation
changes as household incomes and savings rates change. Because of this
feature, it is possible to simulate the long run impacts of policies
that reduce incomes and hence capital formation.

Of course, CGE modeling is limited to current technologies for
production and pollution control; obviously it cannot forecast
cost‑reducing methods in products or compliance that may be invented in
the future. These models also aggregate industry sectors to make the
task manageable, so distinctions that could matter at a finer level of
detail cannot be observed and assessed. Nevertheless, as a tool for
forecasting a highly uncertain future, and how that future might be
altered by various policies, CGE modeling is the best technique we have.

**Computable General Equilibrium Modeling Results Must Be Interpreted
With Caution**

CGE modeling may be the best forecasting technique for this issue, but
it can produce results that are easily misinterpreted outside of the
economics profession. Indeed, understanding some of the assumptions
built into these models is important for how citizens and policymakers
should evaluate their findings.

Let\'s start by looking at some of the key results, then analyze how
they were generated. First, the models indicate that environmental
regulatory costs taken in the aggregate do indeed reduce economic
growth. The amounts vary depending on the model, but to the outside
observer, not by very much. One model \[19\] that examined 35 industrial
sectors, plus households and government activities, over the period
1974‑85 (the period during which many U.S. regulations were phased in)
concludes that GDP growth was reduced by about 0.2 percent annually as a
result of the costs of environmental rules. (Keep in mind that this is a
reduction in the rate of GDP *growth*, not a reduction in GDP. The
economy still grows, but by slightly less per year.)

But CGE models *have to* predict reduced economic growth because of
environmental compliance. After all, pollution control costs in these
models are treated as extra expenditures necessary to produce the same
level of valued output (just as they are in the conventional methodology
for evaluating the short‑run costs of individual regulations). The
outcome is implicit in how the model is constructed. So this finding
isn\'t necessarily a complete picture for what people and policymakers
want to know about real world regulation, where a pollution control
sector emerges as part of the economy, and helps to produce
environmental protection, which is also an \"output\" with value.

Nevertheless, CGE models do reveal other consequences of environmental
compliance costs that are not captured by conventional regulatory cost
calculations. These concern the long run accumulation of indirect
effects. One of these indirect linkages is critical to understand in
order to correctly interpret the results CGE models produce. If
environmental regulations impose costs that make outputs more expensive
for consumers, then what economists call the \"real wage\" - the value
in goods and services of the money people are paid for labor - declines.
But because savings are linked to income, and investment is determined
by savings, the lower real wage results in less capital formation. Over
time this causes a further drop in real wages because the productivity
of labor declines when it has less capital to work with. This may be an
indirect effect, but to the American people, it would be an important
one.

However, for simplicity, CGE models generally assume that household
savings are the only available source of investment funds. This is what
economists call a \"closed economy,\" in which capital from outside the
country cannot be tapped. Making the opposite assumption about access to
international investment capital - an \"open economy,\" like the world
we live in - drastically alters the results of CGE models. In one, for
instance, the total economic cost of environmental rules was 40 percent
lower \[20\].

A second indirect consequence of environmental regulation predicted by
CGE models is lower employment over time. But this is not unemployment
in the way people understand the term - involuntary, regulation‑induced
layoffs. Because these models assume that people will work more for
higher wages and vice versa, the reduced employment predicted by these
models is the consequence of voluntary choices of individuals who elect
to \"consume\" more leisure when the real wage falls, not the
involuntary unemployment of concern to policymakers and the public.

One additional issue to consider in evaluating the conclusions reached
by CGE models concerns the benefits of environmental policies. CGE
modeling does not include benefits at all. It can\'t. The technique is
designed to model the goods and services producing economy. It only
estimates costs. The benefits of environmental regulations - improved
human health and reduced environmental damage - don\'t fit into this
framework.

Studies using CGE models take pains to remind readers that the entire
benefits side of environmental regulation is not captured. But the
omission of benefits has important implications. First, if this
methodology is intended to measure costs and impacts of environmental
rules beyond those estimated using conventional regulatory cost
estimation methods designed to evaluate individual regulations, there is
an obvious asymmetry with the benefits side. If indirect effects and
linkages can amplify the costs of environmental protection requirements
in the long run, as CGE models demonstrate, aren\'t there then long run
benefit‑related indirect consequences that should taken into account?

In fact, the benefits of environmental regulations do have long run
economic implications. For example, healthier workers are more
productive and miss fewer work days \[21\]. Enhanced labor productivity,
however, is not reflected in CGE models. Healthier people also consume
less medical care. If this raises their effective real income and their
savings, according to the logic of CGE models this would raise the rate
of private investment. A cleaner environment also enhances the
productivity of some investments, and reduces the costs of others. None
of these positive effects are incorporated into the long run predictions
of these models. Finally, just as CGE models by definition treat all
regulatory costs as non‑productive, they don\'t define improved human
health and other categories of benefits as valuable outputs. If these
improvements were treated like other forms of consumption, then the
costs of regulations would be seen also as producing valued outputs
instead of just draining resources from other productive activities.

The upshot of all of this is that CGE models report more or less what we
expected to hear - that environmental regulations do involve costs. But,
as is the case with conventional measures of regulatory costs, if the
benefits were incorporated, environmental protection might not reduce
economic growth, properly defined, at all.

**What Conclusions Can We Draw?**

So, conventional economics shows that environmental regulation does not
cause the widespread negative economic effects that are so often
alleged. Does this mean that its critics are always wrong? Not at all.
These myths arise, no doubt, because there are specific rules that cause
*some* of the hardships that eventually get attributed to *all*
environmental regulations in the public mind. Identifying and modifying
these problem areas is a worthy objective. Economics does not conclude
that no adjustments are necessary as long as the total costs and
benefits of all environmental regulations combined are in reasonable
balance. Instead, economists advise examining the marginal costs and
benefits of individual regulations in order to continue to increase
their net benefits. All environmental professionals have an interest in
increasing the efficiency, and thus the effectiveness, of regulation.

There is indeed room for improvement in environmental protection, just
as in any large‑scale program. But in the end, while acknowledging that
environmental regulation may not be perfect, it certainly is not the
economic monster some would have us believe.

**References**

\[1\] \*\*U.S EPA, Office of Policy, Planning and Evaluation,
[Environmental Investments: The Cost of a Clean Environment]{.underline}
EPA-230-11-90-083 November 1990.

\[2\] Schmalensee, Richard. \"The Costs of Environmental Protection,\"
in [Balancing Economic Growth and Environmental Goals]{.underline}
Monograph Series on Tax and Environmental Policies and U.S. Economic
Growth, American Council for Capital Formation, Washington, D.C., May
1994; Jaffe, Adam B., Steven R. Peterson, Paul R. Portney, and Robert N.
Stavins. \"Environmental Regulation and the Competitiveness of U.S.
Manufacturing: What Does the Evidence Tell Us?\" [Journal of Economic
Literature]{.underline}, Vol. XXXIII (March 1995), pp. 132-163.

\[3\] Gray, W.B., and R.J. Shadbegian 1994. \"Pollution Abatement Costs,
Regulation, and Plant-Level Productivity,\" Discussion Paper, U.S.
Department of Commerce, Center for Economic Studies.

\[4\] The data have been collected historically by the Census Bureau,
Department of Commerce, using the MA-200 survey. Unfortunately, the
Census discontinued this survey of pollution control and abatement
expenditures several years ago due to budget cutbacks, although plans
have been made to restart the survey in the near future.

\[5\] Cropper, Maureen L., and Wallace E. Oates. \"Environmental
Economics: A Survey,\" [Journal of Economic Literature]{.underline},
Vol. XXX (June 1992), pp. 675-740; Hazilla, Michael, and Raymond J.
Kopp. \"The Social Costs of Environmental Quality Regulations: A General
Equilibrium Analysis,\" [Journal of Political Economy]{.underline},
1990, Vol. 98, pp. 853-873.

\[6\] Morgenstern, Richard D., William A. Pizer, and Jhih-Shyang Shih.
\"Are We Overestimating the Real Economic Costs of Environmental
Protection?\" RFF Discussion Paper 97-36-REV, June 1997.

\[7\] U.S Department of Commerce, Bureau of the Census [Statistical
Abstract of the United States: 1996]{.underline}, Washington, D.C.,
1996.

\[8\] Organization for Economic Cooperation and Development [Pollution
Abatement and Control Expenditure in OECD Countries]{.underline}
Environment Monograph, OECD/GD(96)50, Paris, 1996.

\[9\] Office of Management and Budget, [Report to Congress on the Costs
and Benefits of Federal Regulations]{.underline}, September 30, 1997.
http://www.whitehouse.gov/OMB/inforeg/rcongress.html

\[10\] \*\*U.S. Environmental Protection Agency, The Benefits and Costs
of the Clean Air Act, 1970 to 1990, prepared for the U.S. Congress by
Office of Air and Radiation/Office of Policy Analysis and Review and
Office of Policy, Planning and Evaluation/Office of Economy and
Environment October 1997.

\[11\] Hahn, Robert W. \"Regulatory Reform: What Do the Government\'s
Numbers Tell Us?\" American Enterprise Institute, Washington, D.C.,
Conference Paper on Reviving Regulatory Reform, 1996.

\[12\] See Viscusi, W.K., \"The Value of Risks to Life and Health\"
[Journal of Economic Literature]{.underline} 31:1912-1946, 1993, for a
summary of estimates of the value of a statistical life.

\[13\] Office of Technology Assessment, U.S. Congress. Industry
Technology and the Environment: Competitive Challenges and Business
Opportunities OTA-ITE-586 (Washington D.C.: U.S. Government Printing
Office), January 1994. Expenditures and costs as reported by industry to
the U.S. Census Bureau.

\[14\] Goodstein, E.B. \"Jobs or the Environment? No Trade-off\"
Challenge (January-February 1995) pp. 41-45. Data are originally from
U.S. Department of Labor, Mass Layoffs in 1987-1990. Bureau of Labor
Statistics Bulletins 2395, 2375, 2310.

\[15\] Goodstein, E.B. \"Jobs and the Environment: The Myth of a
National Trade-Off,\" Economic Policy Institute Monograph, 1994.

\[16\] Jaffe, Adam B., Steven R. Peterson, Paul R. Portney, and Robert
N. Stavins. \"Environmental Regulation and the Competitiveness of U.S.
Manufacturing: What Does the Evidence Tell Us?\" [Journal of Economic
Literature]{.underline}, Vol. XXXIII (March 1995), pp.132-163.

\[17\] Friedman, Joseph, Daniel A. Gerlowski, and Jonathan Silberman.
\"What Attracts Foreign Multinational Corporations? Evidence from Branch
Plant Location in the United States,\" [Journal of Regulatory
Science]{.underline}, November 1992, 32(4), pp. 403-418; Papke, James
A., and Leslie E. Papke. \"Measuring Differential State-Local Tax
Liabilities and their Implications for Business Investment Location,\"
[National Tax Journal]{.underline}, Vol. XXXIX, No. 3, pp. 357-366,
1986; Papke, Leslie E. \"Interstate Business Tax Differentials and New
Firm Location: Evidence from Panel Data,\" [Journal of Public
Economics]{.underline} 45 (1991) pp. 47-68; Levinson, Arik.
"Environmental Regulations and Manufacturers' Location Choices: Evidence
from Census of Manufacturers,\" Columbia University Working Paper, 1992;
and McConnell, Virginia D., and Schwab, Robert. \"The Impact of
Environmental Regulation on Industry Location Decisions: The Motor
Vehicle Industry.\" February 1990, 66 (1), pp. 67-81.

\[18\] For example, Hazilla, Michael, and Raymond J. Kopp. \"The Social
Costs of Environmental Quality Regulations: A General Equilibrium
Analysis,\" [Journal of Political Economy]{.underline}, 1990, Vol. 98,
pp. 853-873, and Jorgenson, Dale W., and Peter Wilcoxen. \"Environmental
Regulation and U.S. Economic Growth\" [RAND Journal of
Economics]{.underline}, Vol. 21, No. 2, Summer 1990, pp. 314-340.

\[19\] Dale W., and Peter Wilcoxen. \"Environmental Regulation and U.S.
Economic Growth\" [RAND Journal of Economics]{.underline}, Vol. 21, No.
2, Summer 1990, p. 153

\[20\] Nestor, Deborah Vaughn and Carl A. Pasurka, Jr. \"CGE model of
pollution abatement processes for assessing the economic effects of
environmental policy\" [Economic Modeling]{.underline} 12 (1) (1995),
pp. 53-93.

\[21\] Gillis, Tom, McGartland, Albert, Nestor, Deborah Vaughn, Pasurka,
Carl A. Jr, and Lanelle Bembenek Wiggins. \"The Social Costs and
Benefits of Air Quality Management Programs: A General Equilibrium
Approach\" Paper presented at the Southern Economic Association
Convention, November 23-25, 1996, and Ostro, Bart D. \"The Effects of
Air Pollution on Work Loss and Morbidity\", Journal of Environmental
Economics and Management, 10, pp. 371-382, 1983.