in the Twenty First Century

This paper discusses four hypotheses about US pollution over the last half century. First, air and water pollution have declined substantially, though greenhouse gas emissions have not. Second, environmental policy explains a large share of these trends. Third, much regulation of air and drinking water pollution has benefits above costs, though evidence for surface water quality regulation is less clear. Fourth, while the distribution of pollution across social groups is unequal, market-based environmental policies do not systematically improve or worsen the inequality of environmental outcomes relative to command-andcontrol standards. I also discuss recent innovations in methods and data used to evaluate these hypotheses, including increasing use of environmental administrative data, statistical cost-benefit comparisons, analysis of previously understudied policies, more detailed approaches to pollution transport, micro-macro frameworks, and a focus on the distribution of environmental outcomes. One goal of describing these hypotheses is to frame a common research agenda advancing in environmental economics. 1 I gave a version of this paper as the keynote address at the summer 2021 conference of the Association of Environmental and Resource Economists. I thank participants in that session for useful questions and comments. I gratefully acknowledge discussions with Mark Jacobsen, Dave Keiser, Cathy Kling, Jim Sallee, Arthur van Benthem, and Reed Walker which informed my thinking in this paper and research it discusses, and Lucy Hackett and Calvin Tolbert for excellent research assistance. In the 1960s, concern about the US environment grew rapidly. Many causes contributed, including Rachel Carson’s Silent Spring, pictures of Earth taken from space, an oil spill off Santa Barbara, the discovery of probable carcinogens in urban drinking water, the first Earth Day in 1970, and a fire on the Cuyahoga River in Cleveland, Ohio. Underlying these causes was a fear that amidst the prosperous postwar period, environmental degradation driven by industrialization threatened to undermine US quality of life. Reflecting prevailing fears of the time, the controversial Limits to Growth report (Meadows et al. 1972) described a future where pollution would grow exponentially for a century. These events contributed to enormous support for environmental policy. The federal government in the early 1970s created the Environmental Protection Agency and passed the Clean Air Act, Clean Water Act, Safe Drinking Water Act, and many other influential environmental policies. These laws had substantial bipartisan support. For example, the Senate passed the 1970 Clean Air Act Amendments without a single nay vote, and the House approved the 1972 Clean Water Act with a vote of 247-23. A half century has passed since these laws, and the growth of both economic research and political debates on these laws give reason to step back. This paper proposes four hypotheses describing what we have learned:  Hypothesis 1 (trends): Air pollution, drinking water pollution, and surface water pollution have declined substantially over previous decades, though CO2 emissions have not.  Hypothesis 2 (causes): Environmental policy explains a large share of these trends.  Hypothesis 3 (consequences): Much regulation of air and drinking water policies has benefits above costs; evidence for surface water is less clear.  Hypothesis 4 (environmental incidence): Market-based policies and command-and-control policies do not produce systematically different distributions of environmental outcomes. These are hypotheses, not theses. I discuss evidence for each. For Hypothesis 1, evidence for air, surface water, and CO2 trends is strong, while evidence for drinking water trends is less clear. For Hypothesis 2, I discuss suggestive evidence from specific settings, though comprehensive evidence is not available. For Hypothesis 3, I focus on evidence around air pollution, though I also discuss the more limited evidence on surface water pollution. For Hypothesis 4, research is emerging; this hypothesis represents a conjecture summarizing the few available studies. While I highlight what is known about specific aspects of these hypotheses, much about them is unknown. My goal in organizing the paper around these hypotheses is both to highlight open questions of importance and to explain methods and findings from individual papers. Some relationships among these hypotheses are worth noting. The first two hypotheses provide a coherent narrative. Air, surface water, and drinking water pollution produce immediate negative and local externalities which give local residents an incentive to pressure policymakers to control them. In part for this reason, stringent environmental policies have targeted these pollutants. But CO2 emissions produce gradual global negative externalities which give local residents a weaker incentive to address them. In part for these reasons, CO2 policy has been weaker, which helps explain why CO2 has not experienced similar declines as air and water pollution. The first and third hypotheses also provide an informative comparison. The first hypothesis describes large changes in pollution over time. Researchers typically assume that the marginal cost of cleaning up pollution increases with the quantity of cleanup, i.e., marginal abatement costs increase with abatement. Given the large decreases in pollution the first hypothesis describes, one might wonder at what point the marginal cost of cleaning up pollution rises enough to equal its benefits. This third hypothesis suggests that despite large and increasing pollution control, benefits of some marginal environmental improvements continue to exceed their costs for air pollution, though the situation for surface water pollution is less clear. The third and fourth hypotheses also provide a natural comparison to fundamental results in welfare economics. The First Welfare Theorem states that under certain assumptions, including the absence of externalities, a competitive equilibrium is Pareto Efficient. The Second Welfare Theorem states that any Pareto Efficient allocation can be achieved as a competitive equilibrium given certain endowments. The third hypothesis represents a natural corollary of the First Welfare Theorem—in the presence of externalities, a competitive equilibrium in the absence of policy is not optimal, but policies that internalize the externalities can increase social welfare. The fourth hypothesis relates more to the Second Welfare Theorem—changing the distribution of economic goods like the environment can produce different allocations of goods without affecting efficiency. Put another way, one can still use efficient policy tools like pollution pricing to achieve a range of distributional outcomes. One clarification of the fourth hypothesis is important. The distribution of environmental outcomes refers to the levels of pollution that different individuals experience. It provides an incomplete measure of distribution and incidence. A more complete measure would account for how different policy instruments affect the returns to capital and labor for different individuals, heterogeneous price indices for goods that different individuals consume, and potentially interactions with other taxes (Bovenberg and Goulder 1996). While the fourth hypothesis does not fully characterize social welfare, it does describe an important component of incidence that is an increasing focus of research policy. I also highlight advances in several areas that have improved the ability of research to test these hypotheses:  Administrative data on environmental goods. Administrative data are collected in order to administer a policy, but scholars are increasingly able to use these detailed data for research.  Statistical cost-benefit tests. Historically, many studies would estimate one set of elasticities and then rely heavily on external estimates from other policies, locations, or populations (sometimes called “benefits transfer”). In some more recent settings, research can compare total or marginal costs and benefits from a single setting, without relying on external estimates from other settings. Additionally, some studies estimate confidence regions for differences between benefits and costs.  Focus on important but understudied policies. Some policies have played central roles in US environmental policy over the last half century but until recently have not been a focus of research.  Richer models of pollution transport. Increasing scientific understanding of how pollution emissions in one location affect pollution concentrations in other locations and increasing use of chemical dispersion and hydrological routing models allow economic research to examine where pollution is emitted, where it affects air and water quality, and how these two relate.  Micro-macro frameworks. Some research combines detailed microdata on individual firms and households, transparent identification of key elasticities, microfounded models of firm and consumer optimization behavior, and aggregation over an entire sector or economy. These types of micro-macro frameworks can seek to examine to what extent specific individual policies account for aggregate macroeconomic changes in the environment.  Focus on the distribution of environmental outcomes. While research has long studied the distributional consequences of economic policy, a recent body of research takes as its main focus the effects of policy on the locations where pollution is emitted and affects environmental quality. This paper provides a limited review. It focuses disproportionately on research I have been involved in, focuses almost exclusively on the US, and mostly overlooks natural resources like fisheries, forests, biodiversity, groundwater, and others. I abstract from these goods since I have less direct familiarity with them, though also because many leading