Production Decision Making in the Face of Uncertainty About Air Toxics Regulation and Global Climate Change Policy
Authors: Gershenson J. K. , Solomon B. D. , Shonnard D. R. , Watkins D. W. , Sutherland J. W. 
Published: November 2021

There is an urgent need to better understand and quantify firm-level decisions made in response to environmental policy. It is to be expected that in the face of new/stricter regulations (e.g., tightened regulations relating to airborne particulate emissions) that the desired intent of the regulation will be achieved (e.g., reduced large-plant emissions in the U.S.). However, the secondary environmental and economic impacts of these policies/regulations are poorly understood. These secondary effects, those beyond the primary environmental effects intended by the policy and what is normally addressed in regulatory impact analyses, are caused by companies’ decisions to pass problems down their supply chain or overseas. As problems are passed down the supply chain, the resources available to address them diminish and the more unrestrained the regulatory restrictions become. A governmental policy decision therefore has a range of potential industrial responses. Each of these responses in turn has their own environmental and economic consequences. Consequently, the ultimate effect of a regulatory policy may be very different from the original intent of the policy. The EPA would certainly not want to establish a new regulation that actually worsens the global environment. A prominent example of a secondary environmental effect caused by a firm-level reaction to environmental regulation is methyl tert-butyl ether (MTBE). MTBE was introduced as an automobile fuel additive to help solve urban air quality problems (CO and O3) only to discover that it adversely affects groundwater quality due to its mobility, odor, and persistence. Although this outcome was caused not only by the firm-level decision, it stands out as an example of why a better understanding of the secondary effects of environmental regulations is critically needed in order to protect the environment and to eliminate costly remediation measures.

This paper is intended as a framework for future research that combines the elements of supply chain decision making, industrial ecology, and environmental policymaking to shed light on the effect of supply chain decisions on the impact of environmental regulation. The overall goal of our research is to develop a comprehensive framework to account for the interrelationships between competing policy pressures and to apply it to an important industrial sector, chemical manufacturing. This effort seeks to establish a procedure for characterizing the linkage between environmental regulations and their ultimate environmental and economic impacts. The effort will consider the probabilistic nature of industry decisions as well as a wide range of industry responses. With a linkage established that maps regulatory changes to their primary and secondary environmental effects, policy decisions may be made that achieve true environmental improvement.

This paper is intended to be a starting point for conversations on how to proceed with this framework. We suggest and describe two major steps with two concomitant objectives.

1) Develop a complete framework for major decisions that industrial facilities can make in response to global climate change policies. The framework will take the form of a set of taxonomies. There will be one taxonomy for each link in the chain between the various policy options and the multitude of potential secondary impacts. This regulation-reaction-impact chain may include intermediate links such as firm size/type and incentives and disincentives. While this typology of responses may appear to be elementary, it can be much more complex given the often competing considerations of cost, profits, and regulatory compliance facing U.S. industry.

2) Identify the relationships among the before-mentioned taxonomies. These relationships will form the web that describes the regulation-reaction-impact process. We recognize that this web of taxonomies may well depend upon the specific industrial sector being considered.