21/10/20: Pollution Shifting and Heterogeneity in Local Regulatory Coverage

 

States, like California within the U.S., and some individual member states within the European Union tend to adopt own-level regulations on harmful emissions in an effort to 'pave the way' for other peer states. These regulations, of course, only apply to the economic agents 'captive' in the state. They do not apply to more mobile companies that can shift their emissions across borders to minimize the impact of more stringent regulations. Even Federal-level standards on pollution abatement are often subject to local applicability variations, resulting in pollution shifting across states' borders in line with the above.

A recent study by Feli Soliman, titled "Intrafirm Leakage" published by CESifo as a Working Paper No. 8619 (https://ssrn.com/abstract=3712780) provides some empirical evidence of exactly such pollution shifting. The study finds that "...multiplant firms partially regulated under the ozone regulations of the US Clean Air Act offset regulation-induced reductions among regulated plants with spillovers to unregulated plants and by moving plants out of regulated areas." Crucially, however, the offsetting decisions are  more than sufficient to render overall pollution output un-impacted by the more stringent local regulations:  "Taken together, these leakage effects fully offset emissions reductions at regulated plants."

Another interesting finding in the study is that thee effects of this pollution shifting "are strongest among highly productive firms and those operating in tradable industries." In other words, the companies that hold prospect for future growth (and expansion of their pollution output) and have higher likelihood of survival are the very same firms that gain from pollution arbitrage across borders.

Overall, the author concludes that "By themselves, these results imply that expanded ozone regulation under the [Clean Air Act] has not contributed to the clean-up of US manufacturing"