Does Environmental Protection Decrease U.S. Economic Growth?

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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 a "computable general equilibrium model", which can be thought of as a multi-sector, economy-wide approach to estimating the impacts of public policies. 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.

For answers to the other questions:
1. What Do We Spend on Environmental Protection?
2. Regardless of the Cost of Environmental Protection, Is It Still Money Well Spent?
3. Does Environmental Protection Cause Unemployment, Plant Closures, and Reduce International Competitiveness?
5. Multi-Sector Economic Modeling Results Must Be Interpreted With Caution
6. What Conclusions Can We Draw?

Does Environmental Protection Decrease U.S. Economic Growth?

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