The effects of environmental regulation on plant productivity: A temporal investigation of phase one of the Federal 1990 Clean Air Act amendments

Scope and method of study. The purpose of this study was to determine whether environmental cost management can be used to simultaneously reduce costs and environmental degradation, an outcome referred to eco-efficiency. This question was explored by evaluating the Porter Hypothesis which assumes that pollution is a form of economic inefficiency and that properly designed regulations can actually induce eco-efficient behavior. The Porter Hypothesis and eco-efficiency were evaluated by investigating how endogenous changes made by utilities in response to the Federal 1990 Clean Air Act Amendments (1990 CAAA) affect productive efficiency. Productive efficiency was measured using Data Envelopment Analysis, which is a methodology that provides a relative index of how well a decision making unit uses inputs to create outputs.; In order to determine the validity of the Porter Hypothesis and its influence on the promotion of eco-efficient behavior, a two-stage approach was adopted. First, DEA measures were used in both cross-sectional and longitudinal analyses to determine if productive efficiency was affected by the 1990 CAAA. In the second stage, regression models were used to empirically determine if the variation in the calculated efficiencies over time significantly related to the intervention of the 1990 CAAA.; Findings and conclusions. The combined results indicated that a properly designed regulation can induce eco-efficient behavior. Specifically, the evidence of this study showed that on a cross-sectional basis, plants affected by the 1990 CAAA were able to reduce pollution and production costs while at least maintaining good output (kilowatt hours of electricity) relative to those not affected by the Act. Further, longitudinal tests suggest these improvements were accomplished in spite of the fact that pollution reductions were made. Finally, regression results indicated that the intervention of the Act does explain variations in efficiency over time. Thus, when evaluated on an overall basis all results suggest that firms can reduce costs while simultaneously reducing pollution and thereby can improve efficiency.