Plant Location and Environmental Regulation

Economic developers and environmentalists today work together more closely than they did a decade ago, yet at times professionals in the two fields lock horns over how economic development impacts the natural environment and how environmental regulation impacts economic growth. These are no small issues, as the seasoned professional knows. Yet, what do we really know about how industrial facility location is impacted by federal and state environmental regulation, especially state regulations, which vary considerably across states?

A study conducted by the National Center for Environmental Economics looks at these issues in the context of the paper and oil industries, which are highly natural resource-dependent industries and both are assumed to be impacted in a significant way by environmental regulations.

Here is short summary of what the researchers (Wayne Gray and Ronald Shadbegian) learned.

The study examined whether a firm's allocation of production across its plants responds to the environmental regulation faced by those plants, as measured by differences in stringency across states. The researchers also tested whether sensitivity to regulation differs based on differences across firms in compliance behavior and/or differences across states in industry importance and concentration.

US Economic Census data for the paper and oil industries to measure the share of each state in each firm's production during the 1967-1992 period. Several measures of state environmental stringency were used and tested for interactions between regulatory stringency and three factors: the firm's overall compliance rate, the index of industry concentration in the state, and the industry’s share in the state economy.

The researchers found significant results for the paper industry: firms allocate smaller production shares to states with stricter regulations. This impact is concentrated among firms with low compliance rates, suggesting that low compliance rates are due to high compliance costs, not low compliance benefits. The interactions between stringency and industry characteristics are less often significant, but suggest that the paper industry is more affected by regulation where it is larger or more concentrated. The results are weaker for the oil industry, reflecting either less opportunity to shift production across states or a greater impact of environmental regulation on paper mills.

Obviously, this study is of greatest relevance to economic developers in states where the paper and oil industries are significant economic sources, but it is relevant to all states in understanding: 1) the difficulty in conducting empirical research on the growth/regulatory impact issue; and 2) the extent to which the stringency of environmental regulations influence plant location decisions in natural resource-dependent industries.

These are issues requiring more systematic research in the future. The facts can help inform both economic developers and environmentalists on how to better coordinate their respective efforts. Moreover, better research could help dispell some of the unfounded assumptions circulating about environmental protection and economic development.

Download the full report here.