Environment: Costs and Benefits | Essay | Chicago Reader

News & Politics » Essay

Environment: Costs and Benefits

Does strong environmental policy cost or pay? An imaginative study yields a surprising answer.

by

Sign up for our newsletters Subscribe

comment

When the federal government proposes to set new limits on how much pollution can be discharged by whom, one response sure to appear prominently in newspaper coverage is, "We can't afford it!" Last August, for example, the Tribune warned that a new set of pollution limits proposed for the Great Lakes would cost up to $2.3 billion a year. $2.3 billion! And we can barely get our schools open!

That estimate, like almost all such estimates, was based on a "cost-benefit study," which is basically an attempt to see into the economic and environmental future. Such studies, and the publicity they receive, are largely responsible for the popular notion that cleaning up our air and water and preventing their further degradation are a drag on our economy.

Are the studies reliable? What happens when you turn the question around and look back rather than forward? Have tougher environmental laws demonstrably affected economic performance in the past? One pioneering researcher has recently concluded that they haven't: at least as far as Illinois and the other 49 states are concerned, the popular notion doesn't stand up to scrutiny.

To find out how much a new set of regulations will cost "us"--which is to say, our economy--government analysts typically ask the people who will bear the direct costs of meeting the new rules. Most often these are the people who run chemical plants, pulp and paper mills, steel mills, oil refineries, and so on. And oddly enough, they almost never say, "Oh, that won't cost too much, nothing we can't handle; don't worry about it."

The study that produced that scary Tribune story about the Great Lakes, for example, was performed by a widely respected consulting firm, DRI-McGraw Hill, for the Council of Great Lakes Governors. It estimated the cost of complying with a set of rules known as the Great Lakes Water Quality Initiative, proposed by the federal EPA, at $710 million to $2.3 billion a year. (Naturally the Tribune story made no mention of the lower figure.)

The DRI work was based in part on an earlier EPA study, which had produced much lower cost figures and had been summarily dismissed by industry officials as unrealistic. To answer industry objections the DRI study factored in information from "several studies released by industry trade associations."

Some of the differences between the EPA and industry estimates, DRI reported, were due to the industry studies assuming the worst case: that every pulp and paper mill, for example, would have to install the most expensive new cleanup technology available. Moreover, as the DRI report drily put it, some of the industry studies appeared to be "vulnerable to self-selection bias." The Chemical Manufacturers Association produced cost figures for the 95 chemical plants around the Great Lakes by extrapolating from a survey of only 8 plants. "It could be," DRI wrote, "that the [association] received responses only from plants facing high costs and that the nonrespondents anticipated minimal costs and thus did not bother to respond to the survey due to lack of interest."

Nonetheless, even as it questioned some of the industry's figures, DRI included them in its study. Moreover, like most economic-impact analyses, the DRI study assumed that however much money industry ends up spending to improve its wastewater treatment, it is money poured down an economic rathole: "The added costs . . . will adversely affect the competitiveness of Great Lakes firms. . . . Losses in production, employment, and incomes in affected industries will be transmitted throughout the economy, reducing employment in services, trade, finance, utilities, and government."

This assumes, of course, that reduction of toxic pollution has no significant overall benefit for our economy. Attempts to quantify its possible benefits, such as an "alternative" cost-benefit analysis of the Great Lakes Initiative prepared by the National Wildlife Federation, founder on the fact that such rewards cannot be isolated and measured as easily as the cost of a new sewage-treatment plant. Less polluted air and water may mean less cancer and fewer birth defects, and so reduced health-care costs for employers and government, but how do you establish that? Making Great Lakes fish safer to eat might bring more anglers to the shores to spend more money, but so many other factors affect fishermen's decisions that it's hard to isolate one variable. Southeast-side property values might rise if the steel mills didn't pump out so many noxious gases, but again, how do you isolate and measure that effect? Perhaps being forced to research and develop cleaner manufacturing processes helps industries produce better products more efficiently over the long haul, but how do you measure that in dollars and cents?

Stephen Meyer, a professor of political science at MIT, noticed a couple of years ago that the "environmental impact hypothesis--the general proposition that strong environmental policies, rigorously enforced, inhibit economic growth and development, stifle employment, and reduce competitiveness--has substantially and pervasively influenced federal policy-making," even though "there has been surprisingly little rigorous research to substantiate it."

What was needed was an objective effort to compare the theory with the real-world results: do places with tougher environmental standards seem to have weaker economies? As it happens, Meyer realized, there is a group of 50 good-sized "places" with widely varying environmental standards, operating under the same economic system, with economies varying in size but not by orders of magnitude, for which consistent economic-performance statistics over a number of years are readily available: the 50 states of the U.S.A. While they fall under the same federal environmental laws, they vary quite a bit in how they interpret and enforce those laws, particularly since many of the federal laws delegate much of the nuts-and-bolts regulation to the state governments (water-pollution discharge rules are quite different in Louisiana and Minnesota for example). So Meyer set out to do something so simple and straightforward that no regulatory agency could ever have thought of it: compare the states' environmental policies with their economic performance.

In his landmark 1992 work, Meyer first studied the period 1982-1989, in part because the Reagan "New Federalism" policies gave increasing latitude to the states in environmental rule making. To measure the states' relative environmental policies, he used a comprehensive study done in 1983 by the Conservation Foundation that ranked the states' overall environmental policy records, based on a list of 23 indicators. To measure economic performance, he used five widely accepted statistics that are generally cited as being most sensitive to the costs of environmental policies: overall labor productivity, manufacturing labor productivity, nonfarm employment growth, construction employment growth, and the standard overall economic-performance measurement, gross state product growth.

Negative correlations between environmental toughness and economic performance would support the conventional environmental impact hypothesis. Lack of meaningful correlations would indicate that environmental policies had no noticeable impact on economic results. And positive correlations would suggest that states with stronger environmental policies were also those with the strongest economies.

To his professed astonishment, Meyer found the latter: "The data failed by a wide margin to support the environmental impact hypothesis across all five [economic] indicators. In fact environmentalism was found to be positively associated with four of the five economic growth variables [manufacturing labor productivity being the exception]. The environmentally strong states outperformed the environmentally weak states by substantial amounts."

Looking for holes in that conclusion--anticipating, no doubt, criticism from economic "realists"--Meyer tested it further. Assuming that environmental regulation does inhibit economic growth, he hypothesized that states that had been able to "throw off the yoke of environmentalism" would show sharply improved economic performance afterward. To test that idea, Meyer analyzed the differences in economic growth for the states between the 1982-'89 period, when federally mandated environmental policies were weakened, and 1973-'80, when federal mandates went through a period of explosive growth. In theory, the states that kept tough environmental policies despite the federal changes should have done worse economically than those that allowed their environmental regulations to relax.

So much for that theory: according to four of the five economic indicators, "the states with higher environmental ranks systematically outperformed those with lower environmental ranks."

Well how about a "cart-before-the-horse" fallacy: The large industrial states with the most robust economies also tend to have the biggest environmental problems. These states would be putting in place more proactive environmental laws and regulations and so would earn high ranks for their environmental policy. Smaller-economy states would tend to have fewer historic environmental problems, so they would rank lower.

To test for this possibility Meyer excluded the 25 largest state economies, as measured by gross state product. He found that "environmentalism is still positively associated in a statistically significant way" with growth in two of his five economic indicators (with the other three showing no meaningful correlations either way). When he tried it with a larger group, excluding only the nine largest state economies, strong environmental policies correlated with strong growth in every economic measurement.

In early 1993 Meyer released an update to answer the objection that while tough environmental laws may not damage our economy in times of plenty, we "just can't afford them" during a recession. He examined that possibility, using the rate of business failures by state for 1990-'91. He found no meaningful correlation: "Environmentally stronger states are not more vulnerable to economic decline during recessions."

Meyer had set out to learn what happened, not analyze why. He did note that "there are some plausible arguments" in favor of the idea that stronger environmental laws, over the long term, help improve an economy. Highly skilled and well-educated workers may be attracted to areas with a higher quality of life; or perhaps strict environmental controls may have a "Darwinian" effect on industry, forcing firms to be more innovative and efficient to reduce waste and so indirectly boosting productivity and competitiveness.

Meyer also wondered whether environmental regulations might simply be insignificant to the success or failure of a modern free-market economy, being "lost in the noise" of more important factors like taxes, availability of skilled labor, inflation, and so forth. Oddly enough, buried deep inside the DRI Great Lakes study, far from the press release that likely formed the basis of the Tribune's coverage, was validation for that idea: the "costs" of the Great Lakes Initiative, DRI wrote, "represent a tiny fraction of the Great Lakes economy, and would be imperceptible in the aggregate."

Bill Clinton and especially Al Gore, during the 1992 presidential campaign, gave some indication that they are aware of these possibilities. The notion that environmental laws may not be economic poison appears to have caught the eye even of Business Week, which ran a headline last winter reading, "Tree-huggers vs. jobs: It's not that simple."

Actually it may be very simple: simply wrong.

Art accompanying story in printed newspaper (not available in this archive): illustration/Jeff Heller.

Add a comment