Environmental Regulations and Technological Change: Pulp and Paper Mills and EPA’s Cluster Rule

In this paper we propose a new model to calculate changes in pollution abatement costs (PAC) when data on bad outputs and information on the cost of inputs assigned to pollution abatement activities are not available. To calculate the PAC of reducing bad output, we introduce a measure of abatement intensity that captures variation in the technologies used to reduce water discharges. We then decompose the change in PAC into three components to identify their relative contribution to changes in PAC: (1) changes in the level of inputs, (2) technological change, and (3) changes in pollution abatement intensity. These three components are estimated using data from 1997 to 2007 on a sample of pulp mills required to comply with effluent limits of the U.S. EPA’s Cluster Rule. We find technological change is consistently associated with declining PAC, while both changes in inputs and abatement intensity are associated with increasing PAC.