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Do Environmental Regulations Disproportionately Affect Small Business? Evidence from the
Pollution Abatement Costs and Expenditures Survey
Randy A. Becker, U.S. Census Bureau, CES
Cynthia Morgan, U.S. EPA, NCEE
Carl Pasurka Jr., U.S. EPA, NCEE
Ronald J. Shadbegian, U.S. EPA, NCEE
After the passage of the 1970 Clean Air Act Amendments and 1972 Clean Water Act
Amendments, the United States realized significant improvements in both air and water quality.
These improvements were due in large part to increasing stringency of environmental regulations
that led to steady declines in emissions from industrial sources. According to the Pollution
Abatement Costs and Expenditures (PACE) survey, the U.S. manufacturing sector spent nearly
$21 billion dollars on pollution abatement operating costs (PAOC) to comply with environmental
regulations in 2005. Policymakers have an ongoing interest in how these regulations affect the
economy. There is a sizable literature on the effects of environmental regulations on plant-level
productivity [Färe, Grosskopf and Pasurka Jr. (1986), Boyd and McClelland (1999), Berman and
Bui (2001a), and Gray and Shadbegian (2002, 2003, 2006), Shadbegian and Gray (2005),
investment [Gray and Shadbegian (1998)], and employment [Berman and Bui (2001b),
Morgenstern, Pizer and Shih (2002), Greenstone (2002), and Cole and Elliott (2007)]. On
whether the impact of environmental regulations differs by establishment size, Dean et al. (2000)
find that industries with high pollution abatement costs had fewer small business formations.
Meanwhile, Becker (2005) finds that air pollution abatement expenditures under the Clean Air
Act were disproportionately higher for larger establishments sometimes, and sometimes the
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reverse, depending on the air pollutant.1 In this paper, we consider all pollution abatement
expenditures and the impact of all environmental regulations, and whether they differ by
establishment size.
We might expect differences in pollution abatement spending by establishment size because of
statutory, enforcement, and/or compliance asymmetries (Dean et al. 2000; Becker 2005).
Statutory asymmetries exist when regulations explicitly impose less stringent requirements on
certain types of businesses. The Regulatory Flexibility Act (RFA) of 1980 imposes requirements
on EPA (and other federal agencies) to thoroughly consider the economic impacts rules and
regulations will have on small businesses. The objective is to ensure that small businesses have
a voice in the process when EPA is making policy determinations in developing its rules and
regulations. Furthermore, the Small Business Regulatory Enforcement Fairness Act (SBREFA)
of 1996 enacted a range of provisions, including several amendments to the RFA. In brief,
SBREFA requires EPA to solicit and consider flexible regulatory options that minimize adverse
economic impacts on small entities. It also added a provision that allows small entities adversely
affected by a final rule to challenge the agency's compliance with the RFA's requirements in
court. Thus, we would expect to find that small businesses are not disproportionately affected by
environmental regulations. Enforcement asymmetries result when regulators choose to target
certain establishments over others, and this decision may hinge on establishment or firm size.
Finally, compliance asymmetries arise when regulatory compliance involves significant fixed
costs. For example, some pollution abatement is quite capital intensive, which would result in
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Beyond these two publications, there is a series of non peer-reviewed studies, funded by the
Small Business Administration (SBA), begun by Professors Thomas Hopkins and Mark Crain
(with several co-authors) in the mid-1990s.
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higher costs per unit of output for smaller establishments. Here, we consider the net effect of
these three asymmetries.
The latest report by Crain and Crain was released by the SBA in October 2010 (without the
benefit of peer review). In this report, the authors use state by two-digit SIC industry level data
from the 1992 Census of Manufacturers and the 1994 PACE Survey to examine whether or not
small businesses had disproportionately higher pollution abatement costs, measured as total
pollution abatement costs (PAOC plus pollution abatement capital expenditures). They find that
pollution abatement costs are disproportionately higher for small businesses. However, these
data are not appropriate to analyze this question for a number of reasons. The main reason is that
the data do not contain any information on establishment size (obviously, a very important
variable in an analysis of this type) since all the data is at the industry level. Nevertheless, in
order to get a better understanding of their methodology, we (attempt to) replicate the report’s
results using the industry data. While we can qualitatively replicate their results, we cannot
obtain their exact estimates.2 We find that their key result - small businesses are
disproportionately impacted by environmental regulations - is quite sensitive to their choice of
specification.
We further explore the issue of environmental regulations and establishment size using more
2
We contacted Professor Mark Crain and the SBA to ask them for the underlying data for this
study. Because they were unwilling to share their data with us, we reconstructed their data set on
our own. One reason why we could not exactly replicate their results is that in 1992 CM and
1994 PACE survey there were 309 state by two digit SIC industries for which all required data
was necessary, but Crain and Crain only used 208 state by two digit SIC industries in their
analysis. We do not know why they only used 208, but we do not believe this affects their
results.
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appropriate data. In particular, we employ the U.S. Census Bureau’s establishment-level data
from the PACE surveys of 1979-1982, 1984-1986, and 1988-1994. To this, we merge data on
these establishments from the Annual Survey of Manufactures (ASM) and CM, including
employment, value of shipments, four-digit SIC industry, geography, and plant vintage (as
measured by an establishment’s first appearance in the CM). We have over 200,000
establishment-years of observations for estimating the relation between establishment size and
environmental expenditures.
Here we focus on establishments’ PAOC intensity – that is, their pollution abatement operating
costs per unit of economic activity. For the denominator we employ establishment employment
or total value of shipments; we find that this choice makes little difference in our qualitative
results. We model PAOC intensity as a function of 6 establishment size categories: 1-49, 50-99,
100-249, 250-499, 500-999, and 1000 or more employees. Additional controls include dummy
variables for 4-digit SIC industry and year. Since the value of dependent variable is bounded
from below for a significant number of observations, the model is estimated via a Tobit
specification. Our preliminary results show that PAOC intensity increases monotonically with
establishment size – a result that is robust to various changes in specification (e.g., the inclusion
of controls for state and/or plant age). We also find that a simple regression of PAOC intensity
(PAOC per employee) on establishment employment, controlling for 4-digit SIC industry, results
in a significant positive coefficient on establishment size – again suggesting that larger
establishments have higher environmental expenditures per unit of activity.
References
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U.S. Environmental Protection Agency (U.S. EPA). 2006c. Revised Final Guidance for EPA
Rulewriters: Regulatory Flexibility Act as amended by the Small Business Regulatory
Enforcement Fairness Act. Available at: www.epa.gov/sbrefa/documents/rfafinalguidance06.pdf
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