/Council on Environmental Quality. Council on Environmental Quality (U.S.) Washington, D.C.:The Council;Springfield, VA:Distributed by National Technical Information Service,[1974]. Environmental management Economic aspects United States. Environmental impact statements United States. Economic development. 09340 Coastal Zone Information Center JAN 25 1977 PB-239 773 THE ECONOMIC IMPACT OF ENVIRONMENTAL PROGRAMS Council on Environmental Quality Washington, D. C. December 1974 DISTRIBUTED BY: National Technical Information Service HC U. S. DEPARTMENT OF COMMERCE 79 E5 E36 11-IFEEP UP TO DATE rk A Between the time you ordered. this report- search activities. 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Recipient's Ac cession No. SHEET 239 773 111274 4. Title and Subtitle 5. Report Date The Economic Impact of Environmental Programs Nov/Dec 1974 6. 7. Author(s) 8. Performing Organization Rept. No. 9. Performing Organization Name and Address 10. Project /Task/Work Unit No. Council on Environmental Quality 722 Jackson Pl. N.W. 11. Contract/Grant No. Washington, D.C. 20006 12. Sponsoring Organizat Name and Address 13. Type of Report & Period Property of CSC Library Covered 1974 summary 14. 15. Supplementary Notes 16. Abstracts This memorandum summarizes CEQ's 1974 estimates and analyses. it includes (1) abatement costs for 1973-1982; (2) macroeconomic impacts of environmental expentitures on: inflation; investment, productivity, and economic growth; employment; government finances; foreign trade; an distribution of income; and (3) impacts on specific industries. Reproduced by NATIONAL TECHNICAL INFORMATION SERVICE US Departmen of Commerce Springfield, VA. 22151 17. Key Words and Document Analysis. 17a. Descriptors economics. environmental programs. distribution of costs. inflation. investment. productivity. growth. employment. government. trade. distribution of income. industry. U.S DEPARTMENT OF COMMERCE NOAA COASTAL SERVICES CENTER 2234 HOBSON SOUTH AVENUE 17b, Identifiers/Open- Terms CHARLESTON, SC 29405-2413 17c. COSATI Field/Group PRICES SUBJECT TO CHANGE 18. Availability Statement 19. Security Class (This 21. No of Pages Report) CLASSIFIED 20. Security Class (This Page FORM NTIS-35 (REV. 10-73) UNCLASSIFIED ENDORSED BY ANSI AND UNESCO. THIS FORM MAY BE REPRODUCED USCOMM-DC 8265-P74 N 0 T I CE THIS DOCUMENT HAS BEEN REPRODUCED FROM THE BEST COPY FURNISHED US BY THE SPONSORING AGENCY. ALTHOUGH IT IS RECOGNIZED THAT CER- TAIN PORTIONS ARE ILLEGIBLE, IT IS BEING RE- LEASED IN THE INTEREST OF MAKING AVAILABLE AS MUCH INFORMATION AS POSSIBLE. CONTENTS Page NO. 1974 Abatement cost Estimates Distribution of Costs by Sector 3 Distribuion over Time 5 Distribution between Investment and'O&M Costs 5 Macroeconomic Impacts 5 Impact on Inflation 7 Impact on Investment, Productivity, and Economic,Growth 7 Impact on Employment Impact on Government Finances 13 Impact on Foreign Trade 15 Impact on the Distribution of Income 15 Impac t on Specific Industries 15 References 22 Notes on Methodology 23 Other Analyses on Economic Impacts Released by,CEQ 24 Tables I. Estimated Incremental Pollution Control Expenditures 2 ii. investment for Air and Water Pollution Abatement by industries,.1973 III. Investment for Air and Water Pollution Abatement 6 by industries, 1974 IV. Percentage Contribution to Price indices with Pollution Control Expenditures V. Plant Closings Where Pollution Control Costs Were 13 Alleged to be Factor, January 1971-June 1974 VI. U.S. Budget outlays by Function, i973 Actual and 14 1974-76 Estimated VII. Manufacturing Energy Cbnsumption, Selected 20 industries, 1967 VIII. Pollution Control Expenditures as a Percentage of 21 value of Shipments, Selected industriesi 1973 and 1980 Figures I. Percent contribution to Change in Wholesale Price 8 index, April 1973-April 1974 (by Major Commodity Groupings) Projected Economic Growth, 1974-1982 10 III. Projected Unemployment Rates, 1974-1982 10 IV. Pollution Abatement Expenditures for New Plant 16 and Equipment by Selected industries, 1973 Pollution Abatement Expenditures for New Plant 15? and Equipment by Selected Industries, 1974 THE ECONOMIC IMPACT OF ENVIRONMENTAL PROGRAMS The Council on Environmental Quality (CEQ) has, since its inception, taken a major responsibility for assessing the economic abatement costs the Nation can expect to face as a result of current Federal environmental legislation@ The council carries out other in-house analyses or contracts for studies concerning the economic impact of.these programs. This memorandum summarizes CEQ's 1974 estimates and analyses. Additional supporting papers are available upon request. (See page 24.) 1974 Abatement Cost Estimates The CEQ's estimate of abatement costs for the ten-year period 1973 through 1982 are given in Table I. These "incremental" abatement costs are those abatement costs projected to meet the requirements of Federal environmental legislation enacted since the mid-sixties, beyond what the Nation would have spent for the same purposes in the absence of this legislation. Four types of costs are shown: - "Investment costs" (for the period 1973-1982) which are the estimated expenditures which will be made on capital equipment for pollution abatement by both public and private sectors. - "Capital costs," which include interest charges on pollution control investments and the depreciation of the capital equipment. - "O&M costs" which are the costs of operating and maintaining the pollution abatement processes. - "Annual costs" which are the sum of the capital costs and the O&M costs. The last column in Table I shows the sum of annual costs projected for each of the ten years 1973, 1974.... 1,982. These abatement costs are estimated primarily from data provide6 by the Environmental Protection Agency (EPA,) and other Federal agencies. The air pollution abatement costs are based primaril r? 'a V m 0) 0m :j F1 5- " rr rr m 0 0a r) H. tr r) r?, P- v m tl P. i- (D" it m q 4 f-, H7 (-- H .4 (n 1-1 t., to kv 0 a, ID rr w () W H- ID 0 w rr m P, 0 0 a 0 I It 0 H. @l it P, it 00w W. C: rr 0 1-- rr (Z 0 1- 0, tr it0 U) H 0 et :J' fD rt 1- ED M ti itH r, I- (D m (D -rr 1. Inp it rt it H. CD f- 0 (Dz P) H, ril rt lb 0 ID -1 0 W. " .3 0) <. (T M W- :1 vH 0 rA 0) OA (D" 0 - (D00 Ln H 0 cr ly 0 @A (D to :3 1 P) Z' , 1:3 rt, & 1:4 erw IM I'D P)M r" JW 0 0 ID it ;:r H.M F, in. H in IVWW. it vrt rp m0 -tQ, %) 0 0 1., 0w 0(Dw 010 i< kil w w -4 N) in P. o (+ ri, rT :3 03w ::r H EA rt tl -V 03 P-0C: (Dm F-q 0 H @Qm:s H. CT 050 zit @3 to rr w W Fl N) ON 00 4 111 tr I:r it rr 1-3 P) 0 L'i W -CD @n Li 4@' Ln F, IV I-H H F@ z ol . !- r . o10. 0 It. IQ i- ko U3 P U, Ul rr rr H r- W. A' rt :c Z z 0. -j tr I" IV n 0 0 Di M (7110 r1l 0 I-- rt U) M a i-I N@ W Iz W. Z :30 0 (D '0 (D D, ID CJ 'j 0 0 rr IT (b 1E CD x tv 1z' on 0) ol 0 a 0 W- it co P- :3 H- rp W m m rr rr 00 40 CQ :3 & :D o 0 0) I'l H. n 1 .1 013 OD-0 -0, 00 co co 4w -41 - w :j 0 1 :3 (D V- '3- ia rA cr CO it rr itP cr (D m V) it 0) rt 0 0 0 w U) (D of OD 0 o' w t@j 0 W W W OD iD0 0w OD w fl) n Al :3 OD it 0 fb it 0:30 H bj -j w:j rt, Ln w Ln w W 1) ko 4 91 Ul '0 -3- on the 1974 edition of The Cost of Clean Air,2 and the private water pollution abatement costs are based primarily upon the 1973 edition of The Economics of Clean Water. 3 The cost esti- mates predominantly assume the installation of "end-of-the- pipe" treatment for air and water pollution abatement, and thus understate potential for less costly production process modifi- cations which Also satisfy.legislated abatement requirements. For this reason, and because CEQ's unit cost assumptions are generally high, the cost estimates are considered to define, on the basis of current knowledge, the maximum likely costs the Nation will experience. However, not all of the costs associated with meeting the 1983 goals of "best available tech- nology" are included because of uncertainty about the degree of abatement that will be required for many industries.4 Cumulative abatement costs (in constant 1973 dollars) over the 1973-82 period are estimated to be $194.8 billion. This estimate is approximately $42.1 billion (28 percent) higher than last year's estimate. However, only $10.1 billion of this increase represents a net increase in real cost estimates (primarily stationary air pollution control). The remainder of the increase resulted from: - Changing the estimating period from 1972- $20.5 billion 81 to 1973-82 (in essence*, dropping 1972, a relatively low cost yeara, and adding 1983, a higher cost year). - Inflation (changing from 1972 dollars to $11.5 billion 1973 dollars). Distribution of Costs by Sector: Approximately $77 billion of the cumulative costs (mobile sources and solid waste collec- tion costs) is paid for directly by the consumer. Another $32 billion is initially paid by government and passed through to taxpayers. Of the remainder, $32 billion will be paid by electrical utilities and the rest by other industries. These costs will be predominantly passed on to the consumer in the form of higher electricity and product'prices. TABLE II INVESTMENT FOR AIR AND WATER POLLUTION ABATEMENT BY INDUS-RIES, 1973, (in millions of dollars) Pollution abatement.investment End-of-the-pipe Process change Tota :I plant & .& or cess.cha qe 0-11 .y expenditures Total Air ]water Total lAi-- @-.Wate, All industries ------------------------- 100,076 4,938 3,176 1,762 1,169 724 4441 Manufacturing -------------------------------- 2,050 1,103 712 446 2661 38,003 3,153 Durable goods -------- ;-------------------- 19,389 1,579 1,207 372 321' 220 101. Primary metals 3,481 814 712 101 112. 82 Blast furnace, steel works ------------- 1,407 230 .163 67 75 56 19. Nonferrous ---------------------------- 1,679 523 492 31. 29 19 9, Electrical machinery ------------ -------- 2,895 129 44 85- 3.5 14 21 -machinery, except.electrical ----------- 3,4.78 aO @52- 2.8 36' 24 12 Transportation equipment ----------------- 3,063 96 74 37 2G 17 Motor vehicles ------------------------ 2-@44 143. .61 62 is 19 16 Aircraft ------------------------------ 531 20 11 10 0 0 0 Stone, clay, 6@ glas -s--------------------- 1,503 144 123 22 50, '42 8 other durables ------------------------ 4@969 j43 180 63 52 3@ 151, Nondurable goods ---- I --- 7 ----------------- 18,614 1,574 643 731 3@1 22.6 .165 1 3,048 152 25 Food including beverage ------------ 68, 84 49 24, Textile ------------ --7 --------------- 787 29 9 2Q 11: 3 8 Paper ---------------- ------ ------- ----- 1,893 355 174 181 14 7@ 7' Chemical --- - --------------- ----------- 4,324 416 203 2,13 149 88 61. PLetrol.eum---7.------ ------------- 5A09 555- 35.2 .2.03- .151 .94 -57. ------ ---------- 1,567 48 26 6- Rubber- 23 12 other nondurables ------- -------------- 1,586 19 12 7 5 4 .1 Nonmanufacturlng@ ---------- -@-62jQ73*@- 1, 7-8.5, -1,126 @559 ..278. -179.--' r Mining@ ----- ------------------- - ------ -- 759- 91.- 41 5.01 15 5 -Railroad-- ------------------- 1,939 :16. 51 .11 5 3 .2.; Air transportation ---------------------- 21413 .15. 12 4 2 .2- 0 Other transportation - - ----------------- -- 1,605 11 6 -.5 :-4- -3- 1 451 8 - -- - -- - - ------------ -3 -6 Public utilitie- " 9@1 s3o.. 22-6- 7. 19,087 ------ @.S03 -14§ :.- :' @: Electric ------------ .1-6'250@'.. 11409 Gas & ot@er ---------- ------------- --- 2,837 42 15 14' -3' 11 -Communication, commercial, & other ----- -- 34,270 201 142 so 10 source: U.S. Department of Commerce, Bi1reau_of Economic Analysis,-Survey of Current Business,_ Vol. 54, July 1974. ...... .- NOT REPRODUCIBLE -5- Distribution over Time: In terms of the timing of expenditures, investments are expected to increase steadily up to a peak in 1976 in order to meet the 1971 goals of the Clean Air Act and the Federal Water Pollution Control Act. Annual costs are expected to increase at a rapid rate through 1977 after which they will level off. Distribution between Investment and O&M Costs: In tenns of real resource costs, CEQ estimates that there will be $81.4 billion invested in capital equipment and $121.8 billion pent on operation and maintenance costs over the 10-year period. As noted earlier, this estimate of investment costs is thought s to be too high because of the emphasis.placed on "end-of-the- pipe" capital investments as opposed to less investment-intensive process charges. The Bureau of Economic Analysis (Department of Commerce) in a recent'survey of pollution abatement invest- ments (see Tables II and III) found them to be somewhat lower than the CEQ estimates.5 As Tables II and III indicate, the BEA survey provides the first information about the relative importance of process change as opposed to "end-of-the-pipe" treatment for pollution abatement. In 1973 and 1974, 23 percent of the total investment for pollution abatement was expected-to be allocated for process changes. Macroeconomic Impacts The macroeconomic impacts of environmental expenditures were analysed by CEQ, with the help of the Chase Econometrics, Inc., macroeconomic rnodel.6 In 1974, the estimated incremental real resource (investment plus O&M) abatement costs amounted to approximately 1.0 percent of the U.S. Gross National Product. This proportion is expected to increase to approximately 1.7 percent in 1976, and then decrease thereafter as investment costs decrease and GNP continues to grow. TABLE III INVESTMENT, FOR'AIR AND,WATER POLLUTION ABATEMENT;BY INDUSTRIES,,@ 1974 (in mi-llions,of dollars) Pollution abatement investment Endn-of@the-pipe Process change Total &;process change only plant.,and expenditures Total.. Air Water Total Air Water All industries ------------------------- 112,114 6,543 4,346 2,196 1,465 1,003 462 Manufacturing -------------------------------- 44,404 41,446 2,929 1,517 1,042@ 721 321 Durable goods ------------------------------- 22,611 2,063 1,523. 540 499. 102 Primary metals ----------------------------- 4,337. 1,00 841; 163- 250 239 11 Blast furnance,steel works ---------------- 1,712 381 304 78 114 109 4 Nonferrous -------------------------------- 2,156 553 469 83 118; ill 6 Electrical machinery ------------------------ 3,179 175 53 122 46 16 30 Machinery, except electrical ---------------- 3,975', 74 44. 42. 27 15, Transportation equipment -------------------- 3,570 195 112 83 29 17 12 Motor vehicles ---------------------------- 2,682 178 103 75 28 117 12 Aircraft ------------------------------------ 580 13 7 6 0 0 0 Stone, clay, & glass ------------- --- I------- 1,683 282 244 39 58 48 10 other durables ------------------------------ 5,867 290 200 90 73 50 23 Nondurable goods ----------------------------- 21,793 2,383 1,406 977 543 324 220, Food including beverage --------------------- 3,276 230 1112 118 67 35 32. Textile ------------------------------------- 773' 43 17' 26 7 3 4 Paper --------------------------------------- 2,484 .500, 326 174 31 16 15 Chemical ------------------------------------ 5,249 608 293 316 i88 109 79 Petroleum ------------------------------------ 6,888 926, 610 316 239 153 86 Rubber ------------------------ ------------- 1,580 51 33 18 8 6 2 other nondurables ----------------- 7 --------- 1,543 24 16, 9 5 2 2 Nonmanufacturing ---7 ------------------------- 67,-710, 2,097 1,418 679 423 283 140 Mining -------------------------------------- 3,143 100 53 47 .218 22 6 Railroad ------------------------------------ 2,272 19 3 16 3 2, 2 Air transportation ------------ -------------- 2,160 9 4 5 1 0 0 other transportation ----------------------- - 1,617 17 10 7 5 3 2 Public utilities ----------------------------- 22,163- 1,696 1,179 .518 307 200. 107 Electric ---------------------------------- 18"808 1,651 1,160 491 295 %8 Gas & other ------------- 3,355 46 19 27 11 2 9 Communication, commercial, & other --------- 36,355 256 170 87 80 57 23, Source: U.S. Department of Conunerce, Bureau of Economic Analysis,,@ Survey of Current Business,- Vol. 54, July 1974. -7- Estimated private pollution control investments (excluding mobile,sources) amount to approximately 3 percent of gross private domestic investment and 6 percent of business invest- ment in plant and equipment in 1974. These ratios are expected to remain approximately constant through 1976 after.which they will fall. Impact on Inflation: The impact of these expenditures on the rate of inflation has been estimated in two ways. One estimate compares the price increases expected in different economic sectors as a result of pollution control expenditures with the contribution of these expenditures to the rate of inflation. As Figure I indicates, much of the increase in the wholesale price index (WPI) over the past year has occurred because of increased energy (predominantly oil) and food prices. The cost of producing crude oil and unprocessed food is virtually unaf- fected by pollution control expenditures. Calculating the impact of the remaining sectors involved weighting the contribution of each to the increase in the WPI by the price increase expected in each sector as a result of direct and indirect pollution control costs. These calculations indicate that pollution control expenditures were responsible for approximately 0.5 percent (one- fortieth of the total increase of 17 percent) in the WPI from 1973 to 1974. This result was confirmed by three separate analyses using sophisticated macroeconomic computer models. The first was the 1973 Chase Econometrics macroeconomic analysis which predicted an increase in the WPI of 0.5 percent durin Ig 1974 as a result of pollution control expenditures.7 Two other similar analyses have been run by the Brookings Institution and by Data Resources, Inc.8 Both show inflation rates of 0.3 percent to 0.5 percent per year resulting from pollution control expenditures. The Chase projections of price increases resulting from pollution control expenditures are given in Table IV. Impact on Investment, Productivity, and Economic Growth: One of the concerns currently being'expressed about environmental programs is that the substantial investments they require will displace investments that firms would otherwise be.making to expand or modernize their production capacity. Such a substi- tution,, if it were to occur widely, could have an adverse impact on the rate of increase in labor, productivity because firms FIGUREI .Percent Contribution to Change in Wholesale Price Indexlr April 1973-April 1974 (by Major Commodity Groupings) Pulp, paper & allied products 5.5% Lumber& wood 1.8% Percent change in WPI during This period 17.0% Machinery & equipment 5.7% Contribution of major groups Food total 28.8% Fuels & related products 22.3% Textile products & apparel 5.3% Other 48.9% 100% Chemicals & allied products 7.3% Fuels & related products 22.3% Other &M Metal & metal Farm products, process products 15.2% foods & feeds 28.8%, Source: Cost of Living Council, 1974, based on Bureau of Labor Statistics data. -9- TABLE IV PERCENTAGE CONTRIBUTION OF POLLUTION ABATEMENT EXPENDITURES TO PROJECTED CHANGES IN PRICE INDICES GNP CPI WPI deflator Increase 1975/76 0.5% 2.0% 0.9% Cumulative increase to 1976 0.8%0 2.6% 1.2% Average increase 1973/76 0.3% 0.90% 0. 4% Increase 1981-82 -0.2% -0.1% 0.00% Cumulative increase to 1982 0.3% 2.4% 0.90% Average increase 1973/82 .03% 0.2% 0.1% CPI = Consumer price index WPI = Wholesale price index Source: Based on Chase Econometrics, Inc., (1974) estimates. would be operating with older, less productive equipment. And this reduced productivity growth would result in a lower rate of economic growth for the Nation. The available data indicate that such effects are likelv to be minimal. The maximum projected investment for environmental purposes by U.S. industries is unlikely to exceed 6 percent of their total plant and equipment expenditures in any one year, and should average approximately 3 percent of these expenditures over the 10-year estimating period. The pollution control expenditures will, of course, place increased demands on the capital market and will displace some private investment, but the Chase Econometrics analyses conclude that the displacement will predominantly be in areas other than plant and equipment expenditures, such as residential constructionp This conc 'lusion is at least partially confirmed by the results of the first Bureau of Economic Analysis survey of-pollution control expenditures, in which only 2 percent of the firms sampled claimed that pollution control expenditures had displaced any of their planned investments for expanding or modernizing their production capacity. FIGURE 11 F '3c%d Economic Growth, 1044M. Real GNP $ 196711 11,2 1,100 1,060 400 do .001 .0.000 With pollution abatement expenditures 900 aw 800 Without pollution abatement expenditures 700 600 5001 1974 1976 1978 1980 1982 FIGURE III AFaAac2ed Unemployment Ratels, 1974-19M Unemployment rate 6.0 With pollution abatement expendit ures 4.0 Without pollution abatement expenditures 2.0 0.0 1974 1976 1978 1980 1982 Source: Chase Econometrics, Inc., "The Economic Irnpa ct of Pollution Control: Macroeconomic and industry Reports, prepared for CEQ. The BEA report concluded, "While it is possible-that in.some. industries pollution abatement restrictions have caused a reduc- tion in investment, the low level of positive response to this question indicates that business as a whole does not think of pollution abatement regulations as reducing investment in new @ 10 plant equipment." In light of these findings, pollution control expenditures are not expected to delay significantly the expansion or modernization of industrial capacity for producing goods and services, and therefore are not expected to have a measurable adverse impact on.. labor productivity. If environmental expenditures have an insignificant impact on plant and equipment expenditures and therefore on productivity, they will have virtually no impact on the rate of growth of the "full employment GNP." However, according to the 10-year forecast by Chase Econometrics, the anticipated peaking of environmentally related expenditures prior to 1978 will create a minor business cycle.which will'affect the actual growth rate in GNP. These expenditures are expected to stimulate the economy prior to 1976 so that the GNP in current and constant dollars will be higher than ilt.otherwise.would have been. After 1976 the slightly higher prices resulting from pollution control,e.xpendi- tures will have a minor depressing effect.on the economy, causing the real GNP to dip below the level expected without environmental expenditures. By 1982 this depressing effect is expected to dis- appear, so that the GNP will be at the same level as it would ha@.-c been without environmental improvenen 't programs. The projected, GNP levels are summarized in Figure II. Impact on Employment: The impact of environmental expenditures on employment.is projected to be insignificant. In the macro- economic analyses the i'mpact of unemployment is expected to mirror the impact on GNP: before 1976 there will be less unemployment than there otherwise would have been, from 1977 to 1980 there will be somewhat more; but by the end of the decade there will be no significant impact on unemployment. Projected employment, rates are@given in Figure III. These macroeconomic analyses do not take account of plant closings caused by envircnmental r6gulations,, however. EPA, which-maintains an "Economic Dislocation Early Warning System" on such closingst had received reports of 69 firms which claimed that they had been to 0 H H F-I H H H tj H H rr 0H- M 10 Vj 10 w 10 M 10 M IV tIj 10 M10 M @v w @u F- 5 F- 5 F- @9 - 5 F, 5 0 F' F@ P) -0 0 z w V w 'a 21 a0) V 0) 0) (D M0 F' 0 @:s F' @J H ;j F- ;:I F- 0 F' :@ I-- @I H ::I F-- @:I Al M0 0rt rt 0 rf- 0 rt, rt, 0 rt, 0 rt 0 rt, 0rt rt, 0 rt, 10M rr ;P) En to < (n En En rn -4 En a) '< (a W. rt, @< (D fD (D (D M fD M (D M M M :5 F- (D (D (b (D (D M M M fl) (D (D PI H. (1) 010 U) Go ul En (A (n to In (a U) M rr ti 01 0:3 M to rt 4- V AI fD0 wH rt :j w -)- 0 to 0 rr OD w U, Paper & N w F@ 0- ON w allied prod V w 0%Q Ln w Ln F@ H w 0M 5 0 N) F, 0 0 0 (t 0 0Q Zn tj 0 0 w CD ftM :1 51 to 'i :r0 Cr (DM %.0 Primary met (D rt.' ca P. CIr (t W0 0 w:r CD H 00 w 0 0 M :3 . Ln Chemical :v (D co 0 LQ t 0,w allied pro M (D H. Ln %0 ON 0 0 k-- OD rr 00 0 Ln Ln N) EQ Food produc 0 :5 rT M P. P. W Ln W w 0M w 0@0 co w 0H- :3 w OD ul w0 ED0 Stone, clay &fD 0 il rr & concrete :3 fDM H(D N) p. F- to Mft (D -0 0 Ln 0 Ul :71 0 OD OD M rt mining & qu -IV (DM hon-metal. 0 Textile Nd EO ft (b N) w ILn F@ w w H w ID 1-1 Q . 00 Ul K) Ln w . vi En ft ON 0 ID 0 L<0 1 = P) -M Other indus (D rr HON t-j 0 H OD N) w Ln 4 bi N H .91H H a% H !j OD 0 OD '9@ K) . OD ko 00 Ul Ln F- K)' @j ko 0 Ul CD CD (D I.-ILI -J@ -13- forced to close plants from January 1971 through June 1974, at least in part because of environmental regulations. These plants represented a total of approximately 12,000 jobs (about .015. percent of the current labor force). The details on these closures are given in Table V. It should be noted that the increase in unemployment caused by these plant closings will be less than the 12,000 jobs that the plants themselves represented. The lost production will be shifted to other plants, sometimes within the same firm, and as a re'sult more jobs will be created at these other plants. There is probably some net loss.in jobs because the plants which increase, 'production are likely to be more efficient than the plants which close. It is the relative inefficiency of these plants -- they are likely to be older, smaller facilities which are only margi- nally profitable even without the requirement-that they install environmental controls.-- that leads the firm to conclude that they should be closed rather than modernized. In many instances they would have been closed soon anyway, and-environmental regu-, lations tend only to accelerate an otherwise inevitable process. However, the problem of plant closures should not be understated. As Table V indicates, there is some geographical concentration of the plants which have closed. Many of these plants are also often located in older, industrial towns already suffering relatively high unemployment rates. Their closures can be a serious blow to the local economy and particularly to the workers who may have serious difficulty finding other employment. Impact on Government Finances: The major sources of government expenditures associated with the implementation of Federal environ- mental legislation are for municipal sewage treatment plants, solid waste collection and disposal, and air and water pollution abatement from publicly owned facilities. At the Federal level, the EPA sewage treatment grants program has become the second largest public works activity exceeded only by the Federal high- way program. Nevertheless, as indicated in Table VI, environ- mental expenditures still account for. only 1.0 percent.of.total Federal outlays in FY 17.4 and 1.3 percent in FY '75. On the state and local levels, because the Federal Government is presently paying a large proportion (up to 75 percent) of the investments required for municipal sewage collection and treatment works, CEQ projects.local government environmental expenditures to be lower than they would have been in the absence TABLE VI U.S. BUDGET OUTLAYS BY FUNCTION 1973 ACTUAL AND 1974-76 ESTIMATED [in billions of dollars] 1973 1974 1975 1976 Description actual estimiate estimalte estimate Function: National defense 76.0 60.6 87. 7 94.8 International affairs 3.0 3.9 4.1 4.3 & finance Space research & technology 3.3 3.2 3.3 3.4 Agriculture & rural development 6.2 4A 2.7 4.1 NATURAL RESOURCES & ENVIRONMENT .6 .6 3.1 4il Commerce & transportation 13.1 .13.5 13.4 13.7 community development & housing 4.1 .5.4 5.7 7.4 Education & manpower 10.2 10.8 11.5 12.3 Health 18.4 23.3 26.3 28.6 Income security 73.1 85.0 100.1 107.2 Veterans benefits & services 12.G 13.3 13.6 .13.8 Interest 22.8 27.8 29.1 30.4 General government 5.5 6.8 6.8 6.9' General revenue sharing 6.6 6.1 6.2 6.3 Allowances -- .3 1.6 4.4 Undistributed intragovernmental -8.4 -10.0 -10.7 -11.6 transactions Total 2@6.5 274.7 304.4 3291@4- DErAILS FOR NATURAL RESOURCES.AND ENVIRONME NT [in billions of dollars] 1973 1974 1975 actual estimate estimate Pollution control and abatement $2.6 $4.0 Recreational resources .6 .8 Water resources and power 2.9 2.9 3.0 Land management .9 1.0 1.1 Mineral resources .1 .3 .3 Other natural resource programs .2 .2 e2 subtotal.all programs 5.8 7.8 9.4 Deduction for offsetting receipts -5.2 -7.2 -6.3 Net to tal $0.6 $0.6 $3.1 Source: Office of Management and Budget, The Budget of the United States Government: Fiscal Year 1975 (U.S. Government Printing Office, 1974), p. 86. of Federal legislation. The fiscal impact of local expenditures will also be reduced by the fact that many of these costs e.g., for sewage treatment and solid waste collection -7 are likely to be financed.out of user charges rather than general revenues.11 Impact on Foreign Trade: Analyses conducted by th e Department of Commerce, other Federal agencies, and independent an alysts have not succeeded in identifying any significant impact of our environmental regulations on our foreign trade and balance of payments.12 Some U.S. exports will become slightly more expensive, and some imports will become more competitive, but the total effect is small. This is largely attributable to a) the rela- tively small price increases for U.S. goods as a result of environmental requirements; b) the lack of import competition for many commodities which may experience price increases because of the weight, bulk, or U.S. quality requirements for those goods, and c) the enactment by many competing countries of stringent environmental regulations that will reduce any comparative advan- tage their industries might have' over U.S. firms. Impact on the Distribution of Income: CEQ and EPA have sponsored studies of the impact of pollution control programs on the distri- bution of income. These analyses are presently being updated by CEQ.13 They show that the medium income family paid approximately 0.5 perce nt of its family income for incremental pollution control expenditures in 1972 in the form of higher products prices, higher tax revenues, and increased service charges for government services. In 1976, this percentage is expected to increase to about 2.0 'percent, falling slightly by 1980. In 1976 and 1980 the increased costs are expected to be relatively evenly divided between higher auto- mobile expenditures, higher prices for other goods and services, and higher taxes. The distributional impact of these expenditures is expected to be mildly regressive. That is, lower income families will pay a slightly higher proportion of their income (although a much smaller dollar amount) for pollution control expenditures than higher income families. Impacts on Specific Industries The previous analyses indicated that there was unlik ely to be any significant macroeconomic impact of environmental programs. However, the impacts are not spread evenly across all sectors. FIGURE IV Pollution. Abatement Expenditures for New Plant and Equipment by Selected Industries, 19M Pollution Abatement -Expenditures Asa Pollution Abatement Expenditures Percentage of Plant and Equipment $ Billion Percent 2.0 1.5 1.0 0 0 10 26 30 40 Electric utilities Petroleum Nonferrous metals Chemical Paper Other durables Blast f u mace, steel works Communication,' commercial & other beverage Food including D Stone, clay & glass Motor vehicles Electrical machinery Mining Machinery, except electrical Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, vol, 54, Ju!v 1974 Some industries pollute much more heavily than others and will therefore have to undertake significantly greater efforts to abate their pollution to acceptable levels. Figures IV and V summarize the BEA findings about the relative level of investments being made for pollution control among different industries. Clearly, the industries which would appear to be most signifi-. cantly affected are: Electric utilities Petroleum refining Iron and steel Pulp and paper Nonferrous metals Stone, clay, glass, and cement Chemicals Food and kindred products These eight industrial groupings account for ofthe total estimated private pollution control investme nts in 1974. The proportion of total plant and equipment investment spent for pollution control purposes in these industries -- ranging from 10 to 20 percent -- is substantially above the national average -- less than 6 percent. of-course, a high proportion of total plant and equipment expenditures being allocated to pollution control may indicate only that the particular industry is investing relatively little for capacity expansion in the Unite3 States. As Tables II and III indicate, all of these industries are expecting to increase their pollution control investments substantially in 1974 over the 1973 levels. Specifically, the expected increase will amount to: 17% for electric utilities 67% for petroleum refining 65% for iron and steel 39% for pulp and paper 6% for nonferrous metals 100%. for. stone,iclay, glass, and cement 20% for chemicals 52% for. food and kindred products. CEQ and 'EPA estimates indicate that these industries will continue to experience relatively heavily pollution control expenditures throughout.the decade. fIGURE V FaDgution Abatement Expenditures for Now Plant and Equipment by Selected Industries, 1974 Pollution Abatement Ex0enditures As a Pollution Abatement E penditures Percentage of Plant and Equipment X $ Billion Percent 2.0 1.5 1.0 .5 0 0 .10 20 30 40 Electric utilities Petroleum Chemical Nonferrous metals Paper, Blast furnace, steel works Other durables Stone, clay & glass Communication commercial & other Food including E beverage Moto r vehi cles Electrical machinery. Machinery, except electrical @Mining Source: U.S. Departmentof Commerce, -Bureau of Economic Analysis, Survey of Current Business,voi. 64,July 1974 ,;Z Other important characteristics of the industries are thato they are all "basic industries," which means that. these price and supply problems ripple through the economy. they are generally energy-intensive industries and (excluding electric utilities) account for more than 73 percent of all energy consumed by all industries, and nearly 20 percent of total U.S. energy consumption. In these industries energy is a significant cost element accounting for nearly l4fi@ per'dollar of value added, compared to the average of all industries of 4jZ per dollar of value added.13 Therefore these industries face serious cost problems because of high energy prices in@ addition to the costs added by environmental regu- lations (see Table VII). Table VIII, however, indicates that even in those relatively most seriously affected industries, environmental expenditures are not a large proportion of total value added in the industry and therefore should not have a substantial impact upon prices or output. Such projected increases and output reductions would not normally be cause for alarm. However, because of the impor- tance of these industries to the functioning of the economy, the possibility of very tight capital markets' limiting the availability of investment funds, and in some cases, a recent history of depressed profits, further analysis is clearly required. CEQ and EPA are presently in the process of spon- soring such studies. TABLE VII MANUFACTURING ENERGY CONSUMPTION, SELECTED INDUSTRIES, 1,967 Total Energy consumed energy % % per $ of output consumption, Manufacturing U. S. BTU/$) .(Trillion Industry kM Btus) Consumption Cons umption 463.0 463 3. 1% Q - 9%. Cement Petroleum 495.2 2537 17.4 5.0 Metals 250.1 4080 27.9, 8.1 Paper 140.1 1156 7.9 2.3 Chemicals 138.1 2460 16.8 4.9 Subtotal 10,596 7.3.3 21.2 0 All other manufacturing 20.9 3914 26.7 7.7 Total industrial (6 9. 7) 14,608 1000/0 28.9. Represents the average. Source.: Energy and'Environmental.Analysis, Inc., "Energy Management in Manufacturing, 1967-1990," 1974, prepared for CEQ. TABLE VIII POLLUTION CONTROL EXPENDITURES AS A PERCENTAGE OF VALUE.OF-SHIPMENTS, SELECTED INDUSTRIES, 1973 and 1980 Costs@/ as a percentage of Value of shipments million).!/ value of shipments SIC Industrial sector 1973 1980 1973 1980 26 Paper & pulp $28,167.4 -$39,715.5 0.42% 0. 88%. 28 Chemical 57,061.5 80,456.7 0.40 0.86 29 Petroleum refining 28,602.2 40,329.1 0.43 0.99 1 N 32 Stone, clay & glass 21,430.0 30,216.3 0.25 0.56 1 33 Primary metals 58,276.5 82,169.9 0.80 2.00 (Five industry average) 0.50 1.00 (All manufacturing average) 0.20 0.50 5% annual increase 1973-80. calculated on basis of annual costs. Sources: value of shipments figures for 1973 are from the Department of Commerce. -22- References 1. See the CEQ annual reports, Environmental Quality-1970; Environmental Quality-1971, Ch. 4; Environmental Qua,lity-7 1972, Ch,. 8; Environmental Quality-1973, Ch.. 3: (U.S., Government Printing Office). 2. Envixonmental Protection Agency', The Cost of Clean Air, Ch. 3: (U.S. Government Printing Office, 1974),. 3. Environmental Protection Agency, The Economics of Clean Water-1973 (U@S. Government Printing office, 1974). 4. A list of items providing a more extended description of .data sources and assumptionsmade in estimating abatement costs appears on page 24. 5. JohnE. Cremeans, "Capital Expenditures by Business for Air and Water Pollution Abatement, 1973 and.Planned 197,4," Survey of Current Business, Vol. 54, July 1974), pp. 58-. 64. 6. Chase.Econometric Associates, Inc., "The Economic Impact, of Pollution Control," prepared for CEQ and EPA, 1974. 7. Chase Econometric Associates, Inc., "The Economic Impact of.Pollution Control: Macroeconomic and Industry Results Executive Summary," prepared for EPA, 19,73. 8. Charles L. Schultze and Allen V. Kneese, Pollution: Prices and Public Policy (Washington, D.C.: The Brookings Institu- tion, 1974), to be released in D.ecember.; and information provided by Charles L.. Schultze... 9. The Chase analyses c:on'clude that for every dollar of pollution control investment made, 40& of other private domestic, investment will be displaced, and most of this displacement will occur in the residential housing sector because it is particularly sensitive to thehigher interest rates which would result from increased,demand.s on the .capital market. 10. John E. Cr6means, -supra note 5,, p.@64. 11. The 197@ Amendments to the Federal water Pollution Control IAct., for instance, require industries disposing of their wastes in municipal systems to reimburse the municipality fully for all costs incurred. The munici- pality will be able to keep out those revenues represent- ing its own expenditures but also some portion of the revenues covering Federal expenditures. 12. Department of Commerce, The Effects of Pollution Abatement on International Trade (U.S. Government Printing office, 1973 and 1974). 13. Nancy Dorfman and Arthur Snow, "Who Bears the Cost of Pollution Control?" prepared for CEQ and EPA by Public Interest Economics Center, Inc., 1973, available from the National Technical Information Service, Department of Commerce (PB-226 447). The CEQ update is expected soon. Notes on Methodology Incremental costs were assumed to equal total costs.in the following areas: noise, radiation, land reclamation, utilities.. thermal w'ater pollution control, control of air pollution from., public sources (solid waste and sewage sludge incineration), and mobile sources.. The selection of the discount rates to be used in amortizing capital costs affects the annual cost estimates. In general, a rate of 8 percent has been used for private investment, 10 percent for mobile sources, and 6 percent for public invest- ment. All three rates are probably below the economists' esti- mates of the "opportunity costs" of investment funds, and they are below interest rates experienced during the past year. Using these rates tends to understate the financial costs of invest- ments made during such high interest rate periods. However, not all investments are financed by borrowing. The assumption'that they all are, which underlies the cEQ cost.analyses, tends.t.o, overstate the financial costs. -24- Other Analyses on Economic Impact of Environmental Programs 'Released by CEQ Available from the Council* Date "Cost of Pollution Abatement" -1974 (from 1974 CEQ Annual Report) PP. 173-197 "Calciulating Aba tem ent C os; t s 1974 (from 1974-CEQ Annual.Report), pp'. 219-226 "The:Macroeconomic'Impact of Pollution 1974. Control Programs. by Chase Econometrics",. Inc. Impact of Pollution Abatement on 1975 Income Distribution Available from the U.S. Government Printing office 1973 CEQ Annual Reportj Environmental 1973 Quality: 1973, "Economics and Environ- mental Management," Chapter 3, pp. 73- 117 1972 CEQ Annual Report, Environmental 1972 Quality: 1972, "The Costs and Eco- Y'Lomic Impacts of Environmental Improve- ment," Chapter 8, pp. 269-309L 1971 CEQ Annual Report, Environmental 1971 Quality: 1971, "The Economy and the Environm@nt," Chapter 4, pp. 99-153 The Economic Impact of Pollution Control A Summary of Recent Studies. Prepared for the Council on Environmental Quality, Department of Commerce, and Environmental Protection Agency. 1972. CEQ also has a few copies of the results of the BEA survey on pollution abatement costs reprinted from the July 1974 Survey of Current Business. Available from NTis* The Economic Impact of pollution Control A Summary Of Recent Possible Impact of Costs of Selected Pollution Control -Studies. Prepared for the Council on Environmental Quality, Equipment on the Electric Utility IAdustry and Certain Department of Commerce, and Environmental Protection Agency. Power Intensive Consumer Industries. National Economic 1972. (PB-207 205, $3.75; microfiche, $2.25) Research Associates, Inc. Volume I. Executive Summary. (PB-207 168, $3.25; $2.25) The Economic Impacts of Meeting [Automobile] Exhaust Volume II. (Introduction, structure of the electric Emission Standards, 1971-1980. Chase Econometric utility industry, and the economic impact of pollution Associates, Inc. abatement upon the industry and upon selected power Part I. Executive Summary. (PB-207 200, $3.25; $2.25) intensive consumer industries]. (PB-207 167, $5.25; $2.@ Part II. Baseline Forecasts of Economic Performance. (PB-207 201, $3.75; $2.25) Economic Impact of Environmental Controls on the Fruits Part IIII. The Economic impact of Pollution Abatement. and Vegetable Canning and Freezing Industries. Agri (PB-207 202, $3.75; $2.25) Division, Dunlap and Associates, Inc. Part IV. Appendix. Presentation of Baseline and Part I. Executive Summary. (PB-207 140; $3.25; $2.25) Alternative Impact Forecasts of Macroeconomic and Industry Part II. Industry Structure. (PB-207 141, $5.75; $2.25) Performance. Part III. Impact Analysis. (PB-207 142, $6.25; $2.25) (PB-207 203 $5.75; $2.25) Part IV. Statistical Supplement. (PB-207 143, $5.75; $2. Analysis of Economic Impacts of Environmental Standards Study of the Economic Impacts of Pollution Control on thE on the Bakery Industry. Ernst & Ernst. Iron Foundry Industry. A.T. Kearney & Company, Inc. Part 1. Executive Summary. (PB-207 169; $3.25; $2.25) Part I. Executive Summary. (PB-207 147, $3.25; $2.25) Part II. JA'descriptive analysis of the bakery products Part II. The Structure of the Industry. (PB-207 14.8, industry detailing industry trends and characteristics $5.25; $2.25) relevant to economic impact analysis of environmental Part III. The Economic Impact of Pollution Abatement standards]. (PB-207 170, $3.25; $2.25) upon the Industry. (PB-207 149, $4.25; $2.25) Part III. [A study of the impact of pollution standards and charges on the bakery industry]. (PB-207 171, $3.75; The Leather Industry: A Study of the Impact of Follution $2.25) Control Costs. Urban Systems Research & Engineering, Inc Volume I. Executive Summary. (PB-207 152, $3.75; $2.25) The Cement Industry: Economic Impact of Pollution Control Volume II. Description of the industry. (PB-207 153, Costs. The Boston consulting Group, Inc. $6.25; $2.25) Volume 1. Executive Summary. (PB-207 150, $3.25; $2.25) Volume III. Impact of Pollution Control Costs on the volume II. [industry description, pollution problems, Tanning Industry. (PB-207 154, $3.75; $2.25) market st.ructure,lfinancial resources, demand, foreign trade, and employment ismpactl. (PB-207 151, $7.00; $2.25) The Effects of Pollution Control on the Nonferrous Metals Industries. 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(PB-207 160, $3.75; $2.25) Economic Impact of Anticipated Paper industry Pollution- Abatement Costs. Arthur D. Little, Inc. Part I. Executive Summary. (PB-207 144t $3.25; $2.25) part II. Industry Structure. (PB-207 145, $4@25; $2.25) Part III. Economic Analysis. (PB-207 146, $4.25; $2.25) The Impact of Costs Associated with New Environmental standards upon the Petroleum Refining Industry. Stephen Sobotka & Company. Part I. Executive Summary. (PR-207 197, $3.25; $2.25) Part II. Structure of the Industry. (PB-207 198, $4.25; $2.25) Part III. The impact of Environmental Control Costs. (PB-207 199, $4.25; $2.25) THE ECONOMIC IMPACT OF ENVTRONMENTAT, PROGRAMS ERRATA SHEET Last paragraph on page 5 should read: In 1974, the estimated incremental roill resource (investmont, plus O&M) abatement costs amounted to approximately 1.0 percent of the U.S. Gross National Product. This proportion is expected to increase to approximately 1.7 percent in 1976, and then decrease thereafter as investment costs decrease and GNP continues to grow. Tables II and ILT,_pa_qes 4and 6 Figures are in millions of dollars not thousands of dolla rs. Page 17 In both industrial lists on this page, thellines that read "nonferrous and primary metals" should read only "nonferrous metals". C)"T a - - - - - -- - --- -- ---. - - --- iflulliffillill@