Environmental Regulations and the Clean-Up of Manufacturing: Plant-Level Evidence From Canada

For much of the industrialized world, pollution from manufacturing has been falling despite increased output. In this paper, we provide the first estimates of the extent to which environmental regulations have contributed to this “clean-up” of manufacturing by causing: (i) the adoption of cleaner production processes, (ii) the reallocation of output across producers, and (iii) producer entry and exit. To do this, we examine a major revision to Canadian environmental policy using a novel, confidential dataset containing information on the production decisions and pollution emissions of Canadian manufacturing plants. We find regulation explains, at most, 61% of the Canadian clean-up, but the underlying mechanisms differ strikingly across pollutants. We present a stylized model featuring plant heterogeneity to illustrate how the costs of abating pollution can affect the channels through which regulation causes a clean-up.