Estimating the cost of environmental regulations and technological change with limited information

In this paper we develop a modified production model to calculate changes in pollution abatement costs (PAC) when both data on bad outputs and information on the inputs assigned to pollution abatement activities are not available. To calculate the PAC of reducing bad output, we introduce a measure that captures variation in the abatement intensity of 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) changes in pollution abatement intensity, and (3) technological change. We demonstrate how to calculate PAC and these three components using data from 1997 to 2007 on a sample of pulp mills required to comply with the effluent limits for dioxin set by the U.S. EPA's Cluster Rule. We find regulation-induced technological change is consistently associated with declining PAC, while both changes in inputs and abatement intensity are associated with increasing PAC.