Cost of Regulatation Compliance
From ClimateWiki
The following is an outline of the predicted costs of environmental regulation compliance through drawing on production theory and functional-form cost estimation.
According to Satish Joshi, Ranjani Krishnan, and Lester Lave, authors of Estimating the Hidden Costs of Environmental Regulation, "environmental regulations are likely to play an increasingly important role in modern business. The scope and number of local, federal, and international regulations are rising, imposing significant costs on business. For example, USITC (1991) estimates that expenditures by U.S. steel producers to meet the requirements of the 1990 amendments to the Clean Air Act could add $17 per ton of raw steel, or more than 5 percent of the cost of production. Recognition of environmental regulation as an important cost driver, and formal incorporation of regulatory impacts in firms' accounting systems may be imperative for effective decision making. Further, regulators need to know the full costs of regulation [visible & hidden] to determine the best mix of regulation to benefit society as a whole."
In their study, Joshi, Krishnan, and Lave examined 55 steel mills using production theory and functional-form cost estimation to determine hidden costs of environmental regulation compliance. They also conducted interviews with the mills' managers and accountants that supported their findings. This is what they found:
"A $1 dollar increase in the visible cost of regulation is associated with an increase total cost of $10-$11, of which $9-$10 are hidden in other accounts.
The findings suggest that inappropriate identification and accumulation of the costs of environmental compliance are likely to distort costs in firms subject to environmental regulation."
Additionally, according to William A. Pizer and Raymond Kopp of Resources for America, "Soon after the appearance of survey-based estimates of compliance costs in the literature, economists began postulating the existence of additional, uncounted burdens associated with environmental protection. For example, regulations that required large capital expenditures could arguably crowd other productive investments (Rose 1983). Or regulations that imposed tighter limits on new emissions sources could discourage investment in otherwise newer and more productive equipment (Gruenspecht 1982; Nelson et al. 1993). Finally, there is the general concern that environmental regulation reduces operating flexibility, slowing productivity improvements in general.... Environmental policies applied to firms either directly force changes in production methods (command-and-control policies) or provide incentives to do so by changing prices (market-based policies). The direct compliance cost is the change in production costs entailed by the policy. This cost will depend on the particular technological alternatives available to the firm."
Pizer and Kopp also identified costs of regulation in households that may not necessarily be quantifiable. It is as follows:
Household Regulation
Regulations that effectively take income away from consumers result in direct costs to households.
In the case of pesticide regulation, products that pose significant environmental and health threats can be banned. In such cases households may switch to higher-cost or lower-quality substitutes. A change in product “quality” reduces household utility and represents a real cost, but it is very difficult to quantify.
Another category of cost results from regulation that restricts household behavior. Although such regulation represents a small category at present, behavior-restricting regulations, particularly recreational restrictions to advance ecosystem goals, may grow in the future. For example, regulations that ban particular types of sport fishing, exclude motorized vehicles from sensitive habitats, or restrict all human intrusion into special areas cause the value of those recreational experiences to decline for those who otherwise would engage in them. The last category of household costs we mention has to do with land use. Development restrictions on a piece of real estate cause the property value to decline and cause the property owner to suffer a capital loss. The restrictions might be imposed to protect an ecosystem, preserve environmental amenities (beaches, for example), or limit suburban sprawl. Increased concern over each of these issues suggests that land use restrictions will be an important regulatory tool for some time to come.
References
Joshi, Satish, Ranjani Krishnan, and Lester Lave. "Estimating the Hidden Costs of Environmental Regulation." Accounting Review 76.2 (2001): 171. Corporate ResourceNet. EBSCO. Web. 19 Apr. 2011.
