Environmental Regulations and the Cleanup of Manufacturing: Plant-Level Evidence

For much of the industrialized world, pollution from manufacturing has been falling despite increased output. We examine how air quality standards---a common environmental regulation---have contributed to this cleanup of manufacturing. We develop a general equilibrium model to show how air quality standards can lead to a cleanup by causing reductions in plant emission intensity, relative changes in plant output, and plant entry and exit. We provide quasi-experimental evidence from Canada to highlight the magnitude of these responses. Our results suggest that air quality standards explain just under 40% of the cleanup of manufacturing.