Environmental Regulations and the Clean-Up 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 "clean-up" of manufacturing. We develop a general equilibrium model to show how air quality standards can lead to a clean-up by causing: (i) reductions in plant emission intensity, (ii) relative changes in plant output, and (iii) 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 clean-up of manufacturing.