Do environmental regulations hamper productivity growth? How accounting for improvements of plants' environmental performance can change the conclusion

Many economists maintain that environmental regulations hamper productivity growth; a view supported by several empirical studies on industry or state level data. However, there is little research of the relationship between the stringency of environmental regulation and productivity growth at the plant level; and the results of the few existing studies are ambiguous. Moreover, the measures of productivity growth applied in previous studies do not credit plants for emission reductions, and this may result in understatement of productivity growth. We perform regression analyses of productivity growth on regulatory stringency using plant level data. To credit a plant for emission reductions, we include emissions as inputs when calculating an environmental Malmquist productivity index (EMI); and do not include emissions when calculation the traditional Malmquist productivity index (MI). The regression analyses show that the overall effect of the regulatory stringency faced by plants on plants' productivity growth is statistically insignificant when MI is applied to measure productivity growth. However, when we apply EMI, the effect is positive and statistically significant. This indicates that not accounting for emission reductions when measuring productivity growth can result in too pessimistic conclusions regarding the effect of regulatory stringency on productivity growth.