JOURNAL OF REGIONAL SCIENCE, VOL. 11, NO. 8, 1977 A SIMULATION MODEL FOR THE ECONOMIC. ASSESSMENT OF ALTERNATIVE AIR POLLUTION REGULATIONS* Adam Roset 1, INTRODUCTION In addition to their beneficial effect on the quality of life, the more stringent environmental regulations of the past decade have had a significant impact on the production structure of industry and on important macroeconomic variables such as investment, output, employment and inflation. Tn response to recent environ- mental legislation which has mandated economic impact statements,’ and out of more general coneem with the economic-environmental interface, a number of assessment models have been developed." All of these models contain at least one ‘and most at least two of the following classes of shortcomings: (1) a conceptual framework which is nonoperational or much too general to be of use for poliey and planning without major modification; (2) the lack of an empirical counterpart or, when attempted, reliance on secondary data; and (3) an inability to forecast changes in direct abatement costs in response to alternative environmental regu- lations. The purpose of this paper is to present a model which can simulate many of the economic consequences of alternative air pollution control requirements, and which overcomes all of the above mentioned limitations. ‘The model is a dynamic input-output system in which the structure of the economy is related to the level of environmental control as well as to time. Several basic assumptions relating specifically to air pollution control, such as its capital intensity, inereasing marginal cost and interindustry cost differences, have been introduced to reflect actual conditions. While rendering the model more complicated than a related model by Leontief, the assumptions should heighten its empirical accuracy. By approaching the problem via a dynamic input-output framework *This research has been supported in part by U.S. Environmental Protection Agency grants R-800280 and R-801525 and by a University of California intramural grant. The author Wishes to thank Professors Walter Isard and Frank Cesario for their helpful comments on carlier otages of this research and Frans Seastrand, Mark Gross, and Ben Nakayama for ‘their assistance with the computer simulations. The author is also indebted to the New York State Department of Environmental Conservation and the Office of Planning Services for providing access to their data + Assistant Professor of Economics, University of California, Riverside. ! These include: The Clean Air Act Amendments of 1970, The National Environmental Policy Act (NEPA) and several “Little NEPA's” recently passed by the states. * Major contributions include work by Leontief (7], Kohn (6], Russell and Spofford (14), Evans (51, Cumberland and Korback (4}, Miernyk and Sears (10), and U.8. EPA {18} Date received: July, 1976; revised, March, 1977, 327328 JOURNAL OF REGIONAL SCIENCE, VOL, 17, NO. 3, 1977 rather than the activity analysis of the Leontief model, we have undertaken to end it more manageable for empirical work. Furthermore, 2 methodology has been incorporated for projecting control costs without resorting to the linearity ascumption of the Leontief model, the addition of an unwieldy number of control activities as in the Kohn model, or the solution of a separate linear programming problem for each industry as in an earlier model by the author (Rose {11]). While the general conceptual framework is applicable to most pollutants and control techniques, the simulation presented focuses on the abatement of a single air pollutant via stack-gas cleaning, or the use of air pollution control equipment. ‘The model was constructed by calculating the cost of abatement inputs and abate- ment capital requirements for the manufacturing sector of New York State during 1972 and then incorporating them into a conventional input-output model for the State. The estimation of the environmental portion of the model represents a sub- stantial improvement over previous research in this area because it is based on primary data. ‘The conceptual model is developed in Section 2. The cost estimating methodal- ogy and abatement coefficients are then presented in Section 3. Section 4 contains a description of the simulation and an analysis of the results. 2, THE MODEL Basic Assumptions ‘Phe Leontief economic-environmental modcl relegated pollution abatement to an activity distinct from the production of ordinary economic goods and services. ‘Thus the concept of pollution control was general enough to represent cither abatement within cach industry or the existence of a separate abatement industry. While the latter case might be appropriate for the control of water and solid waste pollution, present air pollution control technology is such that it ean only be ap- plied at the source. Conceptually, the generality of Leontief’s approach may be advantageous, but because of the existence of significant intra- and interindustry cost differences,’ it might prove to be a liability in some empirical applications. For example, an investigation into the elimination of an average of five pollutants by one hundred industries cach employing an average of five different control techniques would require manipulating a (2600 X 2600) matrix. The model pro- posed in this paper would reduce the dimensions of this matrix to about (115 115).4 In our alternative framework, the production process is viewed in its entirety. ‘There is only one column per industry and it subsumes air cleaning. ‘Thus we em- ploy the basic form of input-output analysis, @ = Dakss =¥e ya) * Such differences are well illustrated in LeSourd and Bunyard (9). “We assume here that it ie desirable to distinguish between different control techniques and their use in controlling each pollutant. Because of limitations of space, however, we have ‘aggregated the control techniques in each industry for the presentation below. Under these ‘conditions, the comparable Leontief matrix would be (600 600)ROSE: ASSESSMENT OF AIR POLLUTION REGULATIONS 320 where X, = the output of economie good i, Y; = the final demand for good i, and 4; = a technical coefficient relating the input of good # used in the produe- tion of one unit of good j. ‘This basic form of the model gives us a better picture of the relative importance of those goods used for abatement, purposes vis & vis conventional inputs within cach industry. Also, it depicts a direct relationship between abatement goods and the output of economic commodities. A similar equation can be used to represent the relationship between the production of economic commodities and a pollution by-product, @ Xp— Lira X;=0 (p= do, 8) where X,, = the gross output of pollutant p and 1 pollution coefficient relating the output of pollutant p generated in the production of one unit of good j. Equations (1) and (2) can then be combined into a single (n +s) X (n+) matrix. We will assume that there is a direct relationship between the pollution flow and the lovel of air quality in a given region. We also postulate the existence of an cavironmental authority with the duty of monitoring the flow of pollution to achieve a desired level of air quality. The amount of pollution abatement man- dated by the authority can be expressed in terms of a tolerated delivery to final demand, ¥,*, or as a percentage of the gross pollution flow, @, = (Xp — Yp*)/Xp. ‘Thus, for the gencral case where control levels ean vary between industries, ©,;, the following net balance equation can be substituted for Equation (2) @’) Xp = Op) Liha ayX; = Vy where Y, represents the net pollution flow which may or may not equal the tol- erated flow, Y,*. The reason for the discrepancy will be explained below. Dynamic Extensions ‘The model developed thus far will be converted to dynamic form on two fronts. First, the economic structure will be linked to the policy variable. This is done to convey the impetus to technological change brought about by a change in control requirements. Second, investment will be made an endogenous variable. This is necessitated by the relative capital intensity of air pollution control via stack-gas cleaning. The purchase of control equipment represents a major capital expenditure which often takes the form of a self-contained plant comprised of the basic cleaning device, motors, fans, duetwork, foundation and housing, Evoked by an increase in the force of environmental regulations, the alteration of the amount of abatement. inputs required to allow an industry to operate at a given level of output will be taken as a special case of technological change. If an industry, such as steel-making, is eurrently required to control 80 pereent of its330 JOURNAL OF REGIONAL SCIENCE, VOL. 17, NO. 3, 197 particulate emissions, a medium-efficieney mechanical dust collector would suffice. However, if the regulation concerning particulate matter were stiffened, a more sophisticated piece of machinery would be required. One response would be to upgrade the present equipment to a higher level of efficiency. Other alternatives would be to serap the medium-cfficieney collectors and purchase new high-effi- ciency ones, or to switch to another technique entirely. Any of these responses would be reflected by a change in input coefficients in the structural matrix and by a change in capital coefficients. In this manner the strueture of the economy could be related to the prevailing level of environmental control, which in turn can be made a function of time. Net investment in pollution control equipment will be calculated with the use of a capital stock adjustment equation of the form (3) Net Investment = y(bi;X,6 — bf'X;* where 7 = the capital stock adjustment mechanism, bij = an average capital coefficient relating the amount of capital good ¢ required for the production of one unit of good j, and t= time. Previous abatement models (ef. Rose [11] and Miernyk and Sears [10}) have made use of simple secelerator investment models. This apparently stemmed from a straightforward application of the paradigm dynamic input-output. balance equation. This form is highly inappropriate to the case in point, since it applies only to investment engendered by expansion in output, and control regulations normally apply to all sourees, existent and new. Accordingly, the term in paren- theses in Equation (3) represents si; — s{j* or the desired capital stock minus the actual stock. While the model is sufficiently general to allow for phasing of responses, for convenience we will assume full and immediate compliance to regu- lations and hence set = 1. Replacement investment will be incorporated into the model through an expedient approach which equates it with capital services. A “depreciation co- efficient” will be calculated which will serve the dual role of specifying replacement investment and the annualized cost of pollution control facilities. The coefficient is represented by rij, the amount of replacement investment (depreciation) of good 7 required for the production of one unit of good j. This feature and the net, investment equation have the effect of closing the model to pollution control capi- tal. ‘Thus our basic balance equation becomes ) X= Chalk, — Darky — Dh bis — Deby ast= yh ‘The net investment equation of the system is the more general capital stock ad- justment model. The aecelerator model, which may still be applicable to conven- tional capital goods, is simply a special case where bt, = bf". am)ROSE: ASSESSMENT OF AIR POLLUTION REGULATIONS 381 A Cross-Sectional Approach to the Specification of Technological Trens ‘The construction of the model is severely hindered by the paueity of historical data on technological change; especially for those features relating to pollution control. Fortunately, this obstacle can be overcome by exploiting certain micro. ceonomie relationships concerning the operation of pollution control equipment. There is a basic theoretical relationship between the cost of a pollution control device and its efficiency of operation (the amount of pollution throughput which it is able to trap).' This relationship is an exponential one due to the diminishing returns inherent in the operation of gas cleaning devices. It ean be expressed in the basic form C = 1/(1 — 8), where C = cost index and @ = efficiency of operation. All aspects of control (capital costs, capital related fixed charges and operating costs) are subject to this relationship. There is little variation among the cost components for a given equipment type although substantial differences do exist between technologies. ‘The relationship can be applied to the relevant elements of the A, R, and B matrices as a trend factor.’ Note the direct correspondence between the operating efficiency of individual control devices and the policy variable @. Poliey changes are thus translated into new input requirements via the cost-efficieney equation. In a policy application or simulation, ¢ is merely replaced by , in Equation (4). In any ease, the model must be solved recursively beginning with either the initial or terminal year. A dynamic inverse is obtained which yields the time related direct and indirect requirements of a unit increase in final demand (see Leontief 8).” "The relationship is found throughout the literature on air pollution control engineering and has been tested extensively. See, for example, White [20] and Wicke [21] This application is facilitated by the fact that technological innovation in air pollution control equipment has been devoted to increasing gas-cleaning efficiency rather than lowering. the cost of equipment of a given efficiency (i.e., as opposed to increasing productivity in th conventional sense). It is strengthened empirically by the fact that technologies now in oper tion span a broad range of efficiency levels. Finally, given a lapse of five years betweea pilot operations of totally new technologies and their commercial application, technological change ‘will be limited to known equipment types over short time horizons. "The model requires a two-stage solution in a policy application. It must first be solved for X, and then a policy level set. Next the relevant structural and capital coefficients have to be changed and used to calculate levels of output needed to satisfy final demands. At first, lance, this procedure might appear rather cumbersome when compared to the Leontief eco nomic-environmental model (7]. However, as demonstrated elsewhere (Rose {13]), that model requires a similar two-stage solution, as well as an adjustment of its coefficients, when applied to the case of air pollution, ‘Note also that the solutions to the models above and a related model by Kohn (6) involve ‘2 minor computational complication. Even under full compliance they result in a deviation between Z(1 ~8,;)Xq # Y,. This problem is due to the inability of the algorithms to foretell, at the outset the additional direct and indirect demands emanating from the production of abatement goods necessitated by @ change in policy. The devistion is likely to be minor and ‘can virtually be climinated through « set of iterations. For example, if the additional amount of pollution generated by the response to the new control levels is 5 percent of X,, and if the average level of control ia 90 percent in the abatement goods industries and ite direct and indirect suppliers, Y,* will be exceeded by only 0.5 percent. Each iteration would further reduce the deviation by slightly less than 90 percent.382 JOURNAL OF REGIONAL SCIENCE, VOL. 17, NO. 3, 1977 In order to apply the cost-efficiency factors direetly, two conditions must be met: uniform inereases in control levels on all sources within an industry and limited substitution between abatement types. These are, however, very reason- able assumptions. Present air pollution regulations in most states require uniform percentage reductions in emissions on all sources and thus uniform increases repre- sent a likely poliey choice. Also, substitution between control types will be limited because: (1) retrofitting or upgrading of existing installations presents the least: expensive response, (2) engineering restrictions limit the feasible number of eontrol types on most of the more sophisticated emission sources, and (3) relative prices do not reverse over fairly wide ranges of efficiency. In eases where these assumptions are unrealistic, modifications of the methodology are easily obtained by adjust- ments of the base 3. CON STRUCTION OF THE MODEL Estimation ‘Most existing input-output tables can be transformed into economie-environ- mental impact models such as the one described above by a simple reclassification of certain industries and by the calculation of structural and capital coefficients relating to abatement goods. Such a methodology was applied to an 86-sector input-output table of the New York State economy. First, industries were redefined on a use basis. ‘Thus equipment, construction, electricity, maintenance, capital related charges and chemicals used for abatement purposes were distinguished from their counterparts used in the direct production of economic goods. The necessary coefficients were calculated by applying a set of cost-estimating equations to the engineering parame- ters of actual air pollution control operations in the manufacturing sector of New York State during 1972. The data base consisted of a set of Emission Point Files obtained from the New York State Department of Environmental Conservation. ‘These files represented a pioneering effort by the NYSDEC in licensing all known sources of air contamination in Upstate New York. In all, over 25,000 sources were licensed between 1969 and 1973. The cost-estimating equations used represented a synthesis of those found in such methodologies as U.S. HEW [17] and Anderson. etal. [2] and what little actual cost data were available from the NYSDEC. Esti- mates were obtained on a per unit basis and then aggregated to conform to the US. Department of Commerce, Bureau of Economic Analysis 86-sector classifi- cation. Since data were not available for New York City, State totals were ob- tained by multiplying Upstate figures by the State/Upstate employment ratio for each industry. These totals were then divided by value of shipments as ob- tained from the Census of Manufacturers [16]. * Output data were not available during the early stages of the research and so coefi- cients for abatement inputs were calculated in employment terme (at the 4-digit SIC level) ‘These coefficients and a detailed exposition of the estimation methodology ean be found in Rose [13]. This reference also contains a set of eost-effectiveness coefficients (expenditures per unit of controlled pollution) for seven major classes of control devices.ROSE: ASSESSMENT OF AIR POLLUTION REGULATIONS 333 Presentation of Coeficients for Abatement Goods With respect to our formal model we can now explicitly distinguish between three types of goods: conventional economic commodities (hi »k), pollution control plant and equipment (g = k + 1, supplementary inputs to pollution control (electri used for pollution control) (f = m +1, +++ ,n), enabling us to disaggregate Equation (4) into the following component parts: Mi — Deas — Dias - Deas + Dex = ve (4a) XY — Cha Xs — Dhar rKs — Lia dDKs + Dh by'Xs Xf = Dia apXs — Dia rhX, Yi G=ftgth=1---,n) Due to space limitations, only the last two equations of the system, those dealing with the use of abatement goods, will be presented here (see Table 1). Also, the term a,;, inputs of pollution control equipment on current account, has been assumed to be zero. This built-in pollution control is now almost exclusively represented by automobile emission control devices and screens on ventilating equipment. As technology advances we can expect the prominence of such entries to increase. Finally, note that the coefficients represent total input requirements. That is, we have not distinguished inputs produced within New York State from those imported from other regions. Goods such as electricity, and capital related charges (interest, insurance, and taxes) are likely to be purchased entirely locally. Personal communication with industrial gas cleaning equipment manufacturers indicates that they are responsible for less than 10 percent of the construction of facilities, so that this input can also be considered virtually a local good. Although. there are several major producers of pollution control equipment in New York, it is likely that a significant percentage of the equipment used in the State is im- ported. To a great extent, maintenance is also undertaken by the equipment producer. As for chemicals, they are likely to have the same local/import ratio as chemicals used in other aspects of production. For the sake of exposition, the coefficients for each industry are arranged in rows rather than columns in Table 1. The current coefficients include depreciation of equipment and its construction, capital related costs, electricity, maintenance and chemicals.’ In flow terms they represent expenditures of $68.8 million in the manufacturing sectors of New York State during 1972. + ym), and power, maintenance, ete., * Nearly all pollution control installations dealt with operated automatically and hence required no labor input other than that associated with maintenance. Even the few large installations where some constant supervision and operation of controls was required, wages represented a negligible portion of the total cost, Also, note that disposal costs are not in- cluded. These arise because air pollution control merely transforms a potential air pollutant into a solid waste problem which, hopefully, is less offensive. At $1.00 per ton of collected particulates in the manufacturing sector of the New York State economy during 1972, solid ‘waste disposal costs would have amounted to sn additional $12.7 million. It is possible that a significant percentage of this figure was recouped through recyeling,JOURNAL OF REGIONAL SCIENCE, VOL. 17, NO. 3, 197 828 0000 00000" 000 cis" 120000 000" £10000 06 58000 1500007 oF1000 06 18100 s0¥000" ¥800 za ist00 00000" 9100 are 202000 181000 ons" #80000 > roo: 008 220000 *ocwo 06 62000 = exzoao O16" 22000 e000" 9Eh000 0036 30000 $920000° 169000 ous’ s61100 0000" 1210000" _se0000 1066" 0020 e510 see000" —99sr00 sess o186z0 00100 Ts1000" 696000 S158" s91000 110000 + 40000 czas s01100 10000" 2 Gr0000 sys" 0109 21000 00000" seco00 e068" Sz0r00" 2000 100000" 000" sus" 018000" 01000 £86000 ozs ass000 99000 10000" 999000 196° s0ez00 22000" + 1eh000 08 a£1000" 10000 +000 sews sc1000 710000" 00000" 10000 96° 258000" 80000 = 610000" use szz000" 00000 0000" 500000" once 20000" 010000 + ar0000" 1466" 028000" 690000" 100000" 680000" monpoud parpury P poo a en uy STE (EE, onitdlog MPRA opto, MHEG SEM, wm ST oa sivap 09 Ted BLOT ‘AwoUoNGT OIG OK MON oY} Jo agus, mNdnOAI 1] UE AO} SIUPY!OD spooy WwoUPIEGY °T GTAVL335 ROSE: ASSESSMENT OF AIR POLLUTION REGULATIONS yeSi00" 121000" 9F1000" e800" szz000" #20000" ‘yer000" 20000" T0000" @z0000" 980000" 200000" 81109" 220000" 090000" 21000" —_ZeT000 sevcoo" —¥90000° 891000" 638000" x00" 200000" y y —ST0000" oze200° oft000" 12000" s¥e000° 182000" 879000" ‘s1¥000° 10000" $0000" 090000" ¢0000"—_-8¥#000" pono 1 ATAVL336 JOURNAL OF REGIONAL SCIENCE, VOL. 17, NO. 3, 1977 For individual industries, the summation of current coefficients ranges from a negligible 0.006 percent of gross output in industry 15, tobacco manufacturers," to 1.375 percent in industry 36, stone and clay products. The ratio for the manu- facturing sector as a whole is 0.11 pereent. The largest current cost component is capital related charges which was computed as a fixed percentage of the gross value of the capital stock at purchase cost. The industries with the largest overall co- cfficients—chemicals, stone and clay, glass and primary metals—are also those with the highest absolute expenditure on pollution control. Capital coefficients for both control facilities and their construction are also given in Table 1. Note that they are average and not marginal coefficients. They represent a capital stock of $246 million estimated at purchase cost. ‘The relationship between the equipment and construction cocfficients differs from industry to industry according to the mix of equipment, types and the severity of the pollution problem. Their relative size between industries is basically the same as the capital related charges coefficient and to a lesser extent the sum of the two depreciation coefficients. The industries with the highest abatement eapital/ output ratios are 36, stone and clay products, and 27, chemicals and selected chemical products, with ratios of .0607 and .0423 respectively. In making interindustry comparisons of abatement coefficients, we should emphasize the importance of control levels. The average operating efficiency of control equipment is given in the right hand column of Table 1. Data were not sufficient to caleulate required control levels on an industry-by-industry basis. Inspection of air pollution control regulations of New York State and the data at hand, however, indicated mandated reduction levels of 98-99 percent on process sources emitting particulates. Under conditions of full compliance to regulations, control efficiency would be equal to the policy variable, ©. Due to technical and economic difficulties, however, many industries arc below required levels. Others in anticipation of future requirements are even exceeding these levels. Additional inter- industry variations are caused by differences in plant size, age and location. A more rigorous comparison of coefficients would be one made at uniform control levels. This will be possible during the course of the presentation below. 4. POLICY SIMULATION Preliminaries ‘The model was used to perform a simulation of hypothetical inerease in the environmental control requirement for particulates in New York State’s manu- facturing sector during 1972. The control level chosen was 99.9 percent which represents state-of-the-art abatement in the case of particulates. Note that this policy is not as radical as might first be imagined sine an overall average control level of 98.79 percent actually prevailed during 1972. It is especially worth examin- ing from the standpoint of a sensitivity analysis, as it represents an upper bound for Gireet and indirect impacts on the state’s eonomy. As noted above, an inerease in the control vat able necessitates more pollution ® Abatement technology in industries such as tobacco and textiles was limited to boiler and incinerator operations.ROSE: ASSESSMENT OF AIR POLLUTION REGULATIONS 337 abatement inputs per unit or per dollar of output. The new input requirements were obtained by the application of cost-efficiency trend factors to the coefficients in Table 1. A weighted average of factors for six major pollution categories was used, with weights depending on the relative use of the technologies in each in- dustry." The sum of the current abatement input. requirements corresponding to 99.9 percent control are presented in Column 1 of Table 3.” ‘Some further refinements of the coefficients were necessary before they could be used in the simulation model. Most important of these was an estimate of the import content of abatement goods. Recall that the coefficients in Table 1 and Column 1 of Table 3 are total requirements per unit. of output. While data. on the source of abutement goods were sketchy, the following conclusions were drawn. Fifty percent of pollution control devices demanded were assumed to be produced within the State and the other half imported. Since maintenance of equipment is often provided by its producers, twenty-five percent of the maintenance for pol- lution control was also assumed to come from outside the State. All other pollution abatement inputs were considered local goods. This is a reasonable assumption in the case of construction, electric power and state and local taxes. It was invoked by default in the case of chemicals, insurance and the cost of capital. ‘The mechanics of modifying the New York table once the abatement flows and stocks were estimated involved the following steps. Pollution control inputs were subtracted from their corresponding sectors for each column of the transactions table and placed in separate rows. (No subtraction was required from final demand column in most eases since pollution control inputs for manufacturing are inter- mediate goods. The exceptions to this involved pollution control equipment snd coustruction.) In order to transform the table irom a static to a dynamic one, investment had to be made an endogenous element. Gross investment in pollution, control plant and equipment during 1972 was calculated and subtracted from final demand. In addition, the capital stock of period t — 1, 1971, had to be estimated. A replacement investment matrix was also added. ‘A square structural matrix was maintained by the addition of columns for the production of abatement goods. The structure of these industries was bor- rowed from the corresponding non-abatement input. Singularity is avoided by the fnot that it is the (I — A) matrix whieh is inverted. Results ‘The results of the simulation are presented in Tables 2 and 3. Th that total annusl expenditures for 99.90 percent control of the gross flow of par- ticulates in the manufacturing sector of the New York State economy in 1972 would have been $135.5 million, This represents an increase of $66.7 million or " Cost-efficieney cquations for major equipment types and relative use of equipment ‘ean bo found in Rose (12, 13]. A similar set of equations has alzo been estimated by Babcock Bh. 4 Tn order to simplify the analysis, it was assumed that control costs were entirely ab- sorbed by industry. This had the effect of keeping baseline gross output constant, thus re- Tieving us of changing nearly every coofficient of the entire table. Greater accuracy could be Attained in the simulation, however, by taking price elasticities of demand into aecount.388 JOURNAL OF REGIONAL SCIENCE, VOL. 17, NO. 8, 1977 TABLE 2: Result of Simulated Increase in the Control Requirement for Particulates to 99.9 Percent Manufacturing Sector, New York State, 1972: Abatement Goods Gross Output ‘Change Over Base “e000! Abatement Good Industry Levels (Percentage) 1b Maintenance 88 27 Chemicals 100 68b Electricity 7 7b Insurance VAS Interest VA Federal taxes (credit) VA State and local taxes VA Construction Depreciation VA Faquipment Depreciation Tmports (maintenance) ‘Total (= annualized costs) 135,492 12 Construction 161,578 49 Equipment 58,827 Imports (equipment) ‘Total (= gross investment) Total Gross Output? falue Added * Depreciation not included in column sum to avoid double-counting, 97 percent over the cost actually incurred during that year when the control level was 98.79 percent." Expressed as a percentage of gross output in manufacturing, the figures are .117 percent and .280 percent: respectively. ‘The overall inerease in output due to a change in control levels was quite small, amounting to less than one-half of one percent. Of the total 409 percent increase, 316 percent was attributable to the chango in structural coefficients (direct costs) and .093 percent to the output multiplier effect (indirect costs). ‘The most significant impact of raising eontrol requirements appears to be in the area of net investment (sce Table 2 and Table 3, Columns 5 and 6). Sizeable expenditures in pollution control equipment and concomitant, construction would be necessary to raiso abatement capacity to mandated levels. The simulated $236.0 million net investment in pollution control plant and equipment represents a twelvefold increase over actual 1972 figures and slso represents 15 percent of actual total net investment in the State. "While these results represent the author's best estimates, some caveats are in order. Note thet $78 million of the total $135 million increase is attributable to interest and depreci- ation costs. Theso results sre based on a cost of capital corresponding to a 60-50 debt-equity ratio and straight-line depreciation modified by intensity of use. Adjustments for the relative une of funds including internal sources and use of alternative depreciation aecounting prac- tices are likely to have a noteworthy effect on the results.ROSH: ASSESSMENT OF ATR POLLUTION REGULATIONS 339 ‘The overall decrease in the emission of particulates amounts to 148,545.3 tons. Note that the total net flow presented in Column 7 of Table 3 is not a 99.90 percent reduction in baseline gross flow emissions since additional pollution was generated by the direct and indirect demands for additional pollution abatement goods. As a result of this pollution generated during the course of pollution eontrol, an effective 99.89903 percent reduction level was attained."* As noted in footnote 7, above, additional iterations of the model will narrow the gap between Y, and ¥,. An industry level inspection of the results yields additional insight into the impact of stricter environmental control. Aside from the pollution abatement goods industries, the largest inereases in gross output were found in lumber, 3.6 percent; primary iron and stecl, 2.1 percent; heating, plumbing and fabricated metals, 1.9 percent; and petroleum refining, 1.8 percent. As would be expected, on the other hand, there was a negligible impact on industries such as apparel, optical equipment, office machinery, etc. The industries most affected are those which represent major inputs into construction and/or pollution control equipment manufacturing. Still, the results reveal one of the limitations of using even an 86 sector input-output table. Pollution control facilities are likely to require a higher proportion of metal work and a lower proportion of lumber input than is indicated by the single construction industry used. A more disaggregated table which distinguished between residential and plant construction would have pro- duced much more accurate results on this score. Increases in net investment among individual industries follows less of an obvious pattern. The largest percentage increases are found in those industries which were characterized by relatively low control levels in 1972 and/or which experienced very low investment in control equipment during normal conditions for that year. Thus relatively light polluting industries such as 34, footwear, and 53, electric transmission equipment, suffered the largest measurable pereentage increases. In terms of absolute levels it is not surprising to find the highest invest- ment expenditures among 27A, chemicals, 36, stone and clay products, 37, iron and steel. The large inereased demand for abatement equipment imposes quite a strain on the industry responsible for the production of this good, 40. The re- quired sixfold inereaso in output may cortainly not be feasible within the short time horizon. Deeper investigation into the capacity and any impediments to expansion of this industry would have to be made. The possibility of increased reliance on imports should also be considered. These questions would have great: relevance to the drafting of an attainable compliance schedule by the environ- mental authority. On an industry-by-industry basis, the greatest reduction in particulate emis- sions are found where the lowest control levels existed prior to the simulation. 1 An additional gross flow of 125,704.6 tons was generated in manufacturing, but since this too was subject to control, the additional net flow was only 125.7 tons, or less than 1.0 pereent of the total net flow from manufacturing, Note also that the gross flow of particulates (as well as other pollutants) would increase in the other sectors of the economy. The only polluter of significance, however, would be electric utilities which are extensively controlled, ‘Thus the net flow increase in nonmanufacturing would also be minor,zea" v6" 260" sor ToReOOT —etonposd jerow “gus zeNO ZF 5 18 099°189 se L000" —-swanposd ouIyoUT Masog TH 8 sionposd ywrau pay sol See100° aay AqUNYA ‘SUNG OF ove zITI00 SIOMIIGOD TIL Ge OTT = €98¢00" SOM moHeJUON AewUE — gE 5 ZoL_SeF610 pow 3 wou! Aswonay oe 3 oo osIz0: sionpoid Sep 9 aug OF 8 a8 e700" sionpoid seus s5vI Ge a ZZ 62000" sionposd aq PAVaMIo0T ¥~ £ FI OBCTOO"—Monpoxd-y FUER aOqVT EE g wt wonswyd “ostwr 7 soqqnd Ze 5 te pean kd sr sponpord pote 7 ued OF 2 anpoad z oe rayon 7 Buuvapp ‘NIG 6s § sonayyuse sons Sz a oz siworuiong viz = £01 nd y Sunueg Oe § we srauyeitos prvogiaded 2 se sonposd pars 7 sodoq 5% 2 a ie zg mor z 5 ise 8 e prsapes aaa plier 8 eee 18 zz peasy 9p ures set suaimzejnueut 0998 qo, oe sionposd paspury 37 poog ase 999 nding 5009 Anisnpoy sau) 340 a 4 5 s 5 z 3 & = 2 g & quoaiog 666 OF SABNONEY JO} JuEUIOIMbaY JIU oq UL oswaxoUT PAHYPNUUS Jo MSY °e ATAVLoro 0} yonbe quounsaaut ouypostg 5 Zz) wo 16 e0ez00 soe cose e's eat aeot00 o10"s8— £0065 n'y ost aesz0 er 5— ono seers eer a0 06 400" ooc'oes'e «eke 000 Bg) ows a 03 onz000 & $90°0+ Tor 0 0 $80" 0 882000" 5 * ° ° zen fy e100 3 ore + m0 OW ot 668100 se + 160 cer 62000 oF 7) oor 0 ser osn00 161 os" n't 810 ws'exo'L gE L000 ase sre ow ow 1 uun‘zi9 18 tert00" me- SL wer th ow Tos"s6r sar eT00 126" 90'S sar'e or'e 00) oceT8 SH GelzoyP uoMMUEN ona 8 ow B- oor o's $0 soo'sec' THT sn0" sou Annnpay oor Ze gov Buryuno> coer Sto irs ese oo" $8 oerTOg" 9 FuNduod ‘oomKQ 19 sire aw os ce o0e 28 sz5K000 ionposd dows OorIY OF S| wew- we wre oe er 99100" nenpay ju0NE Z| owe ae + oT 680 st 690100" “samp 2] oww- sor aun sor oer OL oezo0" —asaurdynbo B14 g s0S- wT 669 sel 004: 6 Be0T00"——“dmbo Supuvy spo, Vp : ‘nauidimbe pyoy no a] orw~ or ost ove 298 one's Zs eaeoo | Bu noRIINATEUED gy 2| swe wo" ort 86 su vaatat Ol 17100" Avon wey 21 s0e- os ST ORE 00" 970° L¥L Bor ——z61000 seuqiny 7 Souda ey Panuquog +e GTAVL2 JOURNAL OF REGIONAL SCIENCE, VOL. 17, NO. 3, 1977 All industries but one attained reduction in emissions and most were characterized by substantial improvement. Only industry 61, transportation equipment, suf- fered a net increase, This was due to the fact that it had already attained 99.9 per- cont efficieney by 1972. Therefore, the inereased gross pollution flow generated by the direct and indirect demands for abatement goods was not offset by an in- crease in effeetive control. Belore leaving this section we ean complete our discussion of relative abate ment costs by inspecting the total abatement coefficients of Column 1 of Table 3. Industry 27, chemicals, now heads the list with the highest abatement require- ment—2.34 percent. Tt is followed by the wooden container, stone and clay prod- ucts, primary iron and steel, plastics and synthetics, and petroleum refining in. dustries. Note, while the rank order of total current coefficients changed little between Tables 1 and 8, there were significant increases. The number of industries «with abatement requirements in excess of 1.0 percent tripled to six and the number in excess of 0.1 percent rose from sixteen to thirty-one. Implications Ignoring any minor effects on other pollutants arising from increases in activity levels or joint abatement, the nct environmental effect of the simulated poliey has been a decrease of 143,545 tons of particulates, a drop of 91.7 pereent over baseline e Sufficient data are not available to ascertain whether the benefit of the decreased emissions is equal to the (direct) cost, estimated at $06.7 million. Keep in mind that the specified 99.9 percent standard is only a proxy for a marginal benefit function. The true marginal benefit function is untikely to be vertical and may only accidentally interscet the marginal cost function at 99.9 percent. Further investigation into the shape of the benefits (foregone damages) curve needs to be undertaken, From a cost-effectivencss standpoint we can compare the figure of $6 per unit of climinated pollution for the first 98.79 pereent control to $248 por unit of eliminated pollution for the last 1.11 percent. ‘The overall impact on the economy appears to be minor. The inereased output in all manufacturing industries but seven amounted to less than 1.0 percent. Only in the two abatement goods manufacturing industries did it exceed 5.0 percent. Increases in employment and income would be of similar numerical size, though one-half pereent change in the former is quite significant. ‘The major ceonomic impact appears to be in the area of investment in abate- ment goods which jumped from 1.0 percent to 15.0 pereent of total net investment: in manufacturing in the State. It is likely that these expenditures would have & displacing effect on other investment although no attempt has been made to meas- ure this in the simulation.’* Of course, the results are due to the assumptions of a one-year implementation timetable and full compliance. In light of the substantial capital requirements and certain real world features involving lead time require- ments, these assumptions are quite tenuous. They were employed because the focus of the exercise is on the overall impact of tighter cnvironmental control. For “The possibility that this may have a dampening effect on the economy is explored by Evans (51ROSE: ASSESSMENT OF AIR POLLUTION REGULATIONS 43 the purpose of an actual policy simulation, it seems desirable to spread investment over time. Methodologically, this can be accomplished by allowing the capital stock adjustment mechanism to be less than unity. All in all, the results show that the adoption of state-of-the-art controls will not wreak havoc upon the State’s economy.” ‘This is a significant finding in light of repeated warnings that economic well-being and maintenance of a high level of environmental quality are mutually exclusive. 5. CONCLUSIONS ‘This paper has presented theoretical and empirical sides of a simulation model for air pollution abatement planning. The research represents an attempt to over- ‘come weaknesses relating to operational capabilities, empirical quality and fore. casting ability of precursor models. All of this has been done within the context of a self-contained input-output system modified to focus on environmentally- related aspects of the economy. Trend factors based on fundamental cost-engi- neering relationships of air pollution control are used to link the economie structure to level of environmental policy. ‘The model was applied to a hypothetical increase in control requirements for particulates in the manufacturing sector of the New York State economy during 1972. The simulation estimated direet and indirect increases in annual abatement, costs, the additional investment in pollution control facilities, the effect on the gross output of commodities and the effect on the pollution flows of each industry. The results indicate that the adoption of state-of-the-art control would not have a significant adverse impact on the economy. Several natural extensions could further heighten the model’s capabilities, and could be added in a very straightforward manner. The model ean be expanded to include a number of pollutants in all sectors of the economy. Control strategies other than stack gas-cleaning can readily be incorporated. The attachment of a labor coefficient matrix will facilitate the calculation of employment multipliers. Also, either through the use of price elasticities or the model’s price value-added counterpart, inflationary consequences ean be examined. Finally, the methodology used to adjust structural coefficients for time trend or policy analysis ean be used to adapt the model to other regions. Care would have to be taken to adjust for differences in production structures and control technologies between regions, and it would also be necessary to estimate actual control levels for the region in question. In light of the recent passage of manda- tory requirements for economie-environmental assessment reports and the un- availability of abatement cost data, such an approach may have to be used until more primary research is completed. REFERENCES 11} Almon, C. “Investment in Input-Output Models and the Treatment of Secondary Prod- ucts,” in A. P. Carter and A. Brody (eds.), Applications of Input-Output Analysis. Amater- dam: North-Holland, 1970, 1 Recall that the simulation represents an upper bound estimate since process and input, substitution were not considered.