Exploring the General Equilibrium Costs of Sector-Specific Environmental Regulations

Abstract

The requisite scope of analysis to adequately estimate the social cost of environmental regulations has been subject to much discussion. The literature has demonstrated that engineering or partial equilibrium cost estimates likely underestimate the social cost of large-scale environmental regulations and environmental taxes. However, the conditions under which general equilibrium (GE) analysis adds value to welfare analysis for single-sector technology or performance standards, the predominant policy intervention in practice, remains an open question. Using a numerical computable general equilibrium (CGE) model, we investigate the GE effects of regulations across different sectors, abatement technologies, and regulatory designs. Our results show that even for small regulations GE effects are significant, and engineering estimates of compliance costs can substantially underestimate the social cost of single-sector environmental regulations. We find the downward bias from using engineering costs to approximate social costs depends on the input composition of abatement technologies and the regulated sector.