The distributional effects of pollution regulations: Do renters fully pay for cleaner air?

Abstract

Changes in housing prices play an important role in determining the incidence of environmental regulations: if the increase in value due to changes in environmental amenities is fully passed forward in the form of higher rental prices, renters may receive no net benefit from the regulations. To estimate the pass-through of the value of an environmental amenity, I exploit the reduction in suspended particulate matter (PM10) due to the 1990 Clean Air Act Amendments (CAAA). Using instrumental variables at varying levels of spatial aggregation I find that the 1990 CAAA led to a significant increase in rents, but the estimated percentage effect is about half as large as that of owner-occupied housing values. Little of this difference is driven by income differences between renters and homeowners; when stratifying by income and comparing the effect of the 1990 CAAA on housing values and rents, point estimates suggest that half of the increase in value is passed on to renters in the form of higher rents. This suggests that pass-through may be incomplete, but landowners still capture much of the value of the air quality regulations.