Can pollution regulations help an industry’s bottom line?

SALT LAKE CITY — A new study shows that certain industries in the right circumstances can benefit from air pollution regulations to boost their profits, running counter to the notion that all regulations are burdensome and costly to industry.

That boost in the bottom line was contrasted in outcomes examined in unregulated industries in the work by Weber State University and University of Utah researchers.

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“It does not mean every firm is better off,” said one of the study’s co-authors, Francois Giraud-Carrier, an assistant professor of supply chain management at WSU’s Goddard School of Business and Economics.

Giraud-Carrier said emission limits like those under a cap and trade system force industry to invest in cleaner technology, raise their prices for the consumer to offset the investment and through time, those increased prices boost a company’s bottom line.

“The large companies sell a very high volume, but we get a cleaner environment and while we may pay more, we get cleaner air,” he said. “The companies make more money, consumers are better off and society is better off.”

The study, co-authored by Krishnan S. Anand, a professor of operations and information systems at the University of Utah, was recently published in the journal Management Science.

Francois Giraud-Carrier

Weber State University

Cap and trade systems create a market with a set number of polluting rights commonly called emission allowances. Industries that pollute less than what is in their regulatory permit can sell off excess allowances to companies that pollute more than permitted. The paper asserts that this type of system incentivizes companies to invest in efficiency and innovation so they can profit from selling allowances.

Giraud-Carrier said the opportunity to boost profits in some industries is particularly relevant for “concentrated” industries like oil and gas, cement and aluminum, which he emphasized are dominated by a few competing firms that hold significant market power.

Because of that market power, they are able to absorb the investment in cleaner technology to pay for pollution abatement while still making a profit, the study says.

He said that shifting emission allowances among players is more effective at tamping pollution in a cap and trade system than a tax that is stagnant and doesn’t provide the same sort of incentives to invest in the most innovative technology.

“Nobody likes regulation. We understand that, but regulation is sometimes necessary,” he said. “Unless you have some kind of regulation, there’s nothing natural to prompt individuals and companies to change their behavior with respect to the environment.”

The paper takes note of the extreme amount of tension among industry, the medical profession and clean air advocates when it comes to pollution controls, pointing to the 2015 mercury rule put out by the U.S. Environmental Protection Agency.

Electric power utilities warned the costly rule would lead to the early retirement of coal-fired power plants and cause layoffs of hundreds of workers. Critics countered that the cost to society from mercury pollution is much more damaging, leading to birth defects and other adverse health outcomes.

In Utah, the mercury rule did force the early retirement of the Hunter Power Plant outside of Price.

The findings did reveal that shifting emission credits only work when regulations are “moderate” and not drastic or punitive.

“Clearly cap and trade should be one of the instruments used to address climate change, but we are not saying it is the only way,” Giraud-Carrier said. “It should be one element in an arsenal of tools, one that’s particularly well-suited to large concentrated industries.”

Bryce Bird, director of the Utah Division of Air Quality, said regulators use a variety of emission reduction tools built around state plans put in place in areas that were out of compliance with federal clean air standards establishing thresholds on pollutants.

The division acts as the “banker” in monitoring the company-to-company transactions when it comes to the amount of emission reduction credits that get transferred.

State plans put a cap on emissions, so any new company emitting pollution would have to purchase credits from another company to stay under that ceiling.

The state plans are built-in with inherent reductions so the credits are not handled on a one-to-one basis, but rather require the declines so the ceiling isn’t breached.

“So if one were to bring in 1,000 tons of new emissions, the (credits) would have to prove there is the retirement of 1,100 tons of emissions,” he said. “It is a net benefit to the airshed because it is not a 1-to-1 ratio for those pollutants,” Bird said.

While the division does not get involved in pricing the transactions, Bird said, the emission reduction credits have been effective.

“It does provide incentives for companies to reduce their emissions and get paid by the company that needs the offset.”

The division also uses a regulatory “tax” by assessing an annual fee on major industrial sources of pollutants that is built around how many tons of pollutants they emit.

In addition, road projects that use federal funds must conform to a transportation budget for emissions in areas where air pollution is a challenge along the Wasatch Front and elsewhere in the state.

The combination of those regulatory tools have been effective over time, he added, with the crowded Wasatch Front able to reduce levels of air pollution despite its fast-growing population.

The advent of Tier 3 fuel being refined and distributed along the Wasatch Front, in addition to new, cleaner model cars coming online, is also helping to make a dent.