Environmental Regulations and Industrial Competitiveness: Case Studies of Toxic Industries in Southern California (Environment & Policy, 62) 3031263758, 9783031263750

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Environment & Policy  62

Ward Thomas Paul Ong

Environmental Regulations and Industrial Competitiveness Case Studies of Toxic Industries in Southern California

Environment & Policy Volume 62

The series, Environment & Policy, aims to publish research that examines global and local environmental policies. It covers a variety of environmental topics ranging from biodiversity, ecology, pollution, climate change, agriculture, biodiversity, sustainability, resources, to water security. This long-standing series has published renowned authors for over a decade and it continues to be the home for environmentalists, policy experts, and related discipline experts who are genuinely interested in tackling the issues of our days.

Ward Thomas • Paul Ong

Environmental Regulations and Industrial Competitiveness Case Studies of Toxic Industries in Southern California

Ward Thomas Department of Urban Studies and Planning California State University, Northridge Northridge, CA, USA

Paul Ong Luskin School of Public Affairs University of California, Los Angeles Los Angeles, CA, USA

ISSN 1383-5130     ISSN 2215-0110 (electronic) Environment & Policy ISBN 978-3-031-26375-0    ISBN 978-3-031-26376-7 (eBook) https://doi.org/10.1007/978-3-031-26376-7 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

This book is dedicated to my mother, Marjolie M. Thomas, and the memory of my father, Mark E. Thomas, for their undaunting support. W.T.

Acknowledgments

We acknowledge our families, friends, and colleagues for their support and love.

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Contents

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 Environmental Regulations and Industrial Competitiveness��������������    1 Introduction������������������������������������������������������������������������������������������������    1 Conceptual and Methodological Issues ����������������������������������������������������    4 Research Methods��������������������������������������������������������������������������������������    8 Concluding Remarks����������������������������������������������������������������������������������   10 References��������������������������������������������������������������������������������������������������   10

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Policy Background: The South Coast Air Quality Management District ������������������������������������������������������������������������������   13 Introduction������������������������������������������������������������������������������������������������   13 The Emergence of Air Pollution in Los Angeles ��������������������������������������   14 The Clean Air Act of 1970 ������������������������������������������������������������������������   18 The AQMD������������������������������������������������������������������������������������������������   19 References��������������������������������������������������������������������������������������������������   22

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 The Metal Finishing Industry and Economic Growth ��������������������������  25 Introduction������������������������������������������������������������������������������������������������   25 The Empirical Literature����������������������������������������������������������������������������   27 The Metal Finishing Industry and Hexavalent Chromium������������������������   29 Regulatory Impacts on the Metal Finishing Industry in Southern California��������������������������������������������������������������������������������   33 Conclusion ������������������������������������������������������������������������������������������������   37 References��������������������������������������������������������������������������������������������������   38

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 The Wood Furniture Industry and Industrial Location����������������������   43 Introduction������������������������������������������������������������������������������������������������   44 Review of the Literature����������������������������������������������������������������������������   46 Evidence of Wood Furniture Relocations��������������������������������������������������   48 Intervening Factors������������������������������������������������������������������������������������   50 Adjustment to Rule 1136 ��������������������������������������������������������������������������   53

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Contents

Isolating the Effects of Rule 1136�������������������������������������������������������������   55 Conclusion ������������������������������������������������������������������������������������������������   57 References��������������������������������������������������������������������������������������������������   57 5

 The Dry-Cleaning Industry and the Early Adopters of Pollution-­Prevention Technologies ����������������������������������������������������   61 Introduction������������������������������������������������������������������������������������������������   61 Background������������������������������������������������������������������������������������������������   63 Firm and Market Characteristics����������������������������������������������������������������   65 Bivariate Analysis��������������������������������������������������������������������������������������   67 Multivariate Analysis ��������������������������������������������������������������������������������   69 Conclusion ������������������������������������������������������������������������������������������������   71 References��������������������������������������������������������������������������������������������������   73

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 Conclusion: Implications for Environmental Policy����������������������������   77 Introduction������������������������������������������������������������������������������������������������   77 The Environmental Policy Dilemma����������������������������������������������������������   78 Approaches to US Environmental Policy��������������������������������������������������   79 Policy Implications of the Case Studies����������������������������������������������������   80 Final Thoughts ������������������������������������������������������������������������������������������   83 References��������������������������������������������������������������������������������������������������   83

Index��������������������������������������������������������������������������������������������������������������������  85

Chapter 1

Environmental Regulations and Industrial Competitiveness

Abstract  Industries in the U.S. emit billions of pounds of toxic chemicals into the environment every year, resulting in a major risk to human health. Many economists and policy makers, however, are strongly opposed to environmental regulations based on an assumption that regulations lead to a loss of jobs and a declining standard of living for U.S. citizens. The empirical literature on this question has produced mixed results, and this chapter critically assesses several conceptual and methodological issues that are embedded in this literature. Our thesis is that stringent environmental regulations have the potential to effectively and efficiently reduce toxic emissions from polluting firms and industries while having a negligible impact on the economic competitiveness of firms and industries. We investigate this thesis through three empirical case studies of polluting industries in Southern California that are highly regulated by the South Coast Air Quality Management District (AQMD): metal finishing, wood furniture, and dry cleaning. We also attempt to reveal the institutional process by which firms comply with environmental regulations. Keywords  Environmental regulations · Economic competitiveness · Environmental pollution · Economic externalities · Market failure · Environmental compliance · Technological uncertainty · Innovation · Adoption

Introduction Over the last half century, the US federal government has played an active role in regulating the emission of toxic chemicals from polluting firms and industries (Rosenbaum, 2019; Telsey, 2016). Congress passed the Clean Air Act of 1970 “to protect and enhance the quality of the nation’s air resources so as to promote the public health and welfare and the productive capacity of the population” (US Environmental Protection Agency, 2007, p.  2). Congress also created the EPA (Environmental Protection Agency) in 1970 to implement and enforce the nation’s environmental laws. The Clean Water Act of 1972 is designed to “restore and © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 W. Thomas, P. Ong, Environmental Regulations and Industrial Competitiveness, Environment & Policy 62, https://doi.org/10.1007/978-3-031-26376-7_1

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maintain the chemical, physical, and biological integrity of the Nation’s waters” (US Environmental Protection Agency, 2022a). The Toxic Substances Control Act of 1976 requires “reporting, record-keeping and testing requirements, and restrictions relating to chemical substances and/or mixtures” among companies using toxic chemicals (US Environmental Protection Agency, 2022c). Additional policies include the Clean Air Act Amendments of 1977 and 1990; the Comprehensive Environmental Response, Compensation, and Liability Act of 1980; the Emergency Planning & Community Right-to-Know Act of 1986 (EPCRA); the Food Quality Protection Act of 1996; and the Frank R.  Lautenberg Chemical Safety for the Twenty-First Century Act (Kraft & Furlong, 2020). While implementing, environmental legislation has significantly improved air and water quality in the United States, environmental pollution resulting from industrial activity continues to be a pervasive problem throughout the country (Jones, 2021; US Environmental Protection Agency, 2011). For example, industries release more than 4 billion pounds of toxic chemicals into the air, land, and water every year, resulting in major risk to human health and the environment (Brackett, 2021). Adding to the problem, US industries develop thousands of new chemicals every year with unknown toxic or dangerous qualities (Rosenbaum, 2019). Moreover, approximately one-half of the nation’s 40.6 million acres of lakes, ponds, and reservoirs and 3.7 million miles of rivers and streams are not clean enough to support their designated uses, such as for fishing and swimming (US Environmental Protection Agency, 2017). These pollutants have severe health consequences. Epidemiological research has linked air pollution in metropolitan areas to adverse health effects in humans, including cancer, cardiovascular disease, and increased mortality (American Lung Association, 2022; Weitekamp et al., 2021). Almost half the people living in urban areas in the United States are exposed to unhealthy levels of ozone and particulate matter; 30 million adults and children have been diagnosed with asthma (American Lung Association, 2022). Finally, climate change resulting from carbon emissions into the atmosphere from polluting industries represents a major threat to the future of the planet. According to the Intergovernmental Panel on Climate Change (IPCC): The cumulative scientific evidence is unequivocal: Climate change is a threat to human well-being and planetary health. Any further delay in concerted anticipatory global action on adaptation and mitigation will miss a brief and rapidly closing window of opportunity to secure a livable and sustainable future for all (Intergovernmental Panel on Climate Change, 2022, p. 35).

The scientific evidence clearly demonstrates a continuing need to regulate industrial activities. Despite this harsh environmental reality, many economists, politicians, policy makers, and other stakeholders are strongly opposed to stringent environmental regulations that are intended to reduce toxic emissions from firms and industries (Coglianese & Carrigan, 2013). For many, their opposition is rooted in the logic of standard economic theory, a theory that assumes that environmental regulations are an impediment to a strong and healthy economy (Gray, 2015; Jaffe et  al., 1995;

Introduction

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Milliman & Prince, 1989). As Adam Jaffe, an economist at Brandeis University and the leading researcher on the effects of environmental regulations on economic competitiveness stated: “The conventional wisdom [in economic theory] is that environmental regulations impose significant costs, slow productivity growth, and thereby hinders the ability of US firms to compete in international markets” (Jaffe et al., 1995, p. 133). According to Wayne Gray, an economist at Clark University and a Research Associate of the National Bureau of Economic Research: “Environmental regulations raise production costs and lower productivity by requiring firms to install pollution control equipment and change production processes” (Gray, 2015, p. 1). Environmental regulations for firms, according to this reasoning, redirect resources away from research and development activities and increase the prices they charge for their products, placing them at a competitive disadvantage with their unregulated rivals. The purported impacts on the economy are devastating: Firms are forced to lay off workers, go out of business, or relocate to foreign countries where environmental regulations are weak or nonexistent. We need to emphasize, within the context of the foregoing arguments, that unregulated pollution generates economic externalities that are not reflected in market prices (Edenhofer et  al., 2021; Owen, 2004; Pigou, 1924; Vatn & Bromley, 1997). This market failure leads to over production and consumption, economic inefficiencies, and lower societal well-being. The ideal policy, from a purely theoretical point of view, is to impose a Pigouvian tax equivalent to the externalized costs, which would lower total output and purchases, provide compensation for adverse impacts, and induce innovations to lower externalities per unit of output. Unfortunately, it is not always feasible or practical to use the taxation approach, so the best implementable strategy is to use a mix of approaches, including the use of regulations on emissions and production processes (Holland, 2012; Lehmann, 2012). Which approach or combination of approaches is optimal or most feasible depends on the specifics of the targeted industry and emissions, the state of existing and potential technology, politics, and other factors. While determining the most desirable mix is important, that question is beyond the scope of this book. Instead, we take an agency’s choice of using a regulatory approach as an a priori given and focus on the question of whether industries can adapt and remain competitive (Lehmann, 2012; Pigou, 1924). Despite strong opposition to stringent environmental regulations, several decades of empirical research examining the effects of environmental regulations on economic competitiveness have produced mixed results. Some empirical studies have indeed found that environmental regulations lead to a reduction in industrial productivity or cause firms to relocate to less regulated regions (Barbera & McConnell, 1986; Gollop & Roberts, 1983; Gray, 2015; Greenstone, 2002; Greenstone et al., 2012; Henderson, 1996; Jorgenson & Wilcoxen, 1990, 1993; Walker, 2013). However, other empirical studies have either found no correlation between environmental regulations and a decline in economic growth or that regulated firms and industries do just as well economically as their unregulated counterparts (Becker, 2011; Belova et al., 2013; Berman & Bui, 2001; Meyer, 1992; Morgenstern et al., 2000). Finally, a third line of empirical research has generated evidence that

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stringent environmental regulations can induce innovation as firms respond by developing new product and process technologies that reduce toxic emissions and increase firm productivity at the same time (Ambec et al., 2013; Porter, 1991; Porter & Van Der Linde, 1995a, b; Schmidheiny, 1992). In light of these mixed empirical findings concerning the effects of environmental regulations on economic competitiveness, we argue that the jury is still out on this question. Moreover, research in the social sciences on this question has tended to wane in recent years. In this book, we wish to help restart this debate by presenting three case studies of polluting industries in the Southern California region that have been subject to stringent environmental regulations. The three industries are metal finishing, wood furniture, and dry cleaning. Each of these industries emits a toxic chemical into the ambient air that poses a serious risk to human health and the environment. The wood furniture industry emits volatile organic compounds (VOCs), the metal finishing industry emits hexavalent chromium, and the dry-­ cleaning industry emits perchloroethylene (PERC). These chemicals are highly carcinogenic and human exposure to them may lead to a number of serious health problems, including respiratory illness, cardiovascular disease, and cancer. We expand on the negative health effects of these chemicals in the chapters that follow. The three are also fruitful case studies for examining the effects of environmental regulations on economic competitiveness because these industries have been subject to stringent regulations by the South Coast Air Quality Management District (AQMD) for several decades. The AQMD was created by the state of California in 1977 to regulate air quality in Southern California in compliance with the Clean Air Act of 1970 (including the 1977 and 1990 Clean Air Act Amendments). AQMD must also be in compliance with the California Clean Air Act of 1988. AQMD’s official jurisdiction includes all of Orange County and the nondesert portions of Los Angeles, Riverside, and San Bernardino counties, an area covering 10,473 square miles and home to approximately 17 million people. We refer to this region throughout this book as Southern California. In Chap. 2, we review the history, background, and legal authority of the AQMD.

Conceptual and Methodological Issues As we have noted, there is a relatively large literature focusing on the relationship between environmental regulations and economic competitiveness. This section identifies and discusses several conceptual and methodological issues that are embedded in this literature. From our perspective, these issues require clarification and explanation of limitations to adequately understanding the effects of environmental regulations on economic competitiveness. Our conceptualization of the relationship between environmental regulations and economic competitiveness has been informed and influenced by the work of Michael Porter and Claus an der Linde (Porter, 1991; Porter & Van Der Linde, 1995a, b). In a series of essays, they have argued that environmental regulations have the potential to encourage firms to

Conceptual and Methodological Issues

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develop product and process technologies that can reduce toxic emissions and increase productivity at the same time. They have also been critical of some of the concepts and methods used by other economists to assess the effects of environmental regulations on economic competitiveness. To begin with, economic competitiveness is a broad and abstract concept, and there is no singular agreed-upon operational definition in the academic discipline of economics (Berger, 2008; Dechezlepretre & Sato, 2017; Jaffe et  al., 1995). One widely cited definition is that economic competitiveness refers to “the degree to which a nation, under free and fair market conditions, produces goods and services that meet the test of international markets while simultaneously maintaining and expanding the real incomes of its citizens” (Tyson, 1988, p. 97). In the literature about the effects of environmental regulations on economic competitiveness, the concept of economic competitiveness has been defined and operationalized in a number of different and more specific ways. For example, economic competitiveness has been operationally defined to include foreign trade, plant locations, firm productivity, employment growth, and economic output (Dechezlepretre & Sato, 2017). While the cited literature refers to international competition, the concepts also apply to interregional competition within a nation. In other words, firms face pressure from competitors abroad and firms in other parts of the country. A systematic failure to be competitive is manifested as an overall decline of the industrial sector for a region or nation. Each of our case studies in this book, likewise, examines the effects of environmental regulations on one or more dimensions of economic dynamics and outcomes. Our case study of the metal finishing industry focuses on the relationship between environmental regulations and economic growth; our case study of the wood furniture industry focuses on the relationship between environmental regulations and firm relocations; and our case study of the dry-cleaning industry focuses on the relationship between environmental regulations and the early adopters of pollution-prevention technologies. We will elaborate on these conceptual dimensions of economic competitiveness more thoroughly in the chapters that follow. Second, environmental regulations usually require polluting firms to adopt alternative or new technologies that mitigate toxic emissions. Accordingly, innovation and technological change are often at the heart of how firm and industries comply with environmental regulations. We divide technologies that can reduce toxic emissions into four categories: product, process, add-on control, and pollution-­ prevention. Product technologies include new or modified versions of an existing product that reduce toxic emissions; process technologies involve the discovery of new production techniques that reduce toxic emissions; pollution-prevention technologies are process technologies that reduce toxic emissions without impeding firm productivity; and add-on control technologies involve the use of equipment that traps, stores, treats, and disposes of toxic emissions (sometimes referred to as end-­ of-­pipe technologies). Third, the majority of empirical research in the social sciences analyzing the effects of environmental regulations on economic competitiveness has been conducted by economists using econometric models. Econometric models typically

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specify a statistical relationship that is believed to exist between particular economic phenomenon based on established theories in economics (Blair & Carroll, 2009). The empirical literature based on econometric models provides a crucial and informative context for the case studies in this book, and we review the relevant studies in detail in the chapters that follow. However, econometric models have been criticized for having limitations when it comes to assessing the effects of environmental regulations on economic competitiveness. The most significant shortcomings are making inaccurate assumptions about the economic behavior of firms and relying on proxy variables that do not fully capture the costs of environmental compliance. We expand on these criticisms in the text that follows. A fourth important conceptual issue is the argument made by many economists that environmental policy makers are incapable of (1) identifying technologies that can efficiently mitigate the emission of toxic chemicals and (2) designing regulations that can foster innovation in less polluting process and product technologies. Economists and the business community, in general, often perceive environmental regulators as white-collar bureaucrats who are divorced from the realities of business (Goodstein & Polasky, 2017). Accordingly, any technologies that environmental regulators recommend or require firms to adopt to alleviate toxic emissions will inevitably be suboptimal. Economists are particularly skeptical of the idea that environmental regulators can identify pollution-prevention technologies. If technologies existed to improve productivity (regardless of whether or not they reduce toxic emissions), firm owners would know about them and would have already adopted them. We argue that this skepticism is misplaced, or at least not applicable to all situations. We approach our case studies with the assumption that there is a role for environmental regulators to play in identifying technologies that can help to mitigate environmental pollution. The fifth issue (which is related to the previous one) concerns the theoretical assumption in standard economic theory that business owners (and managers and engineers) have full knowledge of the productive capabilities of all technologies available in the marketplace (Jaffe et al., 1995; Rosenberg, 1972). Accordingly, they will automatically adjust to changing market conditions by adopting optimal technologies that will maximize productivity and profits. We argue, however, that business owners do not necessarily have full information about the productive capabilities of all technologies available in the marketplace. This alternative assumption is crucial in the context of environmental compliance. As Porter states: The belief [by mainstream economic theory] that firms know about all profitable technologies makes a false assumption about competitive reality—namely, that all profitable opportunities for innovation have already been discovered, that all managers have perfect information about them, and that organizational incentives are aligned with innovating. In fact, in the real-world managers often have highly incomplete information and limited time and attention. Barriers to change are numerous (Porter & Van Der Linde, 1995a, p. 127).

In other words, the fundamental problem is merely inadequate knowledge, which can be remedied.

Conceptual and Methodological Issues

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The mindset of business owners, we argue, is more accurately conceptualized by the concept of “technological uncertainty” (McKenna, 1986).1 There are a confluence of factors that can create technological uncertainty in the minds of business owners in general and during the process of environmental compliance in particular. First, new technologies, including product, process, pollution-prevention, and addon control technologies, may need to undergo years or decades of testing and modifications before their capabilities are fully known. Second, new technologies may necessitate additional steps in the production process that require workers to be trained on new processes over an extended period. Third, it may take a significant amount of time and money for firms to acquire the necessary information to learn how to use new and alternative technologies efficiently. Finally, technological change and innovation often take place through a lengthy process of “learning by doing” involving extensive interaction with, and feedback from, customers and suppliers (Nelson & Winter, 1982; Rosenberg, 1994). The sixth problematic issue involves the difficulty of accurately measuring the economic costs incurred by firms and industries for environmental compliance. To begin with, there is no agreed-upon method in economics for measuring the costs of environmental compliance. A common empirical measure used in the literature is the US Census Bureau’s Pollution Abatement Control Expenditures (PACE) survey that asks firms to estimate their capital expenditures and operating costs for environmental compliance. The problem with the PACE survey, however, is that firms generally do not keep track of their expenditures on environmental compliance and are inclined to overestimate these costs (Berman & Bui, 2001; Dechezlepretre & Sato, 2017; Jaffe et al., 1995). But there are also some broader reasons why environmental compliance costs are a challenge to accurately assess. In addition, environmental compliance costs are difficult to estimate because the regulatory process is inherently political (Rosenbaum, 2019). Polluting industries, for example, rarely accept environmental mandates without a fight and regulators often make regulatory concessions long after a particular regulation has been implemented. Finally, the costs of environmental regulations can be difficult to measure as new scientific research concerning the negative health effects of toxic chemicals may establish grounds for strengthening or weakening an existing set of environmental mandates. Finally, economists typically estimate the efficiency of technologies, that is, their costs, benefits, and productive capabilities, at one point in time using cost-benefit analysis (this includes the efficiency of technologies that generate toxic emissions and the technologies that can potentially mitigate them). If the costs of a particular environmental policy exceed the benefits, then the regulation should not be implemented because it does not maximize social welfare. This methodological approach is problematic for a number of reasons. Environmental regulators often write a particular regulation with the intention of “forcing” firms to discover new technological processes for reducing toxic emissions over the course of several years or even decades. It is reasonable to assume that during this time technology innovations

 Institutional economists typically use the term “economic uncertainty.”

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may take place that may fundamentally alter the cost-benefit equation. For example, firms may discover less toxic raw materials to utilize in production, new machinery or new ways of organizing the shop floor, or less expensive add-on control techniques that reduce toxic emissions. To quote Porter again: This static view of environmental regulation, in which everything except regulation is held constant, is incorrect. If technology, products, processes, and customer needs were all fixed, the conclusion that regulation must raise costs would be inevitable. But companies operate in the real world of dynamic competition, not in the static world of much economic theory. They are constantly finding innovative solutions to pressures of all sorts – from competitors, customers, and regulators (Porter & Van Der Linde, 1995a, p. 120).

This framing gives firms more agency in adjusting to new demands. We now turn to a review of the methodological approach that we have taken to this book to assess the effects of environmental regulations on economic competitiveness.

Research Methods Our starting point for assessing the economic effects of environmental regulations is the case study approach, specifically, industry-specific analysis of the dynamics of firm responses to a pollutant-specific regulation. Our industry case studies, as noted earlier, are of the metal finishing, wood furniture, and dry-cleaning industries. Each of these industries emits a highly toxic chemical into the ambient air that poses a major health risk to people who live and work nearby. The wood furniture industry emits volatile organic compounds (VOCs), the metal finishing industry emits hexavalent chromium, and the dry-cleaning industry emits perchloroethylene (PERC). Moreover, each industry has been subject to stringent environmental regulations for several decades by the AQMD, a regulatory agency created by the state of California in 1977 to be in compliance with the Clean Air Act of 1970. Finally, each industry’s case study, as we noted, concentrates on one particular dimension of economic competitiveness: The metal finishing case study focuses on economic growth, the wood furniture case study focuses on firm relocations, and the dry-­ cleaning case study focuses on the early adopters of pollution-prevention technologies. Industry case studies, we believe, are a fruitful method for examining the effects of environmental regulations on economic competitiveness for a number of reasons. Firms within an industry use similar product and process technologies that generate toxic pollution (Porter, 1995a; Rosenberg, 1972). For this reason, the EPA frequently designs environmental regulations for specific industries because policy solutions to controlling emissions include similar technologies for all firms in an industry. Moreover, industry case studies are informative because the structure of an industry has an important bearing on how efficiently firms will comply with a particular regulatory policy. There are many aspects to industry structure, including the size distribution of firms, product and process technologies, labor and capital

Research Methods

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markets, and upstream and downstream linkages with customers and suppliers. Most industries are also represented by associations who may play a crucial role in assisting firms with the regulatory compliance process. We utilized a mix of qualitative and quantitative methods to assess the effects of AQMD regulations on the economic competitiveness of the metal finishing, wood furniture, and dry-cleaning industries. At the heart of our qualitative approach were personal interviews with the owners and managers of firms. The personal interview is an effective avenue for investigating complex questions, including how corporate managers comply with a particular environmental regulation. The interviewer is in a position to ask respondents to elaborate on responses that are not clear or probe into new and unexpected areas of inquiry (Babbie, 2020). The personal interview questions were organized around the following general areas: (1) the background of the firm, (2) the characteristics of the firm and the industry, (3) the technology of the production process, (4) the major technological challenges of complying with the regulations, and (5) the perspectives of business owners toward the regulations. The personal interviews primarily took place at the location of the firms and most of the interviews were recorded. The sample size of the firms interviewed varied among the three industry case studies. In addition to the personal interviews, we utilized the following qualitative methods in our industry case studies. First, we were often given a tour of the facility at the conclusion of our personal interviews and we recorded our observations afterward through field notes. Second, we conducted telephone interviews with the owners and managers of firms. The telephone interviews were brief because respondents, on average, were reluctant to speak at length on the phone. Accordingly, our telephone interview questions were focused on the basic challenges firms faced complying with the regulations. The sample size of our telephone interviews also varied. Third, we conducted personal and telephone interviews with the leaders of industry associations and key administrative personnel from the AQMD who were knowledgeable about the regulation of the industries. Finally, our qualitative analysis involved the use of secondary sources of information, including administrative records, AQMD and EPA reports, industry trade journals, academic books and journals, and mainstream periodicals. Our industry case studies also involved the use of quantitative methods. To begin with, we relied heavily on “industry lists” obtained from Dun and Bradstreet, a private company that collects information on firms and industries in the US economy. The lists contained the name, address, and telephone number of each firm located in Southern California as well as information on firm size, revenues, and ownership characteristics. We used the industry lists to draw a random sample of firms for our personal and telephone interviews and to help with our analysis of the industries at the firm level. Additionally, we used data from the Bureau of the Census to assess economic trends in each of our industries, including County Business Patterns and the California Employment Development Department. We also obtained databases from the AQMD that included the compliance status of firms in each of the industries. Finally, our quantitative methods for each of our industry case studies included basic descriptive statistics and multivariate analysis.

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1  Environmental Regulations and Industrial Competitiveness

Concluding Remarks The book’s main goal is to improve our understanding of the effects of environmental regulations on economic competitiveness. Accordingly, our aim is to reveal the institutional process by which firms comply with environmental regulations. By doing so, we complement the existing literature. Our effort is not merely an academic exercise. We believe that the research findings can inform environmental policy makers on how to design effective regulations that will reduce environmental pollution while also minimizing the negative economic effects on firms and industries. It is imperative for governments in all societies in the twenty-first century to take aggressive steps to reduce industrial pollution as a key component to address the looming environmental crisis. One of our objectives in writing this book is to present the industry case studies in a way that is clear and understandable to scholars and students from diverse academic disciplines. As we noted earlier, the empirical research assessing the effects of environmental regulations on economic competitiveness has been conducted primarily by economists using complex econometric models. While informative, these models can be difficult to understand, particularly for those without formal academic training in econometric methods. They also, as we reviewed earlier in this chapter, have some inherent limitations. Moreover, we believe that the concepts and methods commonly used by other academic disciplines in the social sciences can help to make valuable contributions to our understanding of the effects of environmental regulations on firms and industries. We hope that this book will motivate scholars from diverse academic disciplines to contribute to the empirical research.

References Ambec, S., Cohen, M., Elgie, S., & Lanoie, P. (2013). The Porter Hypothesis at 20: Can environmental regulation enhance innovation and competitiveness? Review of Environmental Economics and Policy, 7(1), 2–22. American Lung Association. (2022). State of the air report. Retrieved June 1, 2022 from https:// www.lung.org/research/sota Babbie, E. (2020). The practice of social research (15th ed.). Thompson Wadworth. Barbera, A., & McConnell, V. (1986). Effects of pollution control on industry productivity: A factor demand approach. Journal of Industrial Economics, 35, 161–172. Becker, R. (2011). Local environmental regulation and plant-level productivity. Ecological Economics, 70, 2516–2522. Belova, A., Gray, W., Linn, J., & Morgenstern, R. (2013). Environmental regulation and industry employment: A reassessment. US Census Bureau Center for Economic Studies Paper No. CES-WP- 13-36. Retrieved September 14, 2018 from https://ssrn.com/abstract=2306753 Berger, T. (2008). Concepts on national competitiveness. Journal of International Business and Economy, 9(1), 3–17. Berman, E., & Bui, L. (2001). Environmental regulation and productivity: Evidence from oil refineries. Review of Economics and Statistics, 83(3), 498–510.

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Blair, J., & Carroll, M. (2009). Local economic development: Analysis, practices, and globalization (2nd ed.). Sage. Brackett, R. (2021). EPA says amount of toxic chemicals released in environment dropped in 2019. Retrieved April 15, 2022 from https://weather.com/news/ news/2021-­01-­21-­epa-­toxics-­release-­index-­analysis-­interactive-­map Coglianese, C., & Carrigan, C. (2013). The jobs and regulation debate. In C. Coglianese, A. Finkel, & C. Carrigan (Eds.), Does regulation kill jobs? University of Pennsylvania Press. Dechezlepretre, A., & Sato, M. (2017). The impacts of environmental regulations on competitiveness. Review of Environmental Economics and Policy, 11(2), 183–206. Edenhofer, O., Franks, M., & Kalkuhl, M. (2021). Pigou in the 21st century: A tribute on the occasion of the 100th anniversary of the publication of The Economics of Welfare. International Tax and Public Finance, 28(5), 1090–1121. Gollop, F., & Roberts, J. (1983). Environmental regulations and productivity growth: The case of fossil-fueled electric power generation. Journal of Political Economy, 91, 654–674. Goodstein, E., & Polasky, S. (2017). Economics and the environment (8th ed.). Wiley/University of Minnesota. Gray, W. (2015). Environmental regulations and business decisions. September. Article Number 187. Retrieved June 10, 2019 from https://wol.iza.org/articles/ environmental-­regulations-­and-­business-­decisions Greenstone, M. (2002). The impacts of environmental regulations on industrial activity: Evidence from the 1970 and 1977 clean air act amendments and the census of manufacturers. Journal of Political Economy, 110(6), 1175–1219. Greenstone, M., List, J., & Syverson, C. (2012). The effects of environmental regulation on the competitiveness of US manufacturing. Working Paper 2012–13. MIT Center for Energy and Environmental Policy Research, 1–53. Henderson, V. (1996). Effects of air quality regulation. The American Economic Review, 86(4), 789–813. Holland, S. (2012). Emissions taxes versus intensity standards: Second-best environmental policies with incomplete regulation. Journal of Environmental Economics and Management, 63(3), 375–387. Intergovernmental Panel on Climate Change. (2022). Summary for policymakers. In D. C. Pörtner et  al. (Eds.), Climate change 2022: Impacts, adaptation, and vulnerability (Contribution of working group II to the sixth assessment report of the intergovernmental panel on climate change). Cambridge University Press. Jaffe, A., Peterson, S., Portney, P., & Stavins, R. (1995). Environmental regulation and the competitiveness of US manufacturing: What does the evidence tell us? Journal of Economic Literature, 33(1), 132–163. Jones, M. (2021). Toxic nation. Visible Ink Press. Jorgenson, P., & Wilcoxen, P. (1990). Environmental regulation and US economic growth. The Rand Journal of Economics, 21(2), 314–340. Jorgenson, P., & Wilcoxen, P. (1993). The economic impact of the clean air act amendments of 1990. The Energy Journal, 14(1), 159–182. Kraft, M., & Furlong, J. (2020). Public policy: Politics, analysis, and alternatives (7th ed.). CQ Press. Lehmann, P. (2012). Justifying a policy mix for pollution control: A review of economic literature. Journal of Economic Surveys, 26(1), 71–97. McKenna, C. J. (1986). The economics of uncertainty. Oxford University Press. Meyer, S. (1992). Environmentalism and economic prosperity: Testing the environmental impact hypothesis. Massachusetts Institute of Technology, Project on Environmental Policies and Policy. Milliman, S., & Prince, R. (1989). Firm incentives to promote technological change in pollution control. Journal of Environmental Economics and Management, 17, 247–265.

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Morgenstern, R., Pizer, W., & Shih, J. (2000). Jobs versus the environment: An industry-level perspective. Journal of Environmental Economics and Management, 43, 412–436. Nelson, R., & Winter, S. (1982). An evolutionary theory of economic change. Harvard University Press. Owen, A. (2004). Environmental externalities, market distortions and the economics of renewable energy technologies. The Energy Journal, 25(3), 127–156. Pigou, A. C. (1924). The economics of welfare (2nd ed.). Macmillan. Porter, M. (1991). America’s green strategy. Scientific American, 264(4), 168. Porter, M., & Van Der Linde, E. (1995a). Green and competitive: Ending the stalemate. Harvard Business Review, 73(5), 120–132. Porter, M., & Van Der Linde, E. (1995b). Toward a new conception of the environment-­ competitiveness relationship. Journal of Economic Perspectives, 9, 97–118. Rosenbaum, W. A. (2019). Environmental politics and policy (11th ed.). Sage. Rosenberg, N. (1972). Factors affecting the diffusion of technology. Explorations in Economic History, 10(1), 3–33. Rosenberg, N. (1994). Chapter 1: Path-dependent aspects of technological change. In N. Rosenberg (Ed.), Exploring the black box: Technology, economics, and history. Cambridge University Press. Schmidheiny, S. (1992). Changing course. MIT Press. Telsey, A. (2016). The ABCs of environmental regulation (4th ed.). Bernan Press. Tyson, L. D.’. A. (1988). Competitiveness: An analysis of the problem and a perspective on future policy. In M. Starr (Ed.), Global competitiveness: Getting the US back on track (pp. 95–120). W. W. Norton & Company. US Environmental Protection Agency. (2007). The plain English guide to the clean air act. Office of Air Quality Planning and Standards, Research Triangle Park. (Publication No. EPA-456/K-07-001). US Environmental Protection Agency. (2011). The benefits and costs of the Clean Air Act from 1990 to 2020. EPA Office of Air and Radiation. US Environmental Protection Agency. (2017). National water quality inventory: Report to congress. EPA 841-R-16-011. US Environmental Protection Agency. (2022a, October 19). Clean Water Act (CWA) and federal facilities. Retrieved January 10, 2022 from https://www.epa.gov/enforcement/ clean-­water-­act-­cwa-­and-­federal-­facilities US Environmental Protection Agency. (2022c, October 19). Summary of the toxic substances control act. Retrieved May 20, 2022 from https://www.epa.gov/laws-­regulations/summary-­toxic-­ substances-­control-­ct#:~:text=The%20Toxic%20Substances%20Control%20Act%20of%20 1976%20provides%20EPA%20with,%2C%20drugs%2C%20cosmetics%20and%20pesticides Vatn, A., & Bromley, D. (1997). Externalities  – A market model failure. Environmental and Resource Economics, 9(2), 135–151. Walker, R. (2013). The transitional costs of sectoral reallocation: Evidence from the Clean Air Act and the workforce. The Quarterly Journal of Economics, 128(4), 1787–1835. Weitekamp, C., Lein, M., Strum, M., Morris, M., Palma, T., Darcie, K., Lukas, S., & Michael, J. (2021). An examination of national cancer risk based on monitored hazardous air pollutants. Environmental Health Perspectives, 129(3), 1–12.

Chapter 2

Policy Background: The South Coast Air Quality Management District

Abstract  In this chapter, we review the background of the South Coast Air Quality Management District (AQMD), the agency responsible for regulating polluting industries in the Southern California region. The origins of the AQMD can be traced to the emergence of air pollution in the Southern California region during that 1940s that was caused by the region’s economic and population growth. The causes of air pollution and policy solutions were poorly understood at the time. The State of California created the Los Angeles County Air Pollution Control District (APCD) in 1947. The federal government finally intervened with the passage of the Clean Air Act of 1970. The State of California created the AQMD in 1977 to monitor and enforce air pollution control rules and regulations in Southern California in compliance with the Clean Air Act of 1970. The official jurisdiction of the AQMD covers all of Orange County and the nondesert portions of Los Angeles, Riverside, and San Bernardino counties, a region covering approximately 10,473 square miles and home to approximately 17 million people. Keywords  The South Coast Air Quality Management District · Los Angeles County Air Pollution Control District (APCD) · Clean Air Act of 1970 · Southern California · Air pollution · California Air Pollution Control Act (CAPCA)

Introduction This chapter documents the legal and institutional context related to the regulation of the three industrial sectors in Southern California: metal finishing, wood furniture, and dry cleaning. Each of these industries became targets for governmental action because each emits a toxic chemical into the ambient air that poses a serious risk to human health and the environment. The wood furniture industry emits volatile organic compounds (VOCs), the metal finishing industry emits hexavalent chromium, and the dry-cleaning industry emits perchloroethylene (PERC). These chemicals are highly carcinogenic and human exposure to them may lead to a number of serious health problems, including respiratory illness, cardiovascular disease, © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 W. Thomas, P. Ong, Environmental Regulations and Industrial Competitiveness, Environment & Policy 62, https://doi.org/10.1007/978-3-031-26376-7_2

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2  Policy Background: The South Coast Air Quality Management District

Fig. 2.1  History of the AQMD in broad outline

and cancer. Because of these dangers, each industry has been highly regulated by the South Coast Air Quality Management District (AQMD) for several decades. The rest of this chapter reviews the history and policy context of the AQMD. AQMD’s history, shown in broad outline in Fig. 2.1, begins with the emergence of severe air pollution in the city of Los Angeles in the early 1940s as the region experienced rapid population and economic growth. To alleviate the problem, the Los Angeles County Board of Supervisors created the Los Angeles County Air Pollution Control District (APCD) in 1947, the first regional air-quality control agency in the country. As air pollution became a national problem during the 1950s and 1960s, local air-quality control agencies emerged throughout the country. However, this localized approach proved insufficient because it was impossible to control windborne pollution from neighboring jurisdictions. Congress passed the Clean Air Act of 1970, legislation that authorized the development of comprehensive federal and state regulations to limit emissions from stationary and mobile sources of air pollution. The state of California created the AQMD in 1977 to be in compliance with the act.

The Emergence of Air Pollution in Los Angeles Air pollution first emerged as a serious problem in the Los Angeles region during the summer of 1943. Seemingly out of nowhere, a thick, brown, foul-smelling haze appeared in the air that was irritating to the eyes and noxious to breathe (Brienes, 1976; Dewey, 2000; Jacobs & Kelly, 2008). No one knew for sure what the haze was or where it came from and local citizens simply referred to it as “smog,” a slang contraction of the words “smoke” and “fog.” The haze was so thick that at times visibility was limited to three blocks. Some citizens believed smog was the result of a gas attack from a World War II foe; others suspected a synthetic rubber plant located near downtown Los Angeles that produced butadiene for the Rubber Reserve Corporations’ synthetic rubber program (Elkind, 2011). After the plant was temporarily shut down by the city of Los Angeles, however, the smog problem continued unabated. Local broadcasting stations and newspapers began to include smog forecasts with the daily weather report (Boffey, 1968). In September 1943, “blankets” of haze were described by the Los Angeles Times as “daylight dimouts.” The mayor

The Emergence of Air Pollution in Los Angeles

15

of Los Angeles, Fletcher Bowron, referred to the daylight dimouts as “making more than four out of five days a sort of mild hell” (Chowkwanyun, 2019, p. 308). He announced that he and his family were planning to leave Los Angeles to escape the dirty air. The emergence of air pollution in Los Angeles during the 1940s (we now know) was largely a consequence of the region’s rapid economic growth. Los Angeles had a large and skilled workforce, abundant natural resources, large tracts of vacant affordable land, and a hospitable climate that was attractive to industry (City of Los Angeles, 1976; Clark, 1983; Verge, 1999). Moreover, the city’s Pacific Coast location was an ideal distribution point for Asian and Latin American markets. The number of manufacturing plants operating in the Los Angeles region increased from 5505 in 1939 to 9771 in 1947, an increase of 77%1 (Los Angeles Department of Water and Power, 1960). The number of workers employed in these plants increased from nearly 173,000 to more than 358,000. Some manufacturing sectors emerged in Los Angeles during this time as national leaders, including ship building and aircraft (Clark, 1983). Los Angeles also became a major center of automobile manufacturing, second only to Detroit. For example, in 1941, four Los Angeles assembly plants produced 154,000 cars; by 1948 the capacity had grown to more than 650,000 (McWilliams, 1949). By the end of the 1940s, Los Angeles had become the third-largest manufacturing center in the United States only behind Chicago (second) and New York (first). A major catalyst driving manufacturing-based growth in the Los Angeles region during the early 1940s was military spending by the federal government to supply the military needs of World War II (Brienes, 1976; Clayton, 1962; Lotchin, 1992). In 1942, for example, defense contracts flowing to companies in Los Angeles totaled to 3 billion; by 1945, the monetary value of these contracts increased to 10.5 billion (Kidner & Naff, 1945). By 1944, approximately 4000 companies in Los Angeles were involved in military-related production (Verge, 1999). Hundreds of smaller establishments connected to military contracts emerged in a wide range of industries, including aluminum fabrication, synthetic rubber, machine tools, petroleum refining, and tank assembly (Clayton, 1962). Defense spending elevated some industries to national prominence. Prior to 1940, for example, shipyards in Los Angeles had not constructed a large ship in 20 years; by the early 1940s ship building had become the second-largest manufacturing industry in Los Angeles (Verge, 1999). By 1945, the aircraft industry in Los Angeles had received more than $7 billion in military contracts and employed 228,000 workers (Caughey & Caughey, 1977; Verge, 1999). Los Angeles’ population grew hand in hand with the regional economy. During the war years alone, more than half a million people poured into Los Angeles (Nash, 1990). The population of Los Angeles County increased from less than 2.8 million in 1940 to more than 4.1 million in 1950, an increase of about 50%. The four-county region of Los Angeles, Orange, Riverside, and San Bernardino combined (an area that today mirrors the jurisdiction of the AQMD) increased from around 3.2 million

 These statistics are for Los Angeles and Orange counties combined.

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2  Policy Background: The South Coast Air Quality Management District

in 1940 to more than 4.8 million in 1950. More people, of course, meant more material consumption and more people driving cars. During this period, the number of automobiles in California increased from 2.5 million to 4.0 million, with approximately one-half of these totals being within the LA area (Hoekman & Welstand, 2021). By the end of 1960, 3 million motor vehicles were registered in Los Angeles County (Caughey & Caughey, 1977). Los Angeles had emerged as the car capital of the world. The scientific causes of air pollution and policies to alleviate the air-pollution problem were poorly understood in the 1940s (Chowkwanyun, 2019; Dewey, 2000). For this reason, in 1946 the Los Angeles Times—which would play a major advocacy role for clean air—recruited Raymond Tucker, a mechanical engineer at Washington University in St. Louis, to investigate the air-pollution problem in Los Angeles. Tucker had been credited with developing an effective “smoke” control program for the city of St. Louis several years earlier (Brienes, 1976). After studying the problem in Los Angeles for several weeks, Tucker concluded that smog in Los Angeles emanated from several sources, including smoldering dumps, backyard incinerators, automobile exhaust, and industry, especially the petrochemical and manufacturing sectors. Tucker made 23 specific recommendations, including a prohibition on burning rubbish in backyard incinerators and in dumps, and giving citations to smoking trucks. One of Tucker’s main policy recommendations was to create a county-wide air-pollution control agency with broad powers to enforce airpollution regulations across municipalities. On June 10, 1947, on the heels of Tucker’s policy recommendations, California Governor Earl Warren signed the California Air Pollution Control Act (CAPCA), which authorized the creation of air-pollution control districts in counties throughout the state (Boffey, 1968; Kamieniecki & Ferral, 1991). That same year, the Los Angeles County Board of Supervisors created the Los Angeles County Air Pollution Control District (APCD), the first air-quality control agency in the country. County air-pollution control districts (APCDs) were later created in Orange County in 1950 and Riverside and San Bernardino counties in 1957. By 1970, county airpollution control districts were required throughout the state (Kamieniecki & Ferral, 1991). The first director of the Los Angeles County APCD was Louis McCabe, a US army engineer and a former fuels expert with the US Bureau of Mines. The agency started with a budget of $178,000 and a staff of 47, including 22 inspectors and 12 engineers (Brienes, 1976). The Los Angeles County APCD required all major industries to have air-pollution permits and some companies to install add-on pollution control devices designed to “capture” toxic emissions before being released into the air. For example, metal melting plants were required to adopt a “baghouse,” a device that removes particulates from air or gas released during the production process, and steel producers were required to install electrical precipitators on open-­ hearth steel furnaces. In 1948, the APCD implemented Rule 53a, a regulation requiring refineries to limit sulfur emissions to 0.2% by volume of emissions from any single source (Caughey & Caughey, 1977; Chowkwanyun, 2019). This rule

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forced the Hancock Chemical Company to build and install a million-dollar sulfur-­ recovery plant. Industry-wide inspections were conducted regularly by APCD inspectors. The Los Angeles County APCD also initiated collaborative research programs with local universities with the objective of trying to uncover the scientific causes of air pollution. Arie Haagan-Smit, a biochemistry professor at the California Institute of Technology in Pasadena, was on the forefront of this research (Chowkwanyun, 2019). In 1948 laboratory experiments, Haagan-Smit found that exposing plants to ozone caused the same discoloration observed in plants located in agricultural fields near Los Angeles refineries (Haagen-Smit, 1952). In another experiment, he discovered that rubber tubing cracked in 7 min when exposed to high smog levels. Haagan-­Smit’s breakthrough experiment came in 1952 when he found that ozone, the primary ingredient in smog, was not directly emitted from automobiles or industrial smokestacks, but was produced when sunlight reacted with nitrogen oxides and at least one volatile organic compound (VOC) in the atmosphere (Haagen-Smit, 1952; Krier & Ursin, 1977). Moreover, Haagain-Smit and the scientific community confirmed that smog in Southern California was exacerbated by the region’s geography. Southern California is surrounded by the San Gabriel, San Bernardino, and San Jacinto mountains and the Pacific Ocean to the West. Warm air forms a cap over the cooler marine layer, creating an inversion effect that traps pollutants near the ground. Sunlight then triggers a photochemical reaction that produces ozone. Southern California experiences more days of sunlight than any other major urban area in the nation except Phoenix, Arizona. As air pollution became a pervasive problem throughout the United States during the 1950s and 1960s, air-quality control agencies were established throughout the country, many of them modeled on the Los Angeles County APCD (Lowry, 1992). However, this localized approach to controlling air quality proved insufficient because local agencies lacked sufficient resources and the legal authority to control windborne pollution from neighboring jurisdictions. Many stakeholders argued that federal intervention was needed to effectively control air pollution in the United States (Kamieniecki & Ferral, 1991). Congress had passed the Clean Air Act of 1955 and the Clean Air Act of 1963, but these acts were limited to allocating funds for air-pollution research (Welker-Hood et  al., 2011). The 1967 Air Quality Act established air-quality control regions and directed the Department of Health, Education, and Welfare to compile information on the health effects of air pollutants. Finally, Congress passed the Clean Air Act of 1970, the most comprehensive and effective air-pollution policy ever passed by Congress. The Clean Air Act of 1970, along with its 1977 and 1990 amendments, continues to serve as the legal framework for air-pollution policy in the United States today.

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2  Policy Background: The South Coast Air Quality Management District

The Clean Air Act of 1970 The Clean Air Act of 1970 (hereafter the act) is intended “to protect and enhance the quality of the nation’s air resources so as to promote the public health and welfare and the productive capacity of the population”.2 Congress also created the EPA in 1970 with a mandate to implement and enforce the act. The act covers stationary and mobile sources of air pollution. Stationary sources include emissions from power plants, oil refineries, industrial facilities, and factories. Mobile sources include emissions from cars, trucks, buses, ships, trains, and airplanes. We limit our review of the act to stationary sources because our three case studies are stationary-­ source emitters. The act established national ambient air-quality emissions standards (NAAQS) for the following six “criteria” pollutants: sulfur dioxide (SO2), particulate matter (PM2.5 and PM10), nitrogen dioxide (NO2), carbon monoxide (CO), ozone, and lead. The criteria pollutants were targeted for regulation because they are pervasive throughout the United States and pose a significant risk to human health, including heart disease, chronic respiratory diseases, birth defects, nerve damage, and cancer. Two types of air-quality standards were established for each of the criteria pollutants: primary and secondary. Primary standards are designed to protect public health with an adequate margin of safety, especially for vulnerable people such as children, the elderly, and people who suffer from chronic illnesses. Secondary standards are intended to protect public welfare, including harm to animals, crops, vegetation, and buildings. The EPA is required to review the NAAQS every 5 years. The Clean Air Act of 1970 was amended by Congress in 1977 and 1990. The most significant 1977 amendment was the Prevention of Significant Deterioration (PSD) program. The PSD program is intended to preserve air quality in areas of the country that already have clean air. Specifically, air-quality control regions in the United States where the criteria pollutants fall below the thresholds for emissions established by the EPA are classified as “attainment” regions. Air-quality control regions where one or more of the criteria pollutants exceeds the limits are classified as nonattainment regions. The PSD program requires companies locating in an attainment region to use “best available control technologies” (BACT), which are technologies that the EPA has determined to be the most effective at reducing toxic emissions with the least economic impacts. In addition to the PSD program, the 1977 amendments to the act included stricter standards for controlling particulate matter and sulfur dioxide in national wildlife areas. The 1990 amendments to the act were even more extensive. First, the 1990 amendments required the EPA to create national emission standards for an additional 189 toxic or “hazardous” air pollutants (HAPS), including well-known toxins such as dioxins, benzene, arsenic, and beryllium (Rosenbaum, 2019). A substance  Our review of the Clean Air Act of 1970 and the 1977 and 1990 amendments is based on Rosenbaum (2019), Welker-Hood et al. (2011), Kraft (2021), and the US Environmental Protection Agency (2007). 2

The AQMD

19

is considered toxic if exposure can increase the risk of contracting cancer or if exposure may produce adverse health effects such as birth defects and neurological and respiratory problems. Second, the 1990 amendments required the EPA to set “maximum achievable control technology” (MACT) standards for “major” and “area” sources of toxic emissions. Major sources are firms (or a combination of firms) that emit ten tons or more of hazardous air pollutants into the ambient air per year and area sources are firms that emit less than ten tons. MACT standards require affected sources to meet specific emissions limits that are based on emissions levels already achieved by the best controlled similar sources. Third, the 1990 amendments included provisions for the phase out of chemicals that contribute to the depletion of the ozone layer and for the control of acid rain using market-based regulations. Finally, the 1990 amendments added a range of civil and criminal sanctions designed to strengthen the enforcement mechanisms of the act. Implementing environmental laws, policies, and programs involves a multigovernmental system. Responsibilities for implementation and enforcement of many environmental policies and programs are delegated to the states and regional agencies. This devolution is based in part on the EPA’s 247 “air-quality control” regions, which were based on geography and other considerations. States are required to document their efforts to be in compliance with the national environmental legislation through State Implementation Plans (SIPs). States may also adopt air-pollution control policies that are more stringent than those contained in the act (Kamieniecki & Ferral, 1991). California in particular has been on the forefront of going well beyond national standards. States failing to submit adequate SIPs to the EPA may face severe penalties, including denial of federal funds for state highway programs.

The AQMD In 1976, the California State Legislature passed the Lewis Air Quality Management Act, merging the Los Angeles County APCD with the APCDs of Orange, Riverside, and San Bernardino counties to create the South Coast Air Quality Management District (AQMD). AQMD’s official jurisdiction, as we noted in the introduction to this chapter, includes Orange County and the nondesert portions of Los Angeles, Riverside, and San Bernardino counties, an area covering 10,743 square miles and home to approximately 17 million people (Fig. 2.2). In this book, we refer to this region as Southern California. The AQMD was created by the state of California with the objective of bringing Southern California’s air quality into compliance with the act. The AQMD is also required to be in compliance with the California Clean Air Act (CCAA), which was approved by the California Legislature in 1988 and was amended in 1992 (Kamieniecki & Ferral, 1991; South Coast Air Quality Management District, 2020a). The CCAA established stricter standards for some national ambient air-quality standards and identified several additional criteria pollutants to be regulated within the state of California referred to as the California Ambient Air Quality Standards (CAAQS).

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2  Policy Background: The South Coast Air Quality Management District

Fig. 2.2  Map of AQMD’s regulatory jurisdiction

The AQMD officially started operations on February 1, 1977. The stated mission of the AQMD is “[t]o clean the air and protect the health of all residents in the South Coast Air District through practical and innovative strategies” (South Coast Air Quality Management District, 2022). The AQMD is managed by a governing board comprised of 13 members: ten are elected county supervisors and city council members from within AQMD’s jurisdiction and three are citizens appointed by the governor, the speaker of the State Assembly, and the Senate Rules Committee, respectively. The AQMD is required to develop and implement an Air Quality Management Plan (AQMP) that will bring the region’s air quality into compliance with the act and the CCAA (South Coast Air Quality Management District, 2020a). The AQMD is authorized to control air pollution from stationary sources, ranging from large power plants and refineries to small businesses. The AQMD does have some authority to address mobile sources of air pollution through incentive programs and implementation of transportation control measures (e.g., employee ridesharing rules). There are more than 25,000 businesses currently operating in Southern California with a permit issued by the AQMD (South Coast Air Quality Management District, 2020b). These businesses are periodically inspected by personnel from the AQMD to ensure that they are in compliance. The AQMD continuously monitors air quality at 38 locations throughout Southern California. While AQMD has primary responsibility for stationary sources of air pollution in the region, the California Air Resources Board (CARB) oversees the regulation of mobile sources. CARB was created on August 30, 1967 when Governor Ronald Reagan signed the Mulford-Carrell Air Resources Act, merging the Bureau of Air Sanitation and the California Motor Vehicle Pollution Control Board (Kamieniecki & Ferral, 1991). CARB’s mission is to “promote and protect public health and welfare and ecological resources through effective reduction of air pollutants while recognizing and considering effects on the economy” (California Air Resources Board, 2022). CARB is responsible for providing general oversight of the 35 local air-pollution control districts in the state. The AQMP developed by the AQMD (as well as the

The AQMD

21

AQMP of other districts in the state) must be submitted to CARB for approval before being forwarded to the federal EPA as part of the California SIP. CARB is also the lead agency in California for climate change programs. The AQMD, in cooperation with CARB and the federal EPA, has made considerable progress in reducing the emission of the NAAQS and the CAAQS in the Southern California region. Southern California’s ambient air is in compliance with (SO2), nitrogen dioxide (NO2), carbon monoxide (CO), lead, hydrogen sulfide, sulfates, and vinyl chloride. However, excessive ozone and particulate matter are two criteria pollutants that remain out of compliance and make air pollution in Southern California one of the worst in the country (South Coast Air Quality Management District, 2020a). Figures 2.3 and 2.4 show the days in Southern California that the one-hour and the eight-hour ozone standards have been exceeded from 1980 to 2020. While progress has been made, as recently as 2020 the number of one-hour ozone exceedances were more than 20 and the number of eight-hour exceedances were approximately 160. Figure 2.5 shows levels of PM2.5 in Southern California from 2000 to 2020. The data reveal that the region remains out-of-compliance for this criteria pollutant. Finally, the AQMD has made an effort to reduce the emission of “toxic air contaminants” (TACs) in Southern California. Unlike the criteria air pollutants, there are no state or federal standards for ambient concentrations of air toxics. TACs are identified on a list by state and federal agencies based on a review of available scientific evidence. There has been particular concern on the effects that toxic emissions have on environmental justice communities. The AQMD defines “environmental justice” as “equitable environmental policymaking and enforcement to protect the health of all residents, regardless of age, culture, ethnicity, gender, race, socioeconomic status, or geographic location, from the health effects of air pollution” (South Coast Air Quality Management District, 2021, p. 16).

Fig. 2.3  Eight-hour ozone in Southern California

22

2  Policy Background: The South Coast Air Quality Management District

Fig. 2.4  One-hour ozone in Southern California

Fig. 2.5  PM2.5 in Southern California

References Boffey, P.  M. (1968). Smog: Los Angeles running hard, standing still. Science (American Association for the Advancement of Science), 161(3845), 990–992. Brienes, M. (1976). Smog comes to Los Angeles. Southern California Quarterly, 58(4), 515–532. California Air Resources Board. (2022). Mission statement. Retrieved May 20, 2022 from https://ww2.arb.ca.gov/about#:~:text=CARB’s%20mission%20is%20to%20 promote,considering%20effects%20on%20the%20economy Caughey, J., & Caughey, L. (1977). Los Angeles: Biography of a city. University of California Press.

References

23

Chowkwanyun, M. (2019). Two cheers for air pollution control. Public Health Reports, 134(3), 307–312. City of Los Angeles. (1976, April). The economic development of Southern California, 1920–1976. Office of the Mayor. Clark, D. (1983). Improbable Los Angeles. In R.  Bernard & B.  Rice (Eds.), Sunbelt cities. University of Texas Press. Clayton, J. (1962). Defense spending: Key to California’s growth. The Western Political Quarterly, 15(2), 280–293. Dewey, S. (2000). Don’t breathe the air: Air pollution and US environmental politics, 1945–1970. Texas A&M University Press. Elkind, S. (2011). Influence through cooperation: The Los Angeles Chamber of Commerce and air pollution control in Los Angeles, 1943–1954. In S. Elkind (Ed.), How local politics shape federal policy: Business, power, and the environment in twentieth-century Los Angeles. University of North Carolina Press. Haagen-Smit, A. (1952). Smog research pays off. Engineering and Science, 15, 11–16. Hoekman, K., & Welstand, S. (2021). Vehicle emissions and air quality: The early years (1940s–1950s). Atmosphere, 12(1354), 1–30. Jacobs, C., & Kelly, W. (2008). Smogtown: The lung-burning history of pollution in Los Angeles. The Overlook Press. Kamieniecki, S., & Ferral, M. (1991). Intergovernmental relations and clean-air policy in Southern California. Publius, 21(3), 143–154. Kidner, F., & Naff, P. (1945). An economic survey of the Los Angeles area. The Haynes Foundation. Kraft, M. (2021). Environmental policy and politics. Routledge, Taylor and Francis Group. Krier, J., & Ursin, E. (1977). Pollution and policy: A case essay on California and Federal experience with motor vehicle air pollution 1940–1975. University of California Press. Los Angeles Department of Water and Power. (1960). Los Angeles manufacturing: A summary of historical and current census data relating to the City of Los Angeles. Lotchin, R. (1992). Fortress California, 1910–1961: From warfare to welfare. Oxford University Press. Lowry, W. (1992). The dimensions of federalism: State governments and pollution control policies. Duke University Press. McWilliams, C. (1949). California: The great exception. University of California Press. Nash, G. (1990). World War II and the West: Reshaping the economy. University of Nebraska Press. Rosenbaum, W. A. (2019). Environmental politics and policy (11th ed.). Sage. South Coast Air Quality Management District. (2020a). 2020 draft air quality management plan. Author. South Coast Air Quality Management District. (2020b). 2022 annual report. Author. South Coast Air Quality Management District. (2021). Multiple air toxics exposure study (Mates-II): Final report. Pomona. South Coast Air Quality Management District. (2022). The health effect of air pollution. Retrieved from https://www.aqmd.gov/nav/about#:~:text=To%20clean%20the%20air%20 and,through%20practical%20and%20innovative%20strategies US Environmental Protection Agency. (2007). The plain English guide to the clean air act. Office of Air Quality Planning and Standards, Research Triangle Park, North Carolina. (Publication No. EPA-456/K-07-001). Verge, A. (1999). The impact of the second world war on Los Angeles. In W. Nugent & M. Ridge (Eds.), The American west: The reader. Indiana University Press. Welker-Hood, K., Gottlieb, B., Suttles, J., & Rauch, M. (2011). The clean air act: A proven tool in healthy air. Physicians for Social Responsibility. Retrieved from www.psr.org/resources/ clean-­air-­act-­report.html

Chapter 3

The Metal Finishing Industry and Economic Growth

Abstract  The central question we investigate in this chapter is does the implementation of environmental regulations have a negative impact on economic growth? We examine this question through an empirical case study of the effects of AQMD regulations on the metal finishing industry in Southern California. Metal finishing firms emit hexavalent chromium into the ambient air, a highly toxic chemical linked to cancer and other health problems in humans. As a result, the AQMD implemented Rule 1169 in 1988, a regulation requiring the metal finishing industry in Southern California to reduce the emission of hexavalent chromium into the ambient air by 95% per year. To assess the effects of AQMD regulations on the growth of the metal finishing industry in Southern California, we compared the growth of the metal finishing industry in Southern California with the growth of the metal finishing industries in Chicago and Detroit between 1980 and 2018. Using shift-share analysis, we found that the AQMD regulations did not have a detrimental impact on the growth of the metal finishing industry in Southern California. The development of trivalent chromium, a nontoxic substitute finish for hexavalent chromium, allowed some metal finishing firms to efficiently comply with AQMD regulations. The findings add to a growing body of empirical research that casts doubt on standard economic theory. Keywords  Economic growth · Metal finishing industry · Hexavalent chromium · South Coast Air Quality Management District (AQMD) · Multiple Air Toxics Exposure Study (MATES)

Introduction The central question we investigate in this chapter is: Does the implementation of stringent environmental regulations restrict the economic growth of polluting firms and industries? Many economists, the business community, and other stakeholders believe that the answer to this question is a resounding yes. Their opposition is often rooted in, or at least consistent with, the logic of standard economic theory, a theory © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 W. Thomas, P. Ong, Environmental Regulations and Industrial Competitiveness, Environment & Policy 62, https://doi.org/10.1007/978-3-031-26376-7_3

25

26

3  The Metal Finishing Industry and Economic Growth

that assumes that environmental regulations are an impediment to a strong and healthy economy (Gray, 2015; Jaffe et  al., 1995; Milliman & Prince, 1989). According to standard economic theory, environmental regulations force firms to purchase costly pollution control technologies and make inefficient modifications to their production processes. They are also forced to direct resources away from research and development activities and increase the prices they charge for their products, placing them at a competitive disadvantage with their unregulated rivals. The long-run macroeconomic effects of environmental regulations on the US economy, according to standard economic theory, are a reduction in economic growth and a decline in the standard of living for US citizens (Gray, 2015). While many stakeholders are strongly opposed to stringent environmental regulations, several decades of empirical research examining the effects of environmental regulations on economic growth have produced mixed results (Ferris et  al., 2017). Some empirical studies have indeed found that environmental regulations lead to a reduction in economic output (Barbera & McConnell, 1986, 1990; Greenstone et al., 2012; Jorgenson & Wilcoxen, 1990). However, other empirical studies have found no correlation between environmental regulations and economic growth or that regulated firms and industries do just as well economically as their unregulated counterparts (Belova et al., 2013). A third line of empirical research has generated evidence that stringent environmental regulations can induce firms to develop new process technologies that reduce toxic emissions and increase firm productivity at the same time (Ambec et al., 2013; Porter, 1991; Porter & Van Der Linde, 1995a). In this chapter, we attempt to contribute to this empirical debate through a case study of the metal finishing industry in Southern California, a region that historically has had one of the largest concentrations of metal finishing firms in the country. The metal finishing industry is comprised of firms who coat metal products with hexavalent chromium, a chemical that makes them shiny and corrosion resistant, including industrial machinery, tools, and appliances (Baral et al., 2006). The environmental problem, however, is that hexavalent chromium is a toxic chemical that is emitted into the ambient air during the metal finishing process and exposure to humans can cause lung and nasal cancer, renal toxicity, respiratory irritation, nosebleeds, ulcers, holes in the nasal septum, skin ulcerations, and stomach and kidney problems (Caglieri et al., 2006; California Air Resources Board, 1985; California Environmental Protection Agency, 2002; Norseth, 1981; Pellerin & Booker, 2000). For this reason, the metal finishing industry in Southern California has been subject to stringent environmental regulations by the South Coast Air Quality Management District (AQMD) since 1988 (South Coast Air Quality Management District, 2021a). The AQMD was established by the state of California in 1977 to regulate air quality in Southern California in compliance with the Clean Air Act of 1970 (see Chap. 2). Our central empirical question, then, is did AQMD regulations lead to a decline in the economic growth of the metal finishing industry in Southern California since 1988? To answer this question, we compared the growth of the metal finishing industry in Southern California with the growth of the metal finishing industries in

The Empirical Literature

27

Chicago and Detroit between 1988 and 2020, the most recent year for which data are available. Chicago and Detroit also have large concentrations of metal finishing firms but have not been subject to the same stringent environmental regulations, providing our case study with some quasiexperimental controls. Using data from the US Bureau of the Census and a statistical technique referred to as shift-share analysis, we found that despite being subject to more stringent regulations, the metal finishing industry in Southern California performed better than, or comparable to, the industries in Chicago and Detroit. Moreover, some metal finishing firms were able to efficiently adjust to the regulations by substituting trivalent chromium for hexavalent chromium, a nontoxic finish that works with some applications (Toxic Use Reduction Institute, 2012). The remainder of this chapter is organized as follows. In section “Introduction”, we review the empirical literature that has examined the effects of environmental regulations on the economic growth of firms and industries in the US economy. In section “The empirical literature”, we review the structural characteristics of the metal finishing industry and the environmental regulations that were imposed on the metal finishing by the AQMD starting in 1988. In section “The metal finishing industry and hexavalent chromium”, we compare employment trends in the metal finishing industries in Southern California, Chicago, and Detroit and we control for local structural economic changes and national trends in manufacturing. We conclude the chapter with a summary of our findings and a review of data showing a decline in hexavalent chromium in Southern California’s air.

The Empirical Literature Jorgenson and Wilcoxen (1990), in a widely cited study, assessed the effects of US environmental regulations implemented during the 1970s on the rate of growth of the US economy between 1973 and 1985. Using a statistical model that simulated the major factors that determine long-run economic growth, they found that gross national product (GNP) was reduced by about 0.191% per year during this period. In other words, GNP would have been 2.59% higher by 1985 in the absence of regulations. In a separate study using a similar methodology, Jorgenson and Wilcoxen (1993) examined the effects of the 1990 Clean Air Act (CAA) amendments on US economic growth. Their findings revealed that GNP was reduced by about 3% between 1990 and 2005. “We find,” stated Jorgenson and Wilcoxen, “that pollution abatement has emerged as a major claimant on the resources of the U.S. economy” (1990, p. 314). Greenstone (2002) compared economic growth between “nonattainment” and “attainment” counties in the United States between 1972 and 1987. Nonattainment counties, as we reviewed in Chap. 2, are counties where air pollution exceeds national air-quality standards established by the Environmental Protection Agency (EPA) and polluting firms in nonattainment counties are subject to stringent air-­ quality standards. Greenstone found that nonattainment counties (relative to

28

3  The Metal Finishing Industry and Economic Growth

attainment counties) lost approximately 590,000 jobs, $37 billion in capital stock, and $75 billion in output. Walker (2013) used a similar methodology as Greenstone, but instead focused on worker earnings. He found workers who left regulated firms located in nonattainment counties experienced an earnings loss equivalent to 20% of their preregulatory earnings. In aggregate, this amounted to $5.4 billion in earnings losses. Ferris et al. (2017), using a panel dataset of 61 regulated and 109 unregulated firms, found that employment was significantly lower in regulated firms. Barbera and McConnell (1986) compared the rate of industrial productivity in the paper, chemical, stone, clay and glass, iron and steel, and nonferrous metal industries between the 1960s and 1970s. During the 1960s, the federal government played a minor role in regulating polluting industries, but during the 1970s Congress passed several major environmental laws. Their analysis indicated that environmental regulations caused an annual reduction in economic productivity of between 12% and 43%. Gollop and Roberts (1983) analyzed the effects of sulfur dioxide emission restrictions on the rate of productivity growth in 56 fossil-fueled electricity utilities between 1973 and 1979. Their econometric model incorporated proxy variables for the severity of the emission standard, the extent of enforcement, and the emission rate of individual facilities. They found that the annual productivity growth of electric utilities declined by 59% over the period. Gray and Shadbegian (1995), using data from the Pollution Abatement and Control Expenditures (PACE) survey, found that every $1.00 increase in abatement costs was associated with $1.74  in lower productivity for paper mills, $1.35 for oil refineries, and $3.28 for steel mills between 1979 and 1990. Greenstone et al. (2012), using a database of 1.2 million firms from the Annual Survey of Manufacturers, found that productivity declined by 4.8% between 1972 and 1993 for polluting firms in nonattainment counties. A number of empirical studies, however, have found no correlation between environmental regulations and a decline in economic growth. Meyer (1992), for example, ranked the 50 US states based on the stringency of their environmental policies between 1973 and 1989. He found that states with stringent regulations experienced greater economic growth when compared with states with weak regulations. Berman and Bui (2001) examined the effects of air-quality regulations on the productivity of oil refineries in the Los Angeles region between 1987 and 1992. Refineries in Los Angeles during this time incurred environmental compliance costs of approximately $8 million per plant. At the same time, however, productivity in these refineries outpaced nonregulated refineries in Texas and Louisiana. Using PACE as a proxy for environmental stringency, Morgenstern et al. (2002) examined the effects of environmental regulations on the competitive position of the US pulp and paper, plastics, petroleum, and steel industries between 1984 and 1994. They found that a million dollars of additional expenditure for environmental compliance by these industries was associated with an insignificant change in employment. Belova et al. (2013) updated the study by Morgenstern et al. (2002) and found that several years later these industries still experienced no significant job losses as a result of environmental regulations. Becker (2011) found that for the average

The Metal Finishing Industry and Hexavalent Chromium

29

manufacturing firm, there was no statistically significant effect on productivity of being in a county with higher environmental compliance costs. In a third line of empirical research, scholars have argued that the implementation of stringent environmental regulations can induce firms to discover new process technologies that reduce toxic emissions and increase firm productivity at the same time (Ambec et al., 2013; Dechezlepretre & Sato, 2017; Porter & Esty, 2005; Porter & Van Der Linde, 1995b). Using econometric models, Jaffe and Palmer (1997) and Brunnermeier and Cohen (2003), for example, found that strict environmental regulations proxied by higher pollution control expenditures led to higher research and development expenditures and more environment-related patents. But the strongest support for this argument emanates from case studies of individual firms. For example, in the 1990s Raytheon was forced to eliminate the use of ozone-depleting chlorofluorocarbons (CFCs) used for cleaning printed electronic circuit boards by the Montreal Protocol and the US Clean Air Act. Raytheon complied with the regulations by adopting a reusable semiaqueous, terpene-based cleaning agent that improved product quality at lower operating costs. In another example, the company 3M was required to reduce solvent emissions by 90%. To comply, they avoided the use of solvents altogether by coating products with safer, water-based solutions. As a result, 3M gained an early-mover advantage in product development over their competitors, many of whom switched significantly later (Porter & Van Der Linde, 1995a).

The Metal Finishing Industry and Hexavalent Chromium The metal finishing industry uses a chemical called hexavalent chromium to make metal products shiny, attractive, and wear-and-corrosion resistant. Hexavalent chromium has been the chemical of choice for metal finishing firms since it became commercially available in the 1920s (Baral et al., 2006). There are three types of metal finishing processes: (1) hard chromium electroplating, (2) decorative chromium electroplating, and (3) chromium anodizing (California Air Resources Board, 1988) (see Table 3.1). The hard chromium electroplating process deposits a “thick” layer of chromium on metal products over the course of several hours or days for products such as hydraulic cylinders and industrial machinery. Decorative chromium electroplating is measured in seconds or minutes and deposits a “thin” layer of chromium to provide a bright finish for products primarily used for esthetic purposes, such as bicycles, appliances, and jewelry. Chromium anodizing is an electrolytic process to by which an oxide layer is produced on the surface of a part, typically aluminum. The current is reversed compared to electroplating. Anodizing can impart a hard, corrosion-and abrasion-resistant coating that resists wear. The metal finishing industry, in general, can be divided into two distinct segments: “job shops” and “captive shops.” Job shops are independent operators that provide plating or anodizing services to a variety of industries (Haveman, 1998; US

30

3  The Metal Finishing Industry and Economic Growth

Table 3.1  Three types of chromium plating processes

Type of layer Properties provided

Type of parts

Plating duration Substrate

Hard chromium plating Thick layer (2.5–760 μm) Corrosion protection, wear resistance, lubricity, and oil retention Engine parts, industrial machinery, and tools

Hours or days Typically plated on steel

Decorative chromium plating Thin layer (0.003–2.5 μm)

Chromic acid anodizing Electrochemical conversion

A decorative and protective Corrosion and abrasion-­ finish resistant surface by forming an oxide coating Bath fixtures, faucets, automotive bumpers and wheels, furniture components, motorcycle parts Seconds or minutes

Architectural applications, landing gears, giftware and novelties, automotive trim and bumpers

Typically plated on nickel

Aluminum

Seconds or minutes

Source: South Coast Air Quality Management District (2003a)

EPA, 1995b). A typical job shop employs 15–20 people and generates $800,000–$1 million in annual gross revenues (Chalmer, 2008). Captive shops, however, are larger, more specialized, and tied to specific manufacturing companies. Job shops and captive shops typically do not compete against each other, although captive facilities may subcontract work that they are unable to perform to job shops (Kirchner, 2006). In both sectors, the metal finishing process is supervised by skilled electrochemical engineers or by platers with long experience. In smaller facilities, the proprietor typically holds the expertise in plating or anodizing. The business fortunes of both segments of the industry are highly influenced by the well-being of overall manufacturing, particularly the automotive, electronics, computers, machinery, industrial equipment, and aerospace sectors (Pearce, 2005; US EPA, 1995b). Figure 3.1 contains a flow chart showing how, for a typical chromium electroplating process, hexavalent chromium is emitted into the ambient air (California Air Resources Board, 1998). The first step is pretreatment, which involves mechanical buffing, vapor degreasing, or soaking a metal product in an organic solvent. The second step is alkaline cleansing, which is intended to remove surface soil. In the third step, the base metal is dipped in acid to remove tarnish and to neutralize the alkaline film on its surface. In the hard chromium plating operation, the cleaned substrate is subjected to an anodizing treatment before chromium electroplating; for decorative chromium plating, an undercoat of copper or nickel is applied to the base metal before chromium plating. During the next two steps, treatment and electroplating, chromium emissions are emitted into the ambient air when gas bubbles coated with a layer of the unused chromium solution from the plating bath rise to the surface as hydrogen and oxygen bubbles and break the surface of the plating bath to form a chromic acid mist. The emission of hexavalent chromium from the

The Metal Finishing Industry and Hexavalent Chromium

31

Substrate to be plated

Pretreatment step (polishing, grinding, degreasing)

Alkaline cleansing Rinse Acid dip

Rinse Chromic acid Emissions

Chromic acid treatment

Rinse Electroplating of chromium

Chromic acid Emissions

Rinse Hard chromium plated product Fig. 3.1  The hard chromium plating process. (Source: South Coast Air Quality Management District, 2003a)

plating bath is intensified because the plating efficiency of hexavalent chromium is very low compared to the plating efficiency of other chemicals. In general, approximately 20% of the chromic acid in a bath is plated onto a metal object during the metal finishing process. The level of emissions can be influenced by several factors, including the bath temperature, bath concentration, and the plating current (South Coast Air Quality Management District, 2003b).1 In the early 1980s, environmental regulators from the California Air Resources Board and the AQMD estimated that the metal finishing industry in Southern California was responsible for emitting thousands of tons of hexavalent chromium annually into the region’s ambient air, resulting in a cancer risk of 170–2000 cases  Ampere-hours are the integral of electrical current applied to a plating tank over a specific period. Surface tension is the property, due to molecular forces, that exists in the surface film of all liquids and tends to prevent liquid from spreading (South Coast Air Quality Management District, 2003b). 1

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3  The Metal Finishing Industry and Economic Growth

per million people (California Air Resources Board, 1985; Murchison et al., 1988).2 Cancer risk is typically expressed as the number of extra cancer cases occurring over a 70-year lifetime per one million people exposed to toxic air contaminants. In response to the severe health risk, the AQMD implemented Rule 1169 on June 3, 1988, a regulation designed to significantly reduce emissions of hexavalent chromium from the metal finishing industry in Southern California (South Coast Air Quality Management District, 2003b). The primary means by which metal finishing firms could comply with the regulations were through the adoption of add-on control technologies, including packed bed scrubbers, high-efficiency particulate air (HEPA) filters, chemical fume suppressants, and antimist additives.3 These technologies were considered by the AQMD as best available control technologies (BACT) (US Environmental Protection Agency, 2000). Trivalent chromium, a nontoxic chemical, was recommended as a viable substitute for hexavalent chromium for some decorative chrome plating applications (Toxic Reduction Institute, 2012). In 1997, the federal EPA implemented the National Emission Standards for Chromium Emissions (NESHAP) from Hard and Decorative Chromium Electroplating and Chromium Anodizing Tanks (US EPA, 1995a). The federal NESHAP contained requirements similar to Rule 1169 and applied to the metal finishing industry nationwide. Accordingly, the AQMD rescinded Rule 1169 and took responsibility for implementing and enforcing the federal NESHAP in Southern California.4 Several years later, 2003, the AQMD decided to strengthen the NESHAP regulation for metal finishing firms in Southern California by approving Rule 1469 (Selmi, 2005; South Coast Air Quality Management District, 2008; California Air Resources Board, 2006). One of the main requirements was for metal finishing firms located fewer than 25 m from a day care or fewer than 100 m from a school to reduce their emissions of hexavalent chromium to 0.0015  mg per ampere-hour.5 Rule 1469 was also amended in 2008, 2018, and 2021 to require further emission reductions from metal finishing tanks not previously known to be sources of hexavalent chromium emissions, and better shopkeeping practices (South Coast Air Quality Management District, 2018).

 Regulators estimate the level of hexavalent chromium being emitted into the ambient air by multiplying an emission factor (milligrams per ampere-hour) by actual or estimated activity data for a tank (Selmi, 2005). The level of emissions will vary by a number of factors, including firm size, type of metal plating, number of tanks, and ampere-hours. The resulting figure is then converted to mass emissions in pounds per year. An estimate is then made of how much those emission factors can be reduced based on specific control technologies. 3  For a detailed summary of Rule 1169, see Murchison et al., 1988. 4  For a detailed summary of the National Emissions Standards for Hazardous Air Pollutants (NESHAP) regulations, see US Environmental Protection Agency, 1995a. Technically, the EPA regulation became effective for decorative chromium platters in 1996 and hard chromium and anodizing facilities in 1997. Also, the AQMD changed the name of rule 1169 to Rule 1469 to incorporate the NESHAP regulations. 5  For a detailed summary of Rule 1469, see Selmi 2005, and South Coast Air Quality Management District 2003b. 2

Regulatory Impacts on the Metal Finishing Industry in Southern California

33

 egulatory Impacts on the Metal Finishing Industry R in Southern California To empirically assess whether or not AQMD regulations had a detrimental impact on the growth of the metal finishing industry in Southern California since 1988, we compared employment growth in the metal finishing industry in Southern California with employment growth in the metal finishing industries in Chicago and Detroit. These two other regions also have large concentrations of metal finishing firms, but the industries in Chicago and Detroit have not been subject to the same stringent environmental regulations. As noted above, from 1988 to 1996 the metal finishing industry in Southern California was subject to AQMDs Rule 1169 and the metal finishing industries in Chicago and Detroit were not subject to any environmental regulations. Between 1997 and 2002, the industries in all three regions were equally regulated by the federal NESHAP. Since 2003, Rule 1469 has been strengthened several times. These variations in regulatory stringency provided our case study with some quasiexperimental controls: According to standard economic theory, we should expect to find that since 1988 the metal finishing industries in Chicago and Detroit experienced greater economic growth when compared to the metal finishing industry in Southern California. To empirically investigate this question, we used annual employment growth obtained from County Business Patterns (CBP), an annual series of the US Census Bureau that provides information on industries at the subnational level (US Department of Commerce, 2020).6 Employment growth is a common indicator used by economists to measure economic competitiveness. Employment data for Southern California are for Los Angeles and Orange counties because these two counties contain the bulk of the metal finishing industry in the Southern California region.7 Employment data for Chicago are based on Cook County (Chicago is located in Cook County), and the employment data for Detroit are based on Wayne County (Detroit is located in Wayne County). We divided our analysis of employment trends into the three regulatory periods discussed in the preceding text: 1988–1996 when only the metal finishing industry in Southern California was regulated (AQMD’s Rule 1169); 1997–2002 when the industries in all three regions were equally regulated (the federal NESHAP); and 2003–2020 when regulations in Southern California were substantially strengthened (AQMD’s Rule 1469). Our analysis ends in 2020 because this is the most recent year for which data are available.  County Business Patterns keep track of certain characteristics of industries in the US economy using a coding system. Prior to 1998, the coding system was referred to as Standard Industrial Classification (SIC) codes. After 1998, the coding system was changed to better reflect US economic relations with North America and the name of the coding system was changed to NAICS. One code captures the majority of the metal finishing industry: SIC code 3471 and its equivalent NAICS code 332813 (US Department of Commerce, 2020). 7  While AQMDs official jurisdiction includes the urban portions of Riverside and San Bernardino counties, we used Los Angeles and Orange counties for the data analysis because the majority of the metal finishing industry is located in these two counties. 6

34

3  The Metal Finishing Industry and Economic Growth

Metal finishing employment in the United States, Southern California, Chicago, and Detroit, 1988-2020 90,000

16,000 Chicago

SC

Detroit

80,000

United States

70,000

12,000

60,000

10,000

50,000

8,000

40,000

6,000

30,000

4,000

20,000

2,000

10,000 2020

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

0

United States

SC, Chicago & Detroit

14,000

0

Fig. 3.2  Metal finishing employment in the United States, Southern California, Chicago, and Detroit, 1988–2020. (Source: US Department of Commerce, 2020)

To begin with, Fig. 3.2 shows employment trends in the metal finishing industries in the United States, Southern California, Chicago, and Detroit from 1988 to 2020. In the United States in 1988, there were 72,844 people employed in the US metal finishing industry and this number remained relatively steady until the early 2000s when employment began to slowly decline. By 2020, the US metal finishing industry employed 50,784 thousand people, a decline of 30% from 1988. Employment trends in the metal finishing industries in Southern California, Chicago, and Detroit broadly mirrored national trends. In Southern California, 10,064 were employed in the metal finishing industry in 1988 and this number declined to 5773 by 2020, a decline of 44%. In Chicago, 4431 were employed in the metal finishing industry in 1988 and this number declined to 2202 by 2020, a decline of 50%. In Detroit, 1455 were employed in the metal finishing industry in 1988 and this number declined to 712 by 2020, a decline of 51%. One way to provide a more accurate measure of the concentration of the metal finishing industries in Southern California, Chicago, and Detroit relative to the industry at the national level between 1988 and 2020 is by calculating the location quotient. The location quotient is a ratio that provides a measure of the concentration of an industry in a particular region (city, county, or some other regional level) relative to the same industry at the national level. A location quotient greater than one indicates that the local share of employment is greater than the national share and a location quotient less than one indicates that the local share is less than the national share. A location quotient greater than one also indicates that the industry exports goods outside of its region, a sign of a strong industry. In 1988, the location quotients for Southern California, Chicago, and Detroit were 2.6, 2.3, and 2.4 respectively, indicating that all three regions had large shares of the national metal

Regulatory Impacts on the Metal Finishing Industry in Southern California

35

Table 3.2  Metal finishing employment growth by region, 1988–2020

Region Southern California Chicago Detroit

Only Southern California regulated 1988–1996 0.1%

Southern California Chicago, and Detroit equally regulated 1997–2002 −2.2%

Southern California Subject to more stringent regulations 2003–2020 −2.2%

0.2% 0.1%

−1.3% −3.5%

−3.3% −2.1%

Source: US Department of Commerce (2020)

finishing industry. By 2020, the location quotients for Southern California, Chicago, and Detroit were essentially the same: 2.6, 2.4, and 2.4, respectively. The metal finishing industry in Southern California, as measured by the location quotient, maintained its share of national employment relative to the other two regions. Table 3.2 compares annual employment growth in the metal finishing industry in Southern California with annual employment growth in the metal finishing industries in Chicago and Detroit during the three regulatory periods. Between 1988 and 1996, when only Southern California was subject to stringent regulations (Rule 1169), employment grew at an average annual rate of .1% in Southern California, .2% in Chicago, and .1% in Detroit. Between 1997 and 2002, when the industries were equally regulated (the federal NESHAP), employment in the metal finishing industry in all three regions declined annually: −2.2% in Southern California, −1.3% in Chicago, and − 3.5% in Detroit. Finally, employment in all three regions continued to decline after the implementation of more stringent regulations by the AQMD on the industry in Southern California in 2003 (Rule 1469): −2.2% in Southern California, −3.3% in Chicago, and − 2.1% in Detroit. The data in Table 3.2 suggest that the metal finishing industry in Southern California performed just as well as, or better than, the industries in Chicago and Detroit between 1988 and 2020. The foregoing employment trends could have been influenced by cyclical economic trends in national manufacturing because, as noted earlier, the metal finishing industry is closely tied to the health of the manufacturing sector. We therefore attempted to control for cyclical economic trends in national manufacturing using a statistical technique called shift-share analysis. Shift-share analysis provides an indication of the degree to which a region’s economic growth can be attributed to national growth trends as opposed to regional growth trends. The results of our shift-share analysis are shown in Table 3.3. Between 1988 and 1996, the metal finishing industry in Southern California, after controlling for cyclical economic trends in manufacturing, grew at an annual rate of −0.8% while the metal finishing industries in Chicago and Detroit grew at annual rates of 0.3% and − 1.5%, respectively. Annual employment growth was substantially greater in Southern California between 1997 and 2002 when all three industries were equally regulated: 4.5% in Southern California, 1.4% in Chicago, and 2.2% in Detroit. After 2003, when the regulations were strengthened in Southern California, annual employment growth declined in each region, but the decline was less severe in Southern California: −1.8%, −3.3%, and −  2.4%,

36

3  The Metal Finishing Industry and Economic Growth

Table 3.3  Metal finishing employment growth by region controlling for the national manufacturing business cycle, 1988–2020

Region Southern California Chicago Detroit

Only Southern California regulated 1988–1996 −0.8%

Southern California Chicago, and Detroit equally regulated 1997–2002 4.5%

Southern California Subject to more stringent regulations 2003–2020 −1.8%

0.3% −1.5%

1.4% 2.2%

−3.3% −2.4%

Source: US Department of Commerce (2020) Table 3.4  Metal finishing employment growth by region controlling for the local manufacturing business cycle, 1988–2020

Region Southern California Chicago Detroit

Only Southern California regulated 1988–1996 2.0%

Southern California Chicago, and Detroit equally regulated 1997–2002 3.5%

Southern California Subject to more stringent regulations 2003–2020 −0.4%

1.9% 0.6%

4.0% 4.8%

−1.8% −2.3%

Source: US Department of Commerce (2020)

respectively. The metal finishing industry in Southern California generally experienced greater economic growth than the industries in Chicago and Detroit after controlling for cyclical economic trends in manufacturing. Finally, employment trends in the metal finishing industries in Southern California, Chicago, and Detroit could also have been influenced by structural economic changes in the local manufacturing sector of each region. This is important because each region has a strong manufacturing sector as evidenced by the location quotient. In 1988, the location quotient for manufacturing in Southern California was 1.1; in Chicago it was 1.0; and, in Detroit it was 1.3. In 2020, the location quotient for manufacturing was 1.0 in Southern California, 0.8 in Chicago, and 1.4 in Detroit. Controlling for local manufacturing is also important because the manufacturing sector in each region has experienced structural changes at different times since 1988. During the late 1980s and early 1990s, for example, the manufacturing sector in Southern California was hit hard by cutbacks in defense spending as the Cold War with the former Soviet Union came to an end (Thomas & Ong, 2002). The manufacturing sectors in Detroit and Chicago have been impacted at different times by economic restructuring in the automobile and steel industries. The data in Table 3.4 show employment trends in the metal finishing industries in Southern California, Chicago, and Detroit after controlling for structural economic changes in local manufacturing using shift-share analysis. Between 1988 and 1996, after controlling for structural changes in local manufacturing, employment

Conclusion

37

growth in the metal finishing industry in Southern California was 2.0%, while in Chicago it was 1.9%, and in Detroit it was 0.6%. Between 1997 and 2002, when all three regions were equally regulated, annual employment growth in Southern California was slightly below that of Chicago and Detroit: 3.5%, 4.0%, and 4.8%, respectively. The metal finishing industries in all three regions experienced a decline in annual employment growth after 2003, although the decline was less severe in Southern California: −0.4%, −1.8%, and −  2.3%, respectively. Controlling for structural economic changes in local manufacturing also suggests that the growth in the metal finishing industry in Southern California was not negatively affected by AQMD environmental regulations.

Conclusion Standard economic theory has long maintained that environmental regulations have a detrimental effect on the growth of the US economy. An emerging empirical literature in the social sciences, however, has cast doubt on this argument as a general theoretical proposition. The findings of this study reinforce this skepticism. Our findings revealed that stringent environmental regulations implemented by the AQMD since 1988 did not have a detrimental effect on the growth of the metal finishing industry in Southern California. The metal finishing industry in Southern California performed better than, or comparable to, the metal finishing industries in Chicago and Detroit from 1988 to 2020 even though the industries in these other two regions were not subject to the same level of regulatory stringency. While the metal finishing industry in Southern California primarily adjusted to the regulations by adopting pollution control technologies, nontoxic chemical substitutes for hexavalent chromium have been slowly emerging from supplier firms, particularly the use of trivalent chromium, which has shown considerable promise with some applications (Frazer, 2006; South Coast AQMD, 2018).8 Finally, the AQMD regulations have led to a significant reduction in the amount of hexavalent chromium that is present in Southern California’s ambient air.9 Figure  3.3 contains information on the average concentration of hexavalent chromium in the ambient air in Southern California for various years between 1998 and 2019. The data are from the Multiple Air Toxics Exposure Study (MATES), an urban toxics evaluation project initiated in 1977 by the AQMD’s Governing Board as part of their Environmental Justice Initiative (South Coast Air Quality Management  Currently, the most promising nontoxic chemical substitute for hexavalent chromium is trivalent chromium. For some metal finishes, trivalent chromium can provide comparable physical properties and the same color quality as hexavalent chromium while reducing health, safety, and environmental hazards. Trivalent chromium is not considered a toxic chemical by the scientific community (personal communication, D. Cunningham, October 2007; Schario, 2008). 9  While hexavalent chromium is emitted from several sources, much of the decline can be attributed to the regulation of the metal finishing industry since 1988. 8

38

3  The Metal Finishing Industry and Economic Growth

Average concentration of hexavalent chromium in Southern California's air and the resulting cancer risk 120

100

0.2

80 0.15 60 0.1 40 0.05

Cancer Risk (per Million)

Hexavelent Chromium (ng/m3)

0.25

20

0

0

1998

2006

2013

Emissions

Cancer Risk

2019

Fig. 3.3  Average concentration of hexavalent chromium in Southern California’s air and the resulting cancer risk. (Source: South Coast Air Quality Management District, 2021a, b)

District, 2021a, b). MATES includes a fixed-site monitoring program with ten stations to measure long-term regional air toxics levels in residential and commercial areas every several years. The aggregate average concentration of hexavalent chromium in the ambient air, as shown in Fig. 3.3, has declined significantly since 1998, including a dramatic reduction between 2006 and 2019. The decline has resulted in a significant reduction in cancer risk to the population in Southern California from more than 100 cases per million in 1996 and 2006 to approximately 25 cases per million in 2019 (South Coast Air Quality Management District, 2021a, b).10

References Ambec, S., Cohen, M., Elgie, S., & Lanoie, P. (2013). The Porter Hypothesis at 20: Can environmental regulation enhance innovation and competitiveness? Review of Environmental Economics and Policy, 7(1), 2–22. Baral, A., Engelken, R., & Steward, P. (2006). Chromium-based regulations applicable to metal finishing industries in the United States: A policy assessment. Review of Policy Research, 23(1), 1–21.

 Cancer risk is expressed as the number of extra cancer cases occurring over a 70-year lifetime per one million people exposed to toxic air contaminants. 10

References

39

Barbera, A., & McConnell, V. (1986). Effects of pollution control on industry productivity: A factor demand approach. Journal of Industrial Economics, 35, 161–172. Barbera, A. J., & McConnell, V. D. (1990). The impact of environmental regulations on industry productivity: Direct and indirect effects. Journal of Environmental Economics and Management, 18, 50–65. Becker, R. (2011). Local environmental regulation and plant-level productivity. Ecological Economics, 70(12), 2516–2522. Belova, A., Gray, W., Lin, J., & Morgenstern, R. (2013). Environmental regulation and industry employment: A reassessment (U.S. Census Bureau, Center for Economic Studies, Paper No. CES-WP, 12-36). Berman, E., & Bui, L. (2001). Environmental regulation and productivity: Evidence from oil refineries. Review of Economics and Statistics, 83(3), 498–510. Brunnermeier, S. B., & Cohen, M. A. (2003). Determinants of environmental innovation in US manufacturing industries. Journal of Environmental Economics and Management, 45, 278–293. Caglieri, A., Goldoni, M., Acampa, O., Andreoli, R., Vettori, M., Corradi, M., Apostoli, P., & Mutti, A. (2006, April). The effect of inhaled chromium on different exhaled breath condensate biomarkers among chrome-plating workers. Environmental Health Perspectives, 114(4), 542–546. California Air Resources Board. (1985). Initial statement of reasons for proposed rulemaking: Identification of hexavalent chromium as a toxic air contaminant. California Environmental Protection Agency. California Air Resources Board. (1988). Proposed airborne toxic control measure for emissions of hexavalent chromium from chrome plating and chromic acid anodizing operations. California Environmental Protection Agency. California Air Resources Board. (1998). Proposed amendments to the hexavalent chromium control measure for decorative and hard chrome plating and chromic acid anodizing facilities. California Environmental Protection Agency. California Air Resources Board. (2006). Proposed amendments to the hexavalent chromium airborne toxic control measure for chrome plating and chromic acid anodizing operations. California Environmental Protection Agency, Stationary Source Division. California Environmental Protection Agency. (2002, June). Chemicals known to the state of California to cause cancer or reproductive toxicity. Office of Environmental Health Hazard Assessment. Chalmer, P. (2008). The future of finishing. National Metal Finishing Resource Center. Dechezlepretre, A., & Sato, M. (2017). The impacts of environmental regulations on competitiveness. Review of Environmental Economics and Policy, 11(2), 183–206. Ferris, A., Richard, G., Marten, A., & Wolverton, A. (2017). The impacts of environmental regulation on the US economy (Working Paper 17-01) (pp. 1–37). US Environmental Protection Agency National Center for Environmental Economics. Frazer, L. (2006). Shiny science: A new substitute for hexavalent chromium. Environmental Health Perspectives, 114(8), A482–A485. Gollop, F., & Roberts, J. (1983). Environmental regulations and productivity growth: The case of fossil-fueled electric power generation. Journal of Political Economy, 91, 654–674. Gray, W. (2015, September). Environmental regulations and business decisions. Article Number 187. Retrieved April 15, 2019, from https://wol.iza.org/articles/ environmental-­regulations-­and-­business-­decisions Gray, W. B., & Shadbegian, R. J. (1995). Pollution abatement costs, regulation, and plant-level productivity (Working Paper No. 4994). National Bureau of Economic Research. Greenstone, M. (2002, December). The impacts of environmental regulations on industrial activity: Evidence from the 1970 and 1977 Clean Air Act Amendments and the Census of Manufactures. Journal of Political Economy, 11(6), 1175–1219. Greenstone, M., List, J., & Syverson, C. (2012). The effects of environmental regulation on the competitiveness of US manufacturing (Working Paper 2012-13) (pp. 1–53). MIT Center for Energy and Environmental Policy Research.

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Haveman, M. (1998). Profile of the metal finishing industry. Waste Reduction Institute for Training and Applications Research. Jaffe, A., & Palmer, K. (1997). Environmental regulation and innovation: A panel data study. Review of Economics and Statistics, 79, 610–619. Jaffe, A., Peterson, S., Portney, P., & Stavins, R. (1995). Environmental regulation and the competitiveness of US manufacturing: What does the evidence tell us? Journal of Economic Literature, 33(1), 132–163. Jorgenson, P., & Wilcoxen, P. (1990). Environmental regulation and US economic growth. The Rand Journal of Economics, 21(2), 314–340. Jorgenson, P., & Wilcoxen, P. (1993). The economic impact of the Clean Air Act Amendments of 1990. The Energy Journal, 14(1), 159–182. Kirchner, M. (2006, December). Captive operation or outsource? That is the question. Products Finishing, 71(3), 56. Meyer, S. (1992). Environmentalism and economic prosperity: Testing the environmental impact hypothesis. Massachusetts Institute of Technology, Project on Environmental Policies and Policy. Milliman, S., & Prince, R. (1989). Firm incentives to promote technological change in pollution control. Journal of Environmental Economics and Management, 17, 247–265. Morgenstern, R., Pizer, W., & Shih, J. (2002). Jobs versus the environment: An industry-level perspective (Discussion Paper No. 99-01). Resources for the Future. Murchison, G., Popejoy, C., Vincent, R., & Cameron, F. (1988). Proposed airborne toxic control measure for emissions of hexavalent chromium from chrome plating and chromic acid anodizing operations. California Air Resources Board. Norseth, T. (1981). The carcinogenicity of chromium. Environmental Health Perspectives, 40, 212–230. Pearce, L. (2005). SIC 3471 electroplating, plating, polishing, anodizing, and coloring. Encyclopedia of American Industries, 1, 830–833. Pellerin, C., & Booker, S. (2000). Reflections on hexavalent chromium: Health hazards of an industrial heavyweight. Environmental Perspectives, 108(9), A402–A407. Porter, M. (1991). America’s green strategy. Scientific American, 264(4), 168. Porter, M., & Esty, D. (2005). National environmental performance: An empirical analysis of policy results and determinants. Environment and Development Economics, 10, 391–434. Porter, M., & Van Der Linde, E. (1995a). Toward a new conception of the environment-­ competitiveness relationship. Journal of Economic Perspectives, 9, 97–118. Porter, M., & Van Der Linde, E. (1995b, September–October). Green and competitive: Ending the stalement. Harvard Business Review, 73, 120–132. Schario, M. (2008, April). Plating: Trivalent chromium. Finishing Today, 84(4), 45. Selmi, D. (2005). The promise and limits of negotiated rulemaking: Evaluating the negotiation of a regional air quality rule (Legal Studies Paper No. 2005-9). Loyola Law School. South Coast Air Quality Management District. (2003a). Final staff report: Adoption of Proposed Rule 1469 and repeal of Rule 1169—hexavalent chromium—chrome plating and chromic acid anodizing. South Coast Air Quality Management District. South Coast Air Quality Management District. (2003b). Final staff report: Proposed amended rule 1469—Hexavalent chromium emissions from chrome plating and chromic acid anodizing operations. South Coast Air Quality Management District. South Coast Air Quality Management District. (2008). Draft staff report: Proposed amended rule 1469—Hexavalent chromium emissions from chromium electroplating and chromic acid anodizing operations. South Coast Air Quality Management District. South Coast Air Quality Management District. (2018). Draft staff report: Proposed amended rule 1469—Hexavalent chromium emissions from chromium electroplating and chromic acid anodizing operations. South Coast Air Quality Management District.

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South Coast Air Quality Management District. (2021a). Draft staff report: Proposed amended rule 1469—Hexavalent chromium emissions from chromium electroplating and chromic acid anodizing operations. South Coast Air Quality Management District. South Coast Air Quality Management District. (2021b). Multiple air toxics exposure study (Mates-II): Final report. South Coast Air Quality Management District. Thomas, W., & Ong, P. (2002). Barriers to rehiring of displaced workers: A study of aerospace engineers in California. Economic Development Quarterly, 16(2), 167–178. Toxic Use Reduction Institute. (2012). Independent plating case study: Converting to trivalent chromium. University of Massachusetts. US Department of Commerce. (2020). County business patterns. Government Printing Office. US Environmental Protection Agency. (1995a). New regulation controlling air emission from chromium electroplating and anodizing tanks (EPA-453/F-95-001). Government Printing Office. US Environmental Protection Agency. (1995b). Profile of the fabricated metal products industry (EPA/310-R-95-007). Government Printing Office. US Environmental Protection Agency. (2000). Chromium electroplating and anodizing MACT. EPA Region III, Air Protection Division. Retrieved September 20, 2018, from http://www.epa.gov/ reg3/hazpollut/electrop.htm Walker, R. (2013). The transitional costs of sectoral reallocation: Evidence from the Clean Air Act and the workforce. The Quarterly Journal of Economics, 128(4), 1787–1835.

Chapter 4

The Wood Furniture Industry and Industrial Location

Abstract  The central question we examine in this chapter is does the implementation of stringent environmental regulations cause polluting firms to relocate to regions where regulations are weak or nonexistent, resulting in job loss for communities left behind? We investigate this question through an empirical case study of the effects of AQMD regulations on the relocation decisions of wood furniture firms in Southern California. Wood furniture firms emit volatile organic compounds (VOCs) into the ambient air that contribute to urban ozone. As a result, the AQMD implemented Rule 1136 in 1988, a regulation requiring the industry to reduce VOC emissions from 22.1 tons per day to 1.6 tons per day by 2005. Using a mix of quantitative and qualitative methods, we found that the regulations initially caused some wood furniture firms to relocate, especially to Mexico. However, their location decisions were also influenced by a national economic recession, cutbacks in U.S. defense spending, and the globalization of the U.S. wood furniture industry. Moreover, by the late 1990s, technological improvements in lower-VOC and water-based paints and coatings made it feasible for wood furniture firms to remain located in Southern California. Using a regression model that controlled for the business cycle and long-­ term market trends, we estimate that about one-third of the employment decline in the wood furniture industry between 1988 and 2005 was caused by the implementation of Rule 1136. Keywords  Wood furniture industry · Industrial location · Volatile organic compounds (VOCs) · Plant relocations · Maquiladora program · California Furniture Manufacturers Association

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 W. Thomas, P. Ong, Environmental Regulations and Industrial Competitiveness, Environment & Policy 62, https://doi.org/10.1007/978-3-031-26376-7_4

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44

4  The Wood Furniture Industry and Industrial Location

Introduction Many economists and politicians argue that stringent environmental regulations force companies to relocate to other countries or regions in the United States where environmental regulations are weak or nonexistent, resulting in significant job loss for communities left behind (Condliffe & Morgan, 2009; Levinson, 1996). This sentiment is particularly pervasive at the state and local level and is often used by the business community as an argument to discourage politicians from passing new environmental legislation. However, there is very little empirical research concerning whether or not stringent environmental regulations cause firms to relocate out of a region. Those empirical studies that do exist have primarily focused on the influence that environmental regulations have on the location of new firms or new corporate branch plants. These studies have found that traditional location factors, such as access to markets and a qualified labor force, generally have a greater influence on location decisions when compared with the existence of stringent environmental regulations (Brunnermeier & Levinson, 2004). Firm relocations are somewhat different because an existing firm has already made capital investments in a particular location and has established business relationships (Jaffe et al., 1995). They must take these factors into account before making a decision to relocate their operations. The central question we examine in this chapter, then, is do stringent environmental regulations cause polluting companies to relocate to other regions in the United States or to foreign countries? We investigate this question through a case study of the wood furniture industry in Southern California. This is a fruitful case study because the wood furniture industry in Southern California was subject to stringent environmental regulations by the South Coast Air Quality Management District (AQMD) between 1988 and 2005. The industry was targeted for regulation as the result of the emission of volatile organic compounds (VOCs) from coatings that are applied to wood furniture products. VOCs are a major precursor to urban ozone formation, which is a major cause of serious human health problems, including headaches, bronchitis, and other respiratory complications (Bell et  al., 2009; Lippman, 1989). The AQMD was created by the state of California in 1977 with a mandate to bring Southern California’s air quality into compliance with the Federal Clean Air Act of 1970 (see Chap. 2). AQMD’s official political jurisdiction covers Orange County and the nondesert portions of Los Angeles, Riverside, and San Bernardino counties, a region covering 10,473 square miles and home to approximately 17 million people. We refer to this region as Southern California. The AQMD regulations—referred to as Rule 1136—required the wood furniture industry in Southern California to gradually reduce VOC emissions by 83% from 1988 to 1996 by adopting add-on control equipment or substituting lower emitting VOC solvents or water-based materials for traditional nitrocellulose coatings. Adopting add-on controls was an expensive compliance option. For example, a company with seven spray booths and about 300 employees would have been required to install afterburners with capital costs of 3.5 million and $60,000 per

Introduction

45

month in operating costs (South Coast Air Quality Management District, 1988).1 The 1996 deadline was later extended to 2005. The schedule established by Rule 1136 for reducing VOCs from various paints and coatings that are applied to wood furniture products is shown in Table 4.1. When the regulations were implemented in 1988, the industry claimed that the add-on control equipment was too costly and that the alternative solvents and water-based coatings were not technologically feasible. Compliance, they argued, would place them at a competitive disadvantage with their unregulated counterparts located outside of Southern California and they would be forced to relocate out of the region. The owner of one wood furniture company stated in 1988: “To our knowledge, there is no technology that will work” (Stammer, 1988, pp. A1–A29). According to another industry official: “This is a very iffy technology right now…the uncertainties may just push them over the edge” (ibid.). The California Furniture Manufacturers Association stated: “If adopted in its present state, it will force closure of hundreds of plants in Southern California and result in massive unemployment in our communities” (Peltz, 1988, pp. D1–D13). We set out in this case study to see if these dire predictions came true. Using a mix of quantitative and qualitative methods, our analysis revealed that the implementation of Rule 1136 by the AQMD in 1988 initially caused a significant number of wood furniture firms, particularly larger ones, to relocate to Mexico and other places in the United States. Employment in the wood furniture industry in Southern California between 1988 and 2005 declined by about 44%. There were, however, several other extenuating circumstances and intervening factors that negatively influenced the industry during this time, including a national economic recession, cutbacks in US defense contracts flowing to companies in the Southern California region, and the globalization of the US wood furniture industry. Moreover, Table 4.1  Rule 1136 deadlines for achieving VOC reductions Clear topcoats Filler High-solid stains  Nonglaze  Glaze Inks Mold-seal coating Multicolored coating Pigmented coating Sealer

1/1/1989 700 500

7/1/1990 550 500

7/1/1994 275 500

2005 275 275

800 700 500 750 685 700 700

700 700 500 750 685 600 550

700 700 500 750 275 275 550

240 240 500 750 275 275 240

Source: South Coast Air Quality Management District (1996) Note: Grams of VOC per liter of material  Another scenario predicted that a company employing 480 employees and using 15 spray booths having to adopt a regenerative oxidizer with capital costs of 5.2 million and operating costs of $470,000 per year (South Coast Air Quality Management District, 1988). 1

46

4  The Wood Furniture Industry and Industrial Location

our analysis revealed that by the late 1990s, technological improvements in the quality of lower-VOC and water-based paints and coatings made it more feasible for wood furniture firms to efficiently comply with Rule 1136 and remain located in Southern California. Using a regression model that controlled for the business cycle and long-term market trends between 1988 and 2005, we estimated that about one-­ third of the employment decline in the wood furniture industry was caused by the implementation of Rule 1136 by the AQMD. The remainder of this chapter is organized as follows. In section “Review of the literature”, we review the empirical literature that has assessed the effects of environmental regulations on the location decisions of firms and industries. In section “Evidence of wood furniture relocations”, we search for evidence that the AQMD regulations caused wood furniture firms to relocate out of the region between 1988 and 2005. In section “Intervening factors”, we review factors other than Rule 1136 that contributed to wood furniture firms relocating from Southern California. In section “Adjustment to Rule 1136”, we examine how those firms that remained in the Southern California region after Rule 1136 were implemented complied with the regulations. In section “Isolating the effects of Rule 1136”, we estimate the degree of job loss in the wood furniture industry between 1988 and 2005 that can be attributed to the implementation of Rule 1136 using a simple regression model. We conclude the chapter with a summary of our findings.

Review of the Literature Duerksen (1983) investigated the importance corporations placed on states with stringent environmental regulations when deciding where to locate a new corporate branch plant. Based on interviews with dozens of managers of large corporations, he found that traditional locational factors, such as access to markets, labor, and proximity of suppliers carried more weight than the stringency of a state’s environmental policies. “Environmental policies,” Durkenson concluded, “affect a [location] decision only when all other factors are equal—which is rarely the case” (ibid., p. 24). Schmenner (1982) surveyed 158 Fortune 500 firms that had recently opened a new corporate branch plant in the United States and found that only three used the stringency of state environmental policies as a criterion in their siting decisions. Stafford (1985) surveyed 162 corporate managers of the 500 largest US corporations who had located a new corporate branch plant in the United States during the late 1970s and early 1980s. Stafford concluded that “environmental regulations were only of secondary importance, almost always overshadowed by other locational considerations, most notably labor and market access” (ibid., p. 238). Bartik (1988) examined variations in the stringency of environmental regulations among US states and the location of new corporate branch plants among Fortune 500 companies between 1972 and 1978 using a conditional logit model and data

Review of the Literature

47

from Dun and Bradstreet.2 The independent variables in the model consisted of proxies for traditional location factors, including business taxes, labor market conditions, and proxies for the stringency of state environmental regulations. Bartik (1988) found no statistically significant effect between strict environmental regulations among states and the number of new corporate branch plant locations. Levinson (1996) examined the number of new corporate branch plant locations among the 500 largest US manufacturing firms between 1982 and 1987 among US states using data from the Census of Manufacturers and the Pollution Abatement Costs and Expenditures Survey (PACE). He used seven proxies as independent variables to measure the stringency of state environmental policies and, of the seven, only two were statistically significant, but their influence was minor. Friedman et al. (1992), using data from the International Trade Administration (ITA), found that the stringency of a state’s environmental regulations had no effect on where European corporate branch plants decided to locate in the United States and a small statistically significant effect on where Japanese corporate branch plants decided to locate in the United States between 1977 and 1980. McConnell and Schwab (1990) investigated the location of new corporate branch plants in the auto assembly industry between 1973 and 1982. Auto assembly plants emit VOCs during the painting process, a toxic chemical that contributes to urban ozone formation. The methodological context for their study was as follows. The Environmental Protection Agency (EPA) classifies counties in which VOC emissions exceed national standards as “nonattainment” counties (see Chap. 2). Polluting firms which locate in a nonattainment county are required to adopt the “lowest achievable emission rate” (LAER) technologies regardless of costs. Polluting firms locating in attainment counties, however, are subject to “best available control technologies” (BACT), a weaker standard than LAER. Accordingly, an auto assembly plant locating in a nonattainment county would have been subject to an additional cost of between 20 and 40 million. Despite these potential costs, McConnell and Schwab (1990, p. 79) found that nonattainment status among counties “did not matter” where auto manufacturers decided to locate their auto assembly plants, with the exception of a few counties that were extremely out of compliance (Houston, Los Angeles, and Milwaukee). Some empirical studies, however, have found a stronger causal relationship between stringent environmental regulations among states and counties and the location of new firms. Becker and Henderson (2000) examined the influence of attainment status among counties between 1978 and 1987 on the number of new plant births in four industries: organic chemicals, petroleum refining, plastic materials, and furniture. Using a panel dataset available through the Center for Economic Studies (CES) of the US Census Bureau, they found that nonattainment status among counties during this time reduced the expected number of new plant births within these industries by 26–45%. In a similar study, Henderson (1996) found that

 Dun and Bradstreet, as part of its broader business, collects information on the location, number of employees, and SIC codes of firms in the United States. 2

48

4  The Wood Furniture Industry and Industrial Location

counties with a three-year record of attainment had 7–10% more firms in pollution-­ intensive industries due to firms exiting nonattainment counties. Finally, Condliffe and Morgan (2009) found that new plant births fell by 10% as a county moved from a status of attainment to nonattainment. The foregoing research has focused primarily on the effects of environmental regulations on the location of new corporate branch plants and new plant births and not plant relocations. This is likely due to the fact that the US Census does not keep track of plant relocations. There are some significant differences between a decision to locate a new business in a particular place for the first time and a decision to relocate an existing business from one location to another (Levinson, 1996; Schmenner, 1982). For example, when corporate managers locate a new firm for the first time, they have no sunk costs or preexisting business relationships with customers and suppliers to consider. Existing companies, however, have made capital investments in a particular location and have established business relationships. They must take these factors into account before making a decision to relocate their operations. In other words, not only do they need to assess the location where they are going but they also need to assess the locational characteristics of the places that they are leaving behind, significantly complicating the location decision.

Evidence of Wood Furniture Relocations Did the implementation of Rule 1136 in 1988 by the AQMD cause wood furniture firms to leave Southern California and relocate to another region, resulting in job loss for communities left behind? We began to investigate this question by examining employment trends in the industry using data from the Bureau of the Census. We defined the wood furniture industry for this purpose using four North American Industry Classification System (NAICS) codes (Table  4.2) (US Environmental Protection Agency, 1995; US Department of Commerce, 2012). Prior to 1998, the Census Bureau used Standard Industrial Classification (SIC) codes to track US economic activities. The SIC code system was changed to the NAICS code system in 1998 to better reflect economic relations with other North American countries. The SIC and NAICS code matches, shown in Table 4.2, capture the bulk of the wood furniture industry and allowed us to reliably track historical employment trends.

Table 4.2  Wood furniture industry SIC and NAICS codes SIC 2511 → NAICS 337122: Nonupholstered wood household furniture manufacturing SIC 2517 → NAICS 337129: Wood television, radio, and sewing machine cabinet manufacturing SIC 2521 → NAICS 337211: Wood office furniture manufacturing SIC 2541 → NAICS 337110: Wood kitchen cabinet and countertop manufacturing Source: US Department of Commerce (2012)

Evidence of Wood Furniture Relocations

25,000

49

Wood Furniture Employment in Southern California, 1985-2005.

22,500 20,000 17,500 15,000 12,500 10,000 7,500 5,000 2,500 0

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Fig. 4.1  Wood furniture employment in Southern California, 1985–2005. (Source: US Department of Commerce, 2012)

Figure 4.1 shows employment trends in the wood furniture industry in Southern California from 1985 (3 years before the regulations were implemented) to 2005. Employment in the industry grew steadily during the mid-1980s and, by 1988, according to one economist, “the Southern California furniture industry was a giant, $1.3 billion-a-year business” (White, 2011, p. B4). However, around 1988—the same year that Rule 1136 was implemented by the AQMD—employment in the industry began to plummet. It fell from 15,354 in 1985 to 9185 in 1992, a decline of about 40%. The industry rebounded slightly in the early 1990s, but employment continued to drop thereafter, and stood at 8611 employees by 2005. The foregoing census data, as noted earlier, does not keep track of plant relocations. The employment decline in wood furniture since 1988, therefore, may have been due to wood furniture plant closings or workforce reductions. To link the decline in wood furniture employment to plant relocations, we turned to secondary sources of information. The Los Angeles Times reported that between 1988 and 1990, a total of 40 Southern California wood furniture companies relocated to Mexico in response to the implementation of Rule 1136. By 1990, according to one analysis, 22% of the 609 US corporations located just south of the Mexican border were wood furniture manufacturers (Kraul, 1990). Wood furniture firms who relocated to Mexico in response to Rule 1136 after 1988 included Douglas Furniture, Eric Morgan, Good Bedrooms, Good Tables, Cordon’s Cabinets, VBargas Furniture, and Evenflo. According to the owners of these companies, the implementation of Rule 1136 was the decisive reason why they left. The owner of Douglas Furniture stated: “If we wanted to stay in business, we had little or no alternative. The emission standards have gotten more and more stringent—to the point of them

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4  The Wood Furniture Industry and Industrial Location

being difficult to meet and making it impossible for us to expand” (ibid., pp. D1– D4). The CEO of Good Bedrooms similarly said: “Everybody is jumping on the bandwagon. Some of the companies are trying to hang in there, but the long-term outlook is bleak” (ibid.). David Finegood, who relocated two plants to Mexico resulting in the loss of 600 jobs, stated: “We had no intention of moving; it never entered my mind, until we started getting rules from the South Coast Air Quality Management District” (Pasternak, 1991, pp. A1–A24). The Government Accounting Office (GAO), at the request of Congressman John Dingell, attempted to estimate the number of wood furniture firms that had relocated from Southern California between 1988 and 1990 and the amount of job loss that resulted (Smith, 1991). The primary motivation for the GAO study was a concern that wood furniture firms and other economic sectors were relocating to Mexico to take advantage of the Maquiladora program. The Mexican government initiated the Maquiladora program in 1965 to generate economic development and employment along Mexico’s economically depressed northern border. Under the program, the government permitted plants to import raw materials, components, and machinery free from Mexican import duties with the general stipulation that the plants would export their output (Smith, 1991). Using a combination of census data and surveys, the GAO estimated that between 11 and 28 wood furniture firms, mostly larger ones (i.e., more than 100 employees), had relocated to Mexico during this time, resulting in a loss of between 953 and 2530 jobs.3 Moreover, the GAO estimated that between 3 and 100 wood furniture manufacturers had relocated to areas within the United States between 1988 and 1990, including Georgia, Michigan, and Northern California, affecting an additional 130–4449 employees. Finally, the GAO estimated that another 8–99 wood furniture manufacturers in Southern California were planning to relocate out of the region and some of these companies had already made investments in new locations. A survey of wood furniture firms that had relocated to Mexico conducted by the authors of the GAO study revealed that 78% relocated due to AQMD regulations.

Intervening Factors While there is solid evidence that some wood furniture firms relocated from Southern California to Mexico and other places in the United States to avoid environmental compliance with AQMD’s Rule 1136, there were other extenuating circumstances and intervening factors that contributed to the demise of the wood furniture industry in Southern California between 1988 and 2005. For example, the  Bear in mind that the definition of the wood household furniture industry used by the GAO slightly differs from ours. According to the authors of the GAO study: “For this report we use the term ‘wood furniture manufacturers’ to refer to manufacturers of wood kitchen cabinets, household furniture, television and radio cabinets, office furniture, public building furniture, and partitions and fixtures” (Smith, 1991, p. 1). 3

Intervening Factors

51

wood furniture industry is highly sensitive to cyclical economic trends: When the economy is strong, particularly the housing sector, consumers are more likely to spend disposable income on furniture (Berman & Pfleeger, 1997; Buehlmann & Schuler, 2009; Katzanek, 2008). Figure 4.2 shows the number of annual residential building permits issued in the United States juxtaposed with employment trends in the Southern California wood furniture industry from 1985 to 2005 (US Department of Commerce, 2013). Annual US building permits grew steadily during the 1980s, peaking at approximately 1.5 million in 1988. Permits dropped sharply thereafter, declining from 1.7 million in 1986 to just under one million by 1991. Annual US building permits then increased steadily to 2.1 million in 2005. There is clearly a correlation. Moreover, there was a national economic recession in 1990 that was exacerbated in Southern California by cutbacks in US defense spending due to the end of the Cold War (National Bureau of Economic Research, 2013). Defense-related electronics and aerospace companies were heavily concentrated in Southern California and were hit hard when prime defense contracts awarded for aircraft and missiles and space production fell from $10.2 billion in 1988 to $5.1 billion in 1995 (Thomas & Ong, 2002). In addition to cyclical economic trends and a national economic recession, wood furniture firms in Southern California experienced high business costs. Average wages for wood furniture workers in Southern California in 1988, for example, were $8.92 per hour compared to $0.77 per hour for workers in Mexico (Drayse, 1997; Smith, 1991). Wood furniture companies also complained of high workers compensation costs (California Commission on State Government Organization and Economy, 1988; Smith, 1991). Workers compensation costs for wood furniture firms in Southern California increased from $9.06 per hour in 1980

Southern California Wood Furniture Employment and US Building Permits, 1985-2005 25,000

25,00,000 SC Employment

US Building Permits

20,000

20,00,000

15,000

15,00,000

10,000

10,00,000

5,000

5,00,000

0

0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Fig. 4.2  Southern California wood furniture employment and US building permits, 1985–2005. (Source: US Department of Commerce, 2012)

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4  The Wood Furniture Industry and Industrial Location

to $19.40 per hour in 1989 (Lesperance, 1991).4 By the late 1980s, average workers compensation costs for wood furniture companies accounted for 20% of their payroll (Hise, 1992). Finally, the demise of the Southern California wood furniture industry after 1988 may be attributed, in part, to the globalization of the US wood furniture industry (Bryson et al., 2007; Drayse, 2008; Scott, 2006; Xiao et al., 2009). According to Drayse (2008, p.  261), by the 1990s globalization had “unhinged the connection between overall economic activity, furniture consumption and production, and domestic furniture employment.” Historically, wood furniture firms in the United States have located close to their final markets because wood furniture products are bulky and have a low value-to-weight ratio, making transportation costs expensive (Drayse, 1997; Herman, 1995; Isard, 1975). However, recent innovations in transportation, such as the use of containerized shipping, have reduced transportation costs for the wood furniture industry significantly (Drayse, 2008; Leigh, 2000). Innovations in design and packaging reduced the chance of wood furniture being damaged in transit. Moreover, communication technologies have allowed wood furniture companies to develop complex logistic systems to track the production of wood furniture products around the world. According to the owner of one Wisconsin wood furniture company: “[I can] ship Indiana oak halfway around the world, have it made into furniture and sent back to the Midwest—all for about 40% less than the cost of production here” (Drayse, 2008, p. 259). The rapid rise in US wood furniture imports since the early 1990s underscores the rapid globalization of the US wood furniture industry. Total foreign imports of wood furniture to the United States, as shown in Fig. 4.3, increased from two billion in 1990 to approximately 12 billion by 2005 (UNCTAD, 2013). China emerged as the leading exporter of wood furniture to the United States, with Chinese imports of Global and Chinese wood furniture imports to the United States, 1989-2005 14,00,00,00,000 12,00,00,00,000 10,00,00,00,000 8,00,00,00,000 6,00,00,00,000 4,00,00,00,000 2,00,00,00,000 0

China

World

Fig. 4.3  Global and Chinese wood furniture imports to the United States, 1989–2005. (Source: UNCTAD, 2013)  The California workers compensation system requires employers to pay a specified set rate for every $100  hours of labor earned by employees (California Commission on State Government Organization and Economy, 1988). 4

Adjustment to Rule 1136

53

wood furniture increasing from less than one million in the early 1990s to around five billion by 2005. Many US wood furniture firms have relocated to China or subcontracted with Chinese manufacturers where average hourly wages are around 0.50 per hour and overhead costs are 50–60% less than in the United States (Bryson et  al., 2007; Buehlmann & Schuler, 2009). The emergence of competition from China was not lost on wood furniture companies in the Southern California region. According to John Sandberg, CEO of Sandberg Furniture: “In investigating Chinese production of laminate bedroom furniture in 2003, I discovered that I could import completed and boxed products for less than our material cost. I knew we were in trouble” (White, 2011, p. B4).

Adjustment to Rule 1136 We were surprised to find that some wood furniture firms that had relocated to Mexico after the implementation of Rule 1136 in 1988 later decided to return to Southern California. These firms reported that the costs of operating a business in Mexico were much greater than expected. For example, it was difficult to employ a reliable workforce, with corporate managers reporting that employee turnover was as high as 90% (Kraul, 1990). Finding and retaining higher skilled production workers was particularly difficult. One firm estimated that the same level of production that took 35–40 workers in Southern California required 70–140 workers in Mexico (Parrish, 1993). “The dramatically lower cost of labor,” stated the owner of one wood furniture firm who had returned to Southern California, “seems to me to be fool’s gold” (ibid., pp. B1–B8). Moreover, wood furniture companies reported problems with poor quality control. According to one company owner, the need to rework finished furniture jumped from 5% in Southern California to 15% in Mexico (Parrish, 1993). These companies returned to Southern California fully knowing that they would have to comply with Rule 1136. For those wood furniture firms who opted to remain in Southern California after the implementation of Rule 1136, how did they comply with Rule 1136? Some wood furniture firms adjusted by adopting lower VOC solvents and water-based coatings. Firms reported that the alternative solvent 1,1,1-trichloroethane (TCA) was especially effective (South Coast Air Quality Management District, 1996). Also, cooperative efforts to improve the quality of low-VOC coatings were being made by the AQMD, the California Furniture Manufacturers Association, and Southern California Edison, the region’s electric utility. According to Alan Lloyd, the AQMD’s chief scientist, “These coatings [that were being developed] will allow wood furniture makers to meet air quality requirements and still make quality products that are competitive with those made outside the area. In fact, there’s no reason why the few firms that have left to escape pollution controls should not now move back to our area” (American Paint and Coatings Journal, 1993, p. 30). One manufacturer said as early as 1992: “We’d gotten the impression that we had to move out of state to survive, but it’s now looking like we’re going to be able to continue

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4  The Wood Furniture Industry and Industrial Location

making shutters and furniture in California” (Johnson, 1992, pp. D7–D8). Site visits to dozens of wood furniture firms during the early 1990s by AQMD regulators showed that many firms had fully or partially converted to lower VOC solvents and water-­based coatings (South Coast Air Quality Management District, 1996). Some wood furniture companies reported that it took time and a lengthy process of trial and error to use lower VOC solvents and water-based coatings effectively and efficiently. Adopting alternatives required flexibility, instruction from coating suppliers, experimentation, and patience. Moreover, the feasibility of using alternative solvents or water-based coatings, particularly for custom-made products, depended on a number of circumstances, including the substrate, the type of coating, color and gloss, and the level of resistance (South Coast Air Quality Management District, 1996). Using them effectively may also have required new heating equipment, more steps in the production line, and different methods of coating transfer. According to one observer: “Some of the wood furniture companies that successfully converted to water-based coatings had either a simple process where they ‘got lucky’ and found a drop-in coating, or the company had a technical person with a chemical background” (ibid., p. C28). The feasibility of adjusting to the regulations through lower-VOC coatings was set back in 1993 when the federal EPA, based on new scientific evidence, determined that TCA emitted stratospheric ozone-depleting compounds (ODCs) (South Coast Air Quality Management District, 1994). ODCs destroy the ozone layer, which can cause skin cancer by allowing increased amounts of ultraviolet sunlight to reach the earth’s surface. To discourage the use of TCA in manufacturing processes nationwide, the EPA placed a tax on its use and required a warning label on all products containing TCA. In 1996, the EPA completely banned the use of TCA in conformity with the Montreal Protocol, an international agreement that established a schedule for phasing out the use and production of ODCs (South Coast Air Quality Management District, 1996). This created considerable uncertainty within the industry. The owner of one Southern California wood furniture company, in response to the ban on TCA, stated: “Why did the District [AQMD] push us into a product that was going to be phased out just a few short years after its introduction into the market?” Another company owner stated: “How much longer does the District [AQMD] intend to use the [Southern] California Furniture Manufacturing Industry as a guinea pig for environmental regulations?” With the elimination of TCA as a viable alternative solvent, the AQMD conducted an extensive survey of the industry to assess whether or not technologically feasible alternative solvents and water-based coatings were available to meet the 1996 VOC limits (South Coast Air Quality Management District, 1996).5 The survey results revealed that 27% of wood furniture companies in Southern California believed that water-based coatings could be used successfully to meet the 1996  The AQMD contracted with Gary Anderson of Fred K. Anderson & Sons, Inc., to assist them with designing and conducting the survey. Approximately 1000 survey forms were mailed to wood furniture companies. Of these, 211 were returned, representing more than 20% of the industry (South Coast Air Quality Management District, 1996). 5

Isolating the Effects of Rule 1136

55

Table 4.3  The feasibility of low-VOC finishes Meeting the 1996 VOC limits will be: Very easy Moderately easy Somewhat difficult Extremely difficult Total responses

Clear topcoats 24.3% 11.7% 23.4% 40.5% 111

Pigmented topcoats 24.4% 12.8% 25.6% 37.2% 86

Sealer 22.5% 9.8% 22.5% 45.1% 102

Stain 21.6% 9.8% 20.6% 48.0% 102

Basecoat 24.6% 10.1% 24.6% 40.6% 69

Toner 16.7% 7.4% 25.9% 50.0% 54

Washcoat 17.0% 7.5% 17.0% 58.5% 53

Source: South Coast Air Quality Management District (1996)

limits, 37% believed that they could work successfully in some applications, and 37% replied that they would not be available. The survey results for achieving the 1996 VOC reductions through alternative VOC solvents produced similar results. As shown in Table 4.3, of the firms surveyed, only 20–30% believed that low-VOC coatings could be used to meet the 1996 deadlines for various coatings and approximately 30–47% believed they could not. Given the survey results, the AQMD Governing Board extended the final deadline for achieving VOC reductions from 1996 to 2005 (Cone, 1996). According to an AQMD report: “In 1990, most wood coating firms chose alternative materials, primarily TCA, as their principal method of compliance…now that TCA is scheduled for phase-out by EPA, local coating firms have no economically feasible method of complying with the 1996 limits until water-based coatings of higher quality are commercially available.” According to an AQMD Executive Officer: “We thought it was reasonable [the extension to 2005] because there are some real, technical challenges with the water-based systems that haven’t been overcome yet” (ibid., p. A20). While the industry welcomed the extension of the deadlines, they remained opposed to the regulations. According to one company owner: “If forced technology has not worked to date, how can we be expected to continue to shoulder these staggering expenses while the AQMD stages some form of compliance extensions in hopes of future results (ibid., p. A20)?”

Isolating the Effects of Rule 1136 We now attempt to quantify the impact of Rule 1136 on employment in the wood furniture industry in Southern California since 1988 while controlling for other factors. Using a simple time-series regression model, we compared wood furniture employment trends in Southern California with wood furniture employment trends in the United States between 1985 and 2005. If employment decline in Southern California is steeper than the national level, then we may be able to attribute some of the difference to the imposition of Rule 1136. The wood furniture industry, as noted earlier, is highly sensitive to the business cycle (Berman & Pfleeger, 1997). Accordingly, we used two independent variables to control for cyclical economic trends: (1) the annual number of building permits in California and (2) the

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4  The Wood Furniture Industry and Industrial Location

unemployment rate in Southern California. Annual building permits capture fluctuations in demand related to furnishing new homes. We used annual permits for the state of California because the Southern California wood furniture industry supplies much of the state’s furniture needs, as evidenced by its proportionately large share of the state’s total furniture employment (Drayse, 1997). The unemployment rate for Southern California captures overall fluctuations in demand, including replacement, redecorating, and upgrading in existing homes. Models 1 and 2 (Table 4.4) test for long-term secular (i.e., not subject to seasonal or cyclical effects) employment trends while controlling for the business cycle (building permits and the rate of unemployment). The US model uses the national unemployment rate and national level annual building permits. We should expect to find that wood furniture employment in Southern California is positively related to building permits and inversely related to unemployment. If furniture employment in Southern California has a strong secular decline, particularly in the regulatory period, then we might infer a regulatory impact. The models show no secular trends for the United States, but a strong one for Southern California, indicating a pattern that might be associated with the imposition of Rule 1136. In models 3 and 4, we add some time variables to test for possible secular and structural economic changes, including long-term shifts in demand, technology innovations, and increasing global competition. The results of these models indicate that there is no detectable secular trend for furniture employment in the United States, but a strong one for wood furniture employment in Southern California. The size of the variables indicates that Southern California employment grew during the early 1980s and then declined, with the secular contraction roughly coinciding with the imposition of regulations in 1988. The additional Southern California model replaces the simple time variables with dichotomous variables for the different stages of regulation, that is, the extension of the deadlines to 2005. This approach explains a little more of the variation and the estimated coefficients and are consistent with a priori assumptions of the effects of the early stage, the extension of the deadlines to 2005, and then the final full implementation of Rule 1136 in 2005. Table 4.4  Wood furniture regression model Variable Constant Unemployment rate Construction permits Time Time square Initial regulation years Extension period Postextension N= Adjusted R-sq.

Model 1 US employment 230,059*** −13,178*** 0.04079*** 573.4 −7.84

36 0.744

*p