May 15, 2012

Regulation in the Pulp and Paper Industry: Costs and Consequences

Key materials

Abstract

The paper and pulp industry is one of the most heavily regulated industries in the United States. This working paper investigates the extent to which environmental and workplace regulations affect the industry and evaluate the impact of these regulations on the industry, its customers, its employees and society in general. A review of literature on this topic reveals that numerous scholars have attempted to discern the effects of specific regulations on the industry or attempted to place a dollar value on what pollution abatement costs paper manufacturers. In this paper, we will take their findings into account, identify which regulations affect the industry, and describe the total cost these regulations impose on society. We investigate the tangible and direct costs of regulation, meaning the amount that regulation actually costs companies within the industry in dollar terms, as well as the less-visible, non-monetary costs resulting from regulation. Regulation also inevitably creates unforeseen costs that neither the regulators nor participants in the market could have anticipated, and those unanticipated consequences of regulation often create the very types of problems the regulators intended to reduce or eliminate. Although the paper and pulp industry incurs a relatively high regulatory burden, firms in the industry also tend to be quite large, which gives them the advantage of being able to disperse the costs of regulation over more units. It therefore remains unclear whether regulation affects firms in this industry to a greater or lesser extent than the average firm in the United States in absolute terms, but the industry nonetheless serves as an example of the costs and consequences of government regulation.

Introduction

The paper and pulp industry represents one of the largest manufacturing sectors in the United States.[1] The industry brings in $160 billion of revenue annually,[2] employs nearly 400,000 individuals across the country,[3] and provides essential products such as paper, paperboard, and insulation to businesses and individuals around the world.[4] It also faces a great deal of criticism from activist groups—and regulation from government agencies—because of its impact on the environment and its comparatively dangerous working conditions.[5]

The paper and pulp industry faces constant pressure both to limit the extent to which it negatively impacts the environment and to limit the number of injuries and fatalities that happen in its workplaces. That pressure comes from both inside and outside the industry, since the industry benefits from improving its relations with employees and other groups affected by its activities. Federal regulation imposes numerous requirements on the industry with the presumed intent of reducing the undesirable effects on the environment and making its workplaces safer, but regulation also creates additional costs that can reduce their net benefits and impede the industry’s ability to provide important products and services. Moreover, the environmental benefits of lower pollution are somewhat offset by economic costs,[6] and are further offset by the foregone environmental benefits industry expansion would provide.

Within developed countries, environmental quality and workplace safety tend to improve over time, because people tend to demand more of both as their income increases. Therefore, regulations that seek to enhance environmental quality and workplace safety essentially attempt to accelerate developments that would occur even in the absence of regulations, so the exact extent to which regulations have affected those aspects of the economy is not clear. Between 1970 and 1998 the paper and pulp industry significantly reduced its emissions of air pollutants—carbon monoxide, sulfur dioxide, and particulate matter—by 32 percent, 36 percent, and 89 percent respectively. The industry kept pace with the average reduction of emissions for all industries in the United States with regard to carbon monoxide and sulfur dioxide, and it exceeded the national pace with regard to particulate emissions.[7] The industry also dramatically reduced its contribution to water pollution during the same period as a consequence of technological advancements, particularly with the adoption of solid waste incinerators that generate electric power by burning organic waste. Such waste previously contributed substantially to the pollution of lakes and rivers.[8]

Additionally, between 1994 and 2010 the number of workplace injuries in the paper and pulp industry declined at a faster rate than the national rate for all private industries. The table below shows the number of workplace injuries per 100 workers in the paper industry, in the manufacturing sector overall, and in private industry overall.[9]

The visible economic costs and unintended consequences of federal regulation, combined with the difficulty of assessing its benefits, mean that the less obvious aspects of regulations must be seriously investigated and taken into account when determining their overall effect on society. The following sections will go into greater depth on the specific regulations that affect this industry, and will describe their effects.

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