Location is a critical component of business decisions. A firm's location decision may be influenced not only by market forces, such as the location of input suppliers, output processors and competitors, but also by government policies if such policies impact their expected profits and are applied non-uniformly across space. Likewise, a firm may adjust its business strategy, including opening and closing establishments and laying off employees as responses to changes in environmental regulations. In certain polluting industries, location decisions may include choosing potential storage sites for geologic carbon sequestration or finding landfills for industrial solid waste.
There is extensive literature discussing the effects of environmental regulations or agglomeration economies on firm location decisions but few studies analyze the interactive effect of environmental regulations and agglomeration economies across regions in the United States. The potential consequences of changes in environmental regulations may include loss of polluting establishments, jobs, and income. Geological carbon sequestration offers long term storage opportunities to mitigate greenhouse gases (GHGs). Incorporating environmental risk into economic assessments of geological
sequestration choices is crucial for finding optimal strategies in using alternative carbon storage sites with limited capacity. This dissertation consists of three essays that address the above issues.
The first essay examines the interactive effects of air quality regulation and agglomeration economies on polluting firms' location decisions in the United States. Newly available annual (1989-2006) county-level manufacturing plant location data for the United States on seven pollution intensive manufacturing industries are applied in the analysis. Conditional Poisson and negative binomial models are estimated, an efficient GMM estimator is also employed to control for endogenous regulatory and agglomeration variables. Results indicate that births of pollution intensive manufacturers are deterred by stricter environmental regulation; and are attracted by local agglomeration economies. County attainment/nonattainment designations can impose heterogeneous impacts over space and across industries. The magnitude of the regulatory effect depends on the level of local agglomeration. Urbanization economies offset the negative impacts of environmental regulation, whereas localization economies can reinforce or offset the negative impacts of environmental regulation, depending on the industry.
The second essay analyzes the effect of changes in regulatory environmental standards on the total stocks of establishments and local jobs and income Results indicate the effects vary across counties in the United States. When the standards were raised to 80 percent of the current level, from 2007 to 2009, the affected counties would lose a total of 326 establishments, 14,711 jobs with $705 million U.S. dollars of income each year. At the national economy level, the impacts of tightening environmental regulations are relatively small.
The third essay constructs a dynamic optimization framework that deals with optimal utilization of alternative nonrenewable resource sites (geological formations) with possible negative externalities. We apply the model to an optimal usage problem of alternative long term CO₂ geologic storage sites for carbon. The storage sites are different in terms of capacity and potential leakage after CO₂ injection; the problem is determining the minimum cost for storing a fixed amount of CO₂ (sequestered) within a
certain time period. Analytical solutions show the decision rule depends on the discount rate, storage capacities, marginal CO₂ storage costs, and environmental damage costs associated with CO₂ leakage from alternative sinks. The framework provides critical information about the optimal timing of switching from one resource sequestration site to another.