Industrial pollution has staggering consequences in terms of premature deaths, productivity losses, and health care costs. In 2015, conservative estimates put the number of pollution-related deaths at nine million, which represents roughly 16% of all deaths worldwide, and the financial cost of pollution-related deaths and sickness at 4.6 trillion US dollars, which represents about 6.2% of global economic outputs.
Environmental regulations and policies, as well as the degree of public awareness about environmental issues, play an important role in preventing industrial pollution. However, acquiring information that contributes to environmental awareness is not without costs. Polluting firms have incentives to hide information related to their emissions or to disclose misleading information in efforts to avoid negative publicity. Therefore, reducing the cost of acquiring environmental information and promoting the disclosure of correct information is in the public interest.
In our recent paper, we investigate whether industrial pollution can be reduced by improving the transparency of the information environment in which firms operate. To construct our measure of transparency, we focus on the provisions of state-level Freedom of Information (FOI) laws. Most state FOI laws are modeled after the federal FOI Act. Although there have been changes in the laws over time, these have largely been the result of pressure from nonprofit, nonpartisan journalism and media associations, and open government advocacy groups. An advantage of using state FOI laws to measure transparency is that the provisions of these laws are plausibly exogenous from the standpoint of corporate decisions. It is unlikely that firms choose to locate in a particular state because its FOI law is weak or that firms could successfully lobby state legislators to create specific pollution-related exemptions from disclosure.
State FOI laws enable individuals and organizations to obtain information on the initiatives of state and local governments, monitor the interaction of government agencies with state and local businesses, and assess compliance with federal and state laws. We argue that they are likely to hamper the ability of state and local officials to act in ways that might benefit firm or industry interests at the expense of clean air, clean water, and other environmental concerns. Anecdotal evidence supports this argument. For example, the American Civil Liberties Union (ACLU) of Michigan and researchers from Virginia Tech University requested records related to the activities of the Michigan Department of Environmental Quality (MDEQ). This led to the revelation that the MDEQ decided to stop using corrosion control treatment for the Flint, Michigan water supply in order to save money – a decision that had been covered up by public officials. The story about the role of FOI requests in exposing the Flint, Michigan water crisis made headlines in 2016.
Our study develops formal statistical evidence of the FOI effect on pollution by exploiting both cross-sectional and time-series variation in the strength of state FOI laws. To assess the strength of each state’s FOI law, we assign a FOI score to each state based on the provisions of the state’s open records legislation, with criteria such as: presumptions in favor of disclosure, exemptions, fee limits, time limits to respond to records requests, procedures available in case of a request denial, and penalties for an agency’s noncompliance with the law. For our empirical tests, we merge pollutant-level emissions data for all facilities in the manufacturing sector with company information to construct a firm-state-year panel dataset from 1991 to 2016. We also use a recently-developed toxicity measure for each Toxic Release Inventory-regulated chemical to adjust facility-level emissions and enhance our pollution measures.
Using panel regressions, we find a negative and statistically significant relationship between firms’ toxic emissions and the state-level FOI score in a difference-in-differences specification. Specifically, we estimate that a firm’s toxic emissions in a state decrease by 7% when the state-level FOI score increases by one unit. We then examine the effect of FOI laws on local emissions by implementing several tests for the underlying mechanisms. First, we inquire with each state’s environment department or agency to obtain the annual number of FOI requests submitted to the department for our sample period. Our results suggest that, for states with stronger FOI provisions, the number of FOI requests received is negatively associated with the state-level pollution, thereby providing direct evidence of how residents’ attention to environment-related information may alter government or firm behavior in terms of pollution. Second, we explore the cross-sectional variation in the treatment effect in two dimensions: state-level pollution abatement costs and state government efficiency. The evidence suggests that the negative association between FOI scores and emissions is concentrated in states with lower abatement costs (consistent with a cost-benefit tradeoff) and is stronger in states with more efficient governments (which are more likely to respond to FOI requests and/or enforce regulations).
To strengthen the causal interpretation of our findings, we consider heterogeneous treatment effects that arise from cross-sectional variation in public corruption and environmental policy leniency. Our analysis reveals that the negative FOI-emissions relation is more pronounced in states with higher existing corruption level in 1990. This finding makes sense: If FOI laws mitigate industrial pollution by preventing corruption, then the effect of strengthening the laws should be more pronounced for states that have higher preexisting corruption. In addition, the negative FOI-emissions relation is more pronounced in states with more lenient environmental policies, as measured by the political alignment of the state government with the federal government in 1990 (i.e., the alignment with the George H. W. Bush administration). This finding is consistent with the argument that FOI laws should be stronger in states where preexisting environmental regulations provide more leeway for polluting firms.
Our study makes several contributions. Unlike other studies that focus on the impact of FOI laws on public employees and elected officials, we highlight the real impact of FOI laws on corporate operations. Because environmental protection is related to public health and social welfare, our evidence that increasing governmental transparency creates positive externalities in the form of reduced emissions provides new insights to the literature. Furthermore, our finding that state-level FOI laws help to explain firm-level emissions is a novel result in the literature on the determinants of industrial pollution, shedding new light on the relation between information costs and the public’s environmental awareness. More broadly, our findings provide new evidence of the tangible benefits of promoting open government and contribute to the growing literature on political geography and its influence on interactions between government and industry. The key policy implication of our results is that strengthening public access to information on governmental activities, especially those related to the regulation and monitoring of industrial pollution, acts as an important check on firms’ polluting behavior.
Adriana S. Cordis is an Associate Professor of Accounting at Winthrop University.
Po-Hsuan Hsu is a Professor of Quantitative Finance and Yushan Scholar at National Tsing Hua University.
Jin Zhang is a Senior Lecturer of Accounting at Monash University.
This post is adapted from their paper, “Freedom of Information and Industrial Pollution” available on SSRN.
The views expressed in this post are those of the authors and do not represent the views of the Global Financial Markets Center or Duke Law.