Dam Spillovers: The Direct and Indirect Costs from Environmental Constraints on Hydroelectric Generation
52 Pages Posted: 1 Oct 2017 Last revised: 9 Sep 2022
Date Written: August 1, 2022
Abstract
Environmental regulations often cause a subset of affected firms to reallocate production in space
or time. The resulting supply responses by rivals in the same market can raise costs even for
those unconstrained by the regulation. Policy analysis, however, often fails to account for these
spillover effects. This research considers an environmental policy forcing hydroelectric dams
to inefficiently allocate electricity generation over time. Combining quasi-random variation in
regulatory stringency and a regression discontinuity design, I estimate direct costs of regulation
and spillovers to other producers in the same market. These regulations increase market-wide
costs as much as 19.8% and generate millions of dollars per year in pollution externalities.
Spillover effects are substantial, accounting for over 50% of the true policy costs. Decomposition
of spillover channels show implications for optimal policy, including allowing flexibility in the
timing of regulatory compliance, as climate change continues to exacerbate water scarcity.
Keywords: Regulation, Spillovers, Electricity, Environment
JEL Classification: L51, Q25, Q51, Q52, Q53
Suggested Citation: Suggested Citation