1

Asymmetric effects of compliance with the Swedish Environment

Protection Act, 1970-1990 – Swedish pulp and paper producers and

the licensing procedure of the Environment Franchise Board

Introduction

It has been demonstrated in numerous studies that environmental regulations may serve to raise the

minimum efficient scale of plants in subjected industries, causing small-scale plants to exit the

market.1 Regulatory demands for pollution abatement may thus have far-reaching effects on an

industry’s market structure, when such demands are imposed uniformly across all plants. Brock &

Evans (1985) and Pierce (1998) have argued that, for this reason, many governments may wish to

shelter small plants by exempting them from the regulations, or by tiering the regulations in their

favor.2

This paper analyzes the decisions of the Environment Franchise Board (EFB) -the main regulatory

authority for the Swedish Environment Protection Act (SEPA) of 1969 – for a sample of

environmental licensing cases involving Swedish pulp and paper producers during the 1970’s and

1980’s. The main purpose of this analysis will be to examine whether the EFB did in fact differentiate

between small- and large-scale producers when implementing the SEPA, by tiering the regulatory

requirements in the manner suggested above.

The outline of the paper is as follows. In the first section I present an overview of previous research

into the potential market structure effects of environmental regulations, intertwined with a discussion

of these studies applicability to the SEPA. This is followed by a short background section, where I

describe the organization of the EFB as well as the character of the environmental licensing procedure

for which it was responsible. After that I present a theoretical model, in which I have sought to

identify the main factors which guided – the stringency of - the EFB’s decisions. This model is then

tested, along with the variable of plant size, using standard multiple regression analysis. Results are

then presented, followed by a short discussion of the papers findings.

1 See for instance Pittman, Russell W. (1981) Issue in Pollution Control: Interplant Cost Differences and Economies of Scale.

Land Economics, Vol. 57, No. 1, pp. 1-17; Pahigian, Peter B. (1984), The effect of environmental regulation on optimal plant size and factor shares. Journal of Law and Economics, Vol. 27, pp. 1-28; Dean, Thomas J.; Brown, Robert L. & Stango, Victor (2000), Environmental Regulation as a Barrier to the Formation of Small Manufacturing Establishments: A Longitudinal Examination. Journal of Environmental Economics and Management, Vol. 40, pp. 56-75; Yin, Haitao; Kunreuther, Howard & White, Matthew W. (2007), Do environmental regulations cause firms to exit the market? Evidence from underground storage tank (UST) regulations. Working Paper, Erb Institute for Global Sustainable Enterprises, University of Michigan. 2 Brock, William A. & Evans, David S. (1985), The economics of regulatory tiering. The RAND Journal of Economics, Vol.

16, No. 3, pp. 398-409; Pierce (1998)

2

Regulatory asymmetries and the SEPA

Previous research show that many environmental regulations have had a marked tendency of

generating significant sources of utility to (some) subjected firms, mainly through its impact upon

industry market structure. What has been demonstrated is that environmental regulations may, in many

cases, serve to redistribute intra-industry rents by placing small manufacturing establishments at a

competitive disadvantage; causing the exit of marginal small-scale plants from the market, and

resulting in a significantly more concentrated – and hence less competitive - market structure within

the subjected industry. Such effects can be inherent to the regulations due to built in asymmetries, or

may arise during the implementation phase. Conceptually, the design or implementation asymmetries

which have been associated with environmental regulations can be placed into three analytical

categories: 1) compliance asymmetries, 2) statutory asymmetries, and 3) enforcement asymmetries.3

Compliance asymmetries

All environmental regulations will, invariably, alter the production functions of subjected firms, since

compliance with the regulations will demand that at least some - arguably unproductive - investments

be made towards pollution abatement equipment and administrative capabilities. Compliance

asymmetries arise when this impact upon production costs varies between those subjected, so that

some become more severely affected than others.4

Pashigian (1984), Yin (2007) and others have shown that pollution abatement exhibit significant

economies of scale. As larger plants will be able to average the added costs of pollution abatement

over a larger quantity of production, smaller plants will be placed at a competitive disadvantage

insofar that they will incur a larger cost-raising effect per unit of production. Moreover, as the

regulatory requirements makes it mandatory for all plants to invest in abatement equipment, average

industry fixed costs will tend to rise. As industry fixed costs rises, the minimum efficient scale of the

industry’s plants will rise in tandem. If this rise becomes sufficiently large, small-scale plants will

begin to exit the market 5

This effect may be further enhanced if the pollution abatement technology being implemented is

poorly suited for facilities with lower volumes of production. Studies have shown that larger firms

spend a disproportionally large sum on R&D, which makes it plausible that such "scale mismatches"

may arise. Traditionally, many environmental regulations have included provisions stating that

investments must be made in "best available technology" (BAT). Such technology-forcing stipulations

may further exacerbate the detrimental effect of the regulations upon smaller plants, since the best

available technology may not be the most appropriate given the scale of their operations.6

3 Millimet, Daniel A.; Roy, Santanu & Sengupta, Aditi (2009), Environmental Regulations and Economic Activity: Influence

on Market Structure. Annual Review of Resource Economics, Vol. 1, pp. 103-104 4 Ibid.

5 Dean et. al. (2000), p. 59

6 Pahigian (1984)

3

The guidelines for implementation of the SEPA stated that BAT was to be demanded. The term

was used to denote the most efficient technology having already been implemented by at least one

plant within the industry at hand.7 No differentiation was made in this regard between small- and

large-scale facilities. However, the guidelines also stated that BAT was only to be considered a bench-

mark – or starting point; once the level of BAT had been assessed a number of other factors were to be

evaluated in order to arrive at a well-rounded assessment of the technological and economic feasibility

of possible abatement measures. “When these [other factors] are included in the assessment it is far

from certain that this idealized situation [under which BAT would be demanded] will at all times be

realized”8, concluded the head of the justice department in the government bill. Whether, or to which

extent, the compliance asymmetries inherent in the SEPA came to affect small-scale plants negatively

thus depends on whether establishment size was amongst the factors considered relevant to include in

this well-rounded assessment.

Statutory asymmetries

While the effects of compliance asymmetries can be viewed as non-intentional - arising from the

varying capacity amongst subjected plants to cope with the regulations - even when the regulations are

equally applied and enforced over all plants - statutory asymmetries are manifestly intentional in

character. A statutory asymmetry is present when the regulations differentiate the stringency of its

demands when dealing with different classes of plants. In such cases one might say that the regulations

are purposively tiered to favor some plants at the expense of others.9

In the government bill, what was considered the precarious situation of already existing facilities

was for instance discussed in great detail. It was considered essential that the implementation of the

act would not come to have a detrimental impact upon the competitiveness of Swedish industry, with

the risk of destroying what was termed “established values”.10 It was considered an obvious risk that

plants which had made their choice of production technology before the implementation of the act –

and thus in a different institutional setting – would be faced with great difficulties if confronted with

too stringent demands under the law. The Environment franchise board was thus given strict

instructions to make a clear distinction between the demands directed towards new and already

existing facilities. In short, incumbent firms were to be treated more leniently than potential new

entrants. This is of course a very clear-cut case of a statutory asymmetry, which would have favoured

incumbents at the expense of potential entrants. It was also stated in the government bill that subsidies

for undertaking investments in abatement equipment was to be reserved to the investments taking

place in already existing facilities. This is yet another example of a clear-cut statutory asymmetry; the

effects of which would of course have depended upon the actual degree of subsidization.

7 This ”reference plant” could be foreign as well as domestic.

8 Government bill 1969:28, p. 218

9 Brock & Evans (1985), p. 398; Dean et. al. (2000)

10 Government bill 1969:28, p. 215

4

It is surprising to note that over the 300-plus pages of the government bill the equally precarious

situation encountered by small-scale facilities is only discussed once, and then in passing. What is

stated, however, is that the size of plant is one of the factors which the EFB ought to include when

assessing the economic feasibility of possible abatement measures.11 To refer to this statement as a

statutory asymmetry would perhaps be somewhat far-fetched, but it at least gives some indication that

the EFB may have adjusted the stringency of its demands on the basis of establishment size,

depending on how the EFB chose to interpret the government bill and the wording of the act.

Enforcement asymmetries

Enforcement asymmetries arise when the agency (or agencies) responsible for administrating

environmental regulations, devote greater resources towards monitoring and enforcing a particular

class of plants.12 As mentioned above, there were no clear-cut guidelines – or statutory asymmetries -

contained in the government bill which would have necessarily prompted the EFB to devote more of

its resources towards enforcing large- as opposed to small-scale plants. On the other hand, there were

no guidelines prompting the EFB to abstain from such a strategy, and those guidelines that existed

were sufficiently vague to allow for a wide variety of implementation strategies. The SEPA was a

frame law, and as such lacked the clear, unambiguous, rules necessary to predict the EFB’s chosen

strategy. It is thus quite plausible – albeit far from certain – that the EFB came to shelter small

industrial plants, by tiering the regulatory requirements in their favor.

The Environment Franchise Board and environmental licensing under the SEPA.

The SEPA was designed to cover all use of immoveable property – either by individuals or

organizations – that could cause environmental disturbances. Thus, all industrial facilities engaged in,

or planning to engage in, production which could give rise to pollution was required to undergo an

environmental licensing process, which would determine their obligations under the act. The

administrative agency responsible for carrying out these assessments was the Environment Franchise

Board, which consisted of four members; one experienced judge, one member with technological

expertise, one member with administrative experience from working with state environmental policy,

and one member with experience from the industrial sector. Present during the board’s proceedings

was also a secretary, whom was to have judicial experience. All members of the board, including the

secretary, were appointed directly by the Swedish government.13

The licensing process was, in most instances14, initiated by the owners of the industrial plants

themselves. The application for a license was submitted in writing, after which the EFB redistributed

11

Government bill 1969:28, p. 115 12

Dean et. al. (2000), pp. 59-60 13

SFS 1969:387; Government bill 1969:28, pp. 201-202 14

The National Environment Protection Board (NEPB) could, in its capacity of supervisory authority under the law, demand that the EFB would review a polluting facility which had not yet applied for a license, if it deemed this to be of importance for Swedish environmental management.

5

the application for comments from a select number of public authorities. The National Environment

Protection Board (NEPB), the relevant county administrative board and the local public health office

were mandatory consultative bodies. In addition to these three, comments were generally also

requested by the Office for Public Planning and the Fisheries authority. After having received the

desired comments the EFB would then proceed by an inspection of the plant. During this inspection it

was also made possible for the general public to comment on the application; an opportunity which

was sometimes utilized by various non-profit organizations and/or local community groups.15

An issued license by the EFB was to be considered legally valid over the indefinite future, which

meant that no public authority except from the EFB could - once the license had gained legal force -

put forth demands of further abatement measures or impose other restrictions on a licensed activity.16

Even the EFB could not alter the stipulated conditions of the license during an initial buffer period,

which was normally to extend over at least ten years, so long as the activity did not change

substantially in terms of its character or scale. After such a period, the EFB could initiate a review of

the activity which could then result in more stringent demands of abatement being imposed, but not in

a prohibition of the activity. If, however, during the initial buffer period, new circumstances would

arise under which the licensed activity could be shown to generate “significant” environmental

disturbances, the NEPB could demand that the EFB issued “a provision so as to prevent or reduce this

inconvenience in the future”. The EFB was, however, instructed to use this possibility with caution.17

Due to the far-reaching consequences of licensing an industrial activity under the law, the

licensing process would normally procrastinate for several years, from the time of the original

application. The EFB developed a praxis under which it would issue time-limited licenses, which

would usually be valid for between one to three years, during which time the applicant was instructed

to perform investigations or otherwise gain practical experience of the consequences of possible

abatement measures.

The licensing process itself was based on a system of case-by-case assessments, which was to take

into account not only the apparent – or “objective” – need for abatement measures, but also the

specific circumstances relevant to each case, in order to determine what could be considered

“technologically practicable” and “economically feasible” to demand from each applicant. In essence,

the EFB was thereby instructed to perform a kind of socioeconomic cost-benefit analysis, where the

utility stemming from improvements in environmental quality was to be leveled against the social and

economic consequences of environmental protection. Thus, depending on the perceived

socioeconomic value of affected natural resources or environmental amenities, the perceived utility to

the national and/or local economy of the industrial activity being licensed - its importance to the local

15

Westerlund, Staffan (1975), Miljöfarlig verksamhet. Stockholm, p. 62 16

This applied even in such cases where the Public Health Authority had come to consider the activity at hand as hazardous to public health. All the Public Health Authority could do in such instances was to instruct the local Public Health Office to impose restrictions on the general public’s use of the damaged environmental resource; i.e. for instance prohibit swimming in a polluted water source. 17

Westerlund (1975), pp. 64-67

6

labor market and so on and so forth - the stringency of the EFB’s demands could vary substantially,

and was intended to do so by the legislators.18

Research design

The purpose of the following examination will be to see whether the size of plant can be shown to

have had a noticeable effect upon the stringency of the EFB’s demands for a sample of environmental

licensing cases involving Swedish pulp and paper plants during the 1970’s and 1980’s; particularly,

whether small-scale pulp and paper plants received more lax demands of abatement, as hypothesized

by Brock & Evans (1985) and Pierce (1998). The data for this study has been collected from the

archives of the Environment Franchise Board, and consists of records of decisions for all pulp and

paper plants which applied for an environmental license between 1970 and 1979. A total of 220 such

records were gathered, pertaining to 66 different plants. Not all of these cases could be included in the

sample however, due to a number of reasons. Seventeen of the cases provided inadequate data to

perform the necessary calculations; for some of the cases information was simply missing, while for

other cases the necessary information was provided, but was lacking in accuracy. Nine of the cases

procrastinated into the 1990’s and were therefore omitted from the sample, while an additional eleven

cases involved plants that were closed down before receiving their environmental licenses.19 The final

sample thus consists of 29 pulp and paper plants, ranging from the very small-scale – with a yearly

production volume of < 50 000 tons – to the very large-scale - plants producing in excess of 500 000

tons per year.

The dependent variable – i.e. the stringency of the EFB’s demands – consists of a composite

measure of the demanded reduction of two common water pollutants; BOD7 (biological oxygen

demand) and SPM (suspended particulate matter). The variable has been derived by calculating the

percentage difference in relative pollution intensity (volume of emissions divided by total volume of

production) before and after completion of the licensing process.20 In addition to providing a good

estimate of the actual impact – and hence the stringency – of the EFB’s demands upon the individual

plants, this design of the dependent variable also serves to increase the internal comparability of the

sample, by cancelling out the effects stemming from variability in pollution intensity between different

plants. As the plants included in the sample varied substantially with respect to their composition

and/or technology of production, they would also have varied in pollution intensity. Keeping all else

equal, plants which exhibited higher levels of pollution intensity would most likely have been assigned

18

Government bill 1969:28, pp. 208-220 19

Only one plant, however, was explicitly prohibited by the EFB to continue operations (Kramfors sulphite mill in Ångermanland). 20

In its original form the variable exhibited clear signs of non-normality, most notably with respect to skewness. I therefore chose to transform the variable by taking the reflected square roots of the original values. This made the variable conform to the assumption of normality, but made interpretation of the results somewhat less straight-forward. Since the transformed variable is a reflection (or mirror image) of the original variable, this means that all signs must be reversed when interpreting the correlation coefficients. In table 1 below I have thus reversed the signs of the correlation coefficients to facilitate interpretation of the results.

7

significantly higher emission levels by the EFB than their less pollution intensive counterparts. Yet,

the relative abatement effort required to reach this level may have been exactly the same as that of a

less pollution intensive plant having been assigned much lower emission levels. By using the

percentage reduction – rather than the absolute assigned level – of emissions, the stringency of the

EFB’s demands can be measured on one, uniform scale, allowing for comparisons between plants

exhibiting great diversity with respect to pollution intensity.

Independent variables and research hypotheses

Apart from the focus variable – size of plant – I have included an additional six independent variables,

which will serve to control for the effects of some of the more easily identifiable factors which ought

to have have influenced the stringency of the EFB’s demands. Below, I present each of the

independent variables along with a justification for their inclusion, an hypothesis concerning their

correlation with the dependent variable, as well as some short notes on the measurements used.

The size of plant and its impact upon the stringency of EFB demands

As stated above, the SEPA contained no special provisions – or statutory asymmetries - which sought

to protect or shelter small industrial plants from being adversely affected by the act. Nevertheless,

small plants may still have been treated more leniently by the EFB, depending on how the EFB chose

to interpret the wording of the act. Though the preparatory work of the SEPA contained little

discussion of the special predicament facing small-scale industrial producers, it did contain several

declarations of intent which could be interpreted as seeking to safe-guard such producers from being

too adversely affected by the law’s implementation. For instance, it was stated that the implementation

of the act should not be allowed to “impede the ability of a well-run company to remain profitable”,

and that plant closures was to be avoided except for the most extreme of cases.21 Furthermore, in one

passage of the government bill the size of plant was in fact highlighted as a factor which the EFB

ought to include when assessing the economic feasibility of possible abatement measures.22 Therefore,

it is quite plausible – albeit far from certain – that the EFB came to shelter small industrial plants, by

tiering the regulatory requirements in their favor.

Hypothesis 1: Size of plant will be either non-related or positively related to the stringency of EFB

demands

The measurement used for this variable is the total volume of production (in thousand tons) for each

plant at the time for their original application for an EFB license.

21

Government bill 1969:28, p. 216 22

Government bill 1969:28, p. 115

8

Plans for expansion and its impact upon the stringency of EFB demands

As mentioned previously, the preparatory work of the SEPA spoke at length about the special

difficulties of compliance which faced the already existing facilities – i.e. industrial facilities which

were already in operation before the implementation of the act. When it came to such facilities, the

EFB was given clear instructions to proceed with care, so as to avoid destroying what was termed

“established values”. Simply put, the already existing facilities were to be treated more leniently under

the law. This leniency, however, was not to be extended to those already existing facilities which were

planned to undergo extensive alterations in terms of character or scope.23 Thus, applications involving

plans for extensive reconstruction and/or expansion of production would most likely have received

more stringent demands, as compared to applications with the aim of simply licensing existing

operations.

Hypothesis 2: Plans for expansion will be positively related to the stringency of EFB demands

Though it would have been possible to use a metric measurement for this variable, I have chosen to

make use of a categorical (dummy) variable to represent plans for expansion, as it seems improbable

that a metric version of the variable would display a linear relationship to the independent variable.

Recipient deterioration and its impact upon the stringency of EFB demands

The EFB’s assessments were to constitute – or at least simulate - a holistic deliberation between

different societal interests; most notably, a deliberation between the socioeconomic utility of the

industrial activity being licensed and the converse social utility stemming from improvements in

environmental quality. As stated previously, the EFB’s assessments can thus be viewed as a form of

cost-benefit analysis, where economic and environmental values received positive signs, while the

associated costs and extended socioeconomic consequences of pollution abatement - as well as the

costs to society of further environmental deterioration - received negative signs. A greatly deteriorated

recipient source would naturally have resulted in a more stringent assessment by the EFB, as this

would have served both to raise the social utility of pollution abatement and the cost of abstaining

from environmental protection.

Hypothesis 3: Recipient deterioration will be positively related to the stringency of EFB demands

For this variable I have constructed a three-level ordinal ranking for the state of the recipient source -

1) no noticeable deterioration, 2) noticeable deterioration, and 3) significant deterioration – based on

reports from the Institute for water and air pollution research (IVL24), comments provided by the

NEPB, the county administrative boards, the public health office, the Fisheries authority, as well as

23

Government bill 1969:28, pp. 215-216 24

Institutet för vatten- och luftvårdsforskning

9

comments by the EFB itself; all of which can be found in the records of decisions of the EFB. This

three-level ranking is then represented in the regression in the form of two dummy variables.25

Year of licensing and its impact upon the stringency of EFB demands

One of the main arguments given for the case-by-case licensing procedure of the SEPA was that it

would allow the regulatory authority to continuously monitor the technological advances made within

the area of pollution abatement, adjusting the stringency of its demands as technology progressed. A

system of binding emission standards was feared to become too rigid in this regard, as even smaller

innovations could potentially make such standards obsolete, making it difficult for regulatory demands

to keep pace with technological development. Instead, “best available technology” was to be

implemented within each plant, so long as it could be considered economically feasible.26 Seeing as the

plants included in my sample received their respective licenses from the EFB at various stages over a

19-year period (1970-1989), one would expect that the plants which received their licenses early on in

the period would have been encountered with noticeably more lax demands than those plants which

received their licenses at a later stage - at which time the standard of available abatement technology

would have been significantly more advanced.

Hypothesis 4: Year of licensing will be positively related to the stringency of EFB demands

Product mix and its impact upon the stringency of EFB demands

As mentioned above, the dependent variable for this examination was purposively designed to

eliminate the effects stemming from differences in the composition of production amongst different

plants. By using the percentage reduction – rather than the absolute assigned level – of emissions, the

effects on the independent variable from variation in pollution intensity amongst plants could thus be

minimized. However, it is still quite plausible that some classes of plants would have experienced

greater technological difficulties in abatement than others; i.e. a given percentage reduction in

pollution per unit of production would most likely have been harder – more costly - to accomplish in

some facilities, due to the composition of its produce. For instance, the sulphite pulping process was

demonstrably harder to rid from pollutants than was, for instance, the case for mechanical pulping. In

assessing the technological and economic feasibility of abatement the EFB would most likely have

factored in such difficulties, and would have adjusted the stringency of its demands accordingly.

Hypothesis 5: Sulphite pulping will be negatively related to the stringency of EFB demands

25

Admittedly, the ranking is based on qualitative judgments, which could be erroneous – at least to some degree. Unfortunately, good quantitative data on the state of the recipient source has not been available except for in a small minority of the cases. Perrault and Leigh (1989) suggests that one way of improving the reliability of data based on qualitative judgments would be to expose it to multiple judges; they also present an index of reliability which could be used to derive an objective – or inter-subjective - measure for the reliability of the ranking. Perrault, William D. & Leigh, Laurence E. (1989), Reliability of Nominal Data based on Qualitative Judgments. Journal of Marketing Research, Vol. 26, pp. 135-148. This has not been done for the present version of the paper however. 26

Government bill 1969:28

10

Hypothesis 6: Mechanical pulping will be positively related to the stringency of EFB demands

Product mix is represented in the regression in the form of two dummy variables; one signifying

sulphite pulp production, and the other signifying mechanical pulp production.

Figure 1. Determinants of the stringency of the EFB’s demands for pollution abatement

Results

The results obtained from the multiple regression is presented in table 1 below. Significant results

were obtained for four out of the seven variables included: size of plant, plans for expansion,

noticeable deterioration of the recipient source, and significant deterioration of the recipient source.

Product mix turned out non-significant, which could simply be due to the fact that the differences in

technological conditions between sulphite and mechanical pulping plants were not substantial enough

to warrant differential treatment from the EFB. Somewhat more surprisingly however, is that the year

of licensing does not exhibit a significant relationship to the stringency of the EFB’s demands. This is

highly unexpected, as the variable can be said to represent the impact of technological development –

the reason for expecting the EFB to have issued more stringent demands of abatement during the later

stages of the examined period was precisely because the efficiency of available abatement technology

would have been greater than earlier on in the period. Most likely, the failure to obtain a significant

result for this variable is more due to the research design, than the actual impact of the factor which

Size of plant

Plans for

expansion

Recipient

deterioration

Year of

licensing

Product mix

1)Sulphite pulping

2)Mechanical pulping

Stringency of EFB

demands

(Demanded reduction of

relative pollution intensity)

11

the variable sought to represent. As can be seen from table 1 the beta values for the three insignificant

variables are all fairly low, and it is quite plausible that the effect sizes which can be expected from

these factors are also fairly low. Due to the limited sample size used in the regression, the level of

statistical power may simply have been too weak to detect as significant effect sizes below 0.2.27

Table 1. Regression results: Determinants of the stringency of the EFB’s demands

Beta value Sig. Part correlations (Squared*) VIF

1. Plant size -0.89 0.000*** -0.74 (55%) 1.424

2. Plans for 0,37 0.002** 0.34 (12%) 1.173

expansion

3. Noticeable 0,23 0.081* 0.18 (3%) 1.703

deterioration of

recipient

4. Significant 0,61 0.000*** 0.45 (23%) 1.850

deterioration of

recipient

5. Year of 0,17 0.187 0.13 1.653

licensing

6. Sulphite pulp -0,12 0.274 -0.11 1.177

production

7. Mechanical -0,06 0.638 -0.05 1.387

pulp production

*Unique contribution to total explained variance

*** Significant at the 1% level, ** significant at the 5% level, * significant at the 10% level

If we ignore for the moment the non-significant variables, and focus instead on those variables for

which statistically significant relationships with the independent variable were found, we can see that

the explanatory power of the model is still quite high. The adjusted R2 for the regression containing all

seven variables is .76528, and if we rerun the regression with only those variables which were found

significant the adjusted R2 increases slightly to .767. A look at the sum of the squared part correlations

(93%) indicate that there is only a small portion of shared variance between the variables, which is

also supported by the values for VIF which are all quite low. So it should be safe to say that the four

significant variables explain around 70 percent of the variance in the independent variable.

The strongest effect by far was found for the focus variable, plant size, which contributed to just

over 55 percent of the total explained variance of the independent variable. The result was also highly

significant (<.001). However, plant size seem to exhibit an inverse, not positive, relationship to the

independent variable, which would indicate that small plants were actually confronted with

significantly more stringent demands of abatement than were large plants. The B-coefficient for the

variable plant size was -.091 with a standard error of .022, which means that for every additional

27

The low level of statistical power is also the reason for why I have chosen to include as significant values below .1 but above .05, which would normally count as insignificant. I plan to redo this examination in my upcoming PhD thesis, where I will augment the sample by an additional 15 to 20 cases, which should allow me to set the level of alpha lower while at the same time, hopefully, finding statistically significant results for some of the now insignificant variables. 28

The R2 is .831, but again, due to the small sample size the adjusted R2 is probably a better estimate of the explained variance.

12

thousand tons of produce the EFB’s demands would have decreased by 0.09 ± 0.02 percent. In other

words, a large-scale plant producing in excess of 500 000 tons per year would have been confronted

with demands for pollution reduction that were some 30 to 50 percent lower than that of a small-scale

plant producing in the vicinity of 50 000 tons per year.

Discussion and conclusions

The main question which this paper sought to answer was whether the EFB differentiated between

small- and large-scale plants when implementing the SEPA. The short answer is yes, it did; the long

answer is somewhat more complicated, as the differentiation seems to have consisted in the EFB

demanding less of those plants which, on the face of it, seem to have had the least need for such

leniency; while demanding significantly more of those plants which, a priori, seemed the most likely

candidates for special treatment.

However puzzling these findings may seem in background to the theoretical predictions provided

by Brock & Evans (1985) and Pierce (1998), they may be viewed as consistent with the broader

character of Swedish economic policy during much of the examined period. The Rehn-Meidner model

- which constituted an integral part of what has come to be known as the Swedish or Nordic model of

political economy - was basically aimed at keeping inflationary pressure in check, whilst at the same

time maintaining full employment. This were to be performed by restrictive use of macro-economic

policy instruments - as aggregate demand were to be kept constant -, a wage policy of solidarity, and

selective use of employment measures. The model was intended not only to produce a more equitable

society, but contained a more dynamic element in that it attempted to aid the structural rationalization

of Swedish industry. By employing a tight macroeconomic policy, the profit levels of individual

Swedish companies could be kept on a moderate level; in combination with a wage policy of

solidarity, which meant that no company would be able to compete by reducing wages during a

recession, the model helped speed up the elimination of marginal, unproductive, companies. For this

policy-induced rationalization not to result in rising levels of unemployment, the model relied on the

use of selective employment subsidies and tax relieves, which were directed towards what was

considered highly productive companies within the currently expanding sectors of the economy, as

well as on a wide array of mobility-enhancing labour market policies. By concentrating Swedish

productive resources within a select number of highly productive companies, the goals of full

employment and economic growth could be met without risk of pushing up the general level of profits

amongst producers, which could have enfeebled the relative position of workers, as well as risked

sparking inflationary tendencies.29

It has been emphasized that the Swedish model exhibited a clear tendency towards favouring the

establishment of big business, as employment-enhancing measures, in the form of subsidies and tax

29 Jakobsson, Ulf (2000), Makropolitik i Sverige, in Södersten, Bo (ed.), Marknad och politik. Kristianstad, pp. 109-111

13

relieves were, for the most part, being directed towards the larger, more capital-intensive Swedish

enterprises. In large part, this reflected the predominant business philosophy of the day, where

rationalization and economic efficiency had become more or less synonymous with the notion of

economies of scale and vertical integration of companies. This tendency was further enhanced by the

markedly concentrated ownership structure of Swedish industry, which had become formalized during

the inter-war years. Swedish economic policy became both a reflection of, and a contributing factor to,

this state of affairs, as both the favourable conditions for consolidating profits within companies, as

well as the relatively high taxes levied upon the paying of dividends, served to significantly hamper

the mobility of capital; and then in particular with respect to the market for securities. Similarly, the

Swedish credit regulations of the time, which have been characterized by Lennart Schön as

"essentially [constituting] a rationing system in the hands of the big banks"30, ensured that new firm

entry remained moderate.31

One possible interpretation of the results obtained in this paper could thus be to view the

implementation of the SEPA as a natural continuation of the Swedish model of political economy into

the domain of environmental policy. As such, it would have operated primarily on the plant – as

opposed to the company – level, but seeing as company size is normally positively related to plant

size, its effects would most likely have propagated to the company level also. In the pulp and paper

industry, which bore the brunt of Swedish industry’s environmental abatement costs during the 1970’s

and 1980’s, these effects would have been all the more pronounced. A plausible hypothesis can thus

be formulated, under which the implementation of the SEPA came to act as a catalyst for the structural

rationalization of the pulp and paper industry during the 1970’s and 1980’s; a rationalization process

which over the course of twenty years resulted in the elimination of 75 percent of Swedish pulp and

paper companies, and which left the three largest companies in 1990 accounting for ¾ of the

industry’s total production capacity.32

While Swedish authorities did - starting in the late 1940's - initiate a number of investigations to

examine the potential problem of anti-competitive behaviour within Swedish industry, it is important

to emphasize that the public authorities did not, at the time for the implementation of the SEPA, view

oligopolistic (or even monopolistic) tendencies as undesirable by their own right, so long as they were

the "right kind" of oligopolies. In the partial report of the "Concentration investigation" (SOU 1968:5),

examining the market structure of the Swedish pulp and paper industry, one reads that although the

30

Schön, Lennart (2007), En modern svensk ekonomisk historia – tillväxt och omvandling under två sekel. Stockholm, pp. 414-418 31

Ibid. 32

In the case of one of the industry’s most important goods, newsprint, the three largest corporations were by 1990 the sole producers and had even formed a cartel, “the Swedish Newsprintmills Association”, which negotiated prices with the organisation of Swedish publishers, making the Swedish market for newsprint a monopoly/monopsony market. This of course meant that it had become impossible in practice for foreign exporters to compete in the Swedish market for newsprint. By this time – a report from the Swedish Competition Authority reveals – the small number of companies competing in any given branch of the industry had also made it possible for companies to strike deals with one another, imposing voluntary production restrictions on themselves in exchange for similar gestures by their counterparts. Statens Pris och Konkurrensverk (1991), Branchbeskrivningar: Delrapport till Konkurrenskomittén. Massa och pappersindustrin. Stockholm

14

investigation found evidence indicating that "limited forms of monopolism" had developed out of the

previously established (and officially endorsed) sales-cartels, and that the industry could well develop

more genuine examples of monopolistic and oligopolistic structures in the years to come33, this

development was not necessarily to be considered a negative prospect for the Swedish economy.

When assessing the impact of "possible monopoly effects", the investigation emphasized, one must

also "take into account the potential for cutting costs which can be realized by means of increased

specialization and production taking place in larger units"34.

References

SFS 1969:387

Government bill 1969:28

SOU 1968:5

Koncessionsnämnden för miljöskydds arkiv; SE/RA/420569: BIA/BIB

Brock, William A. & Evans, David S. (1985), The economics of regulatory tiering. The RAND

Journal of Economics, Vol. 16, No. 3, pp. 398-409

Dean, Thomas J.; Brown, Robert L. & Stango, Victor (2000), Environmental Regulation as a Barrier

to the Formation of Small Manufacturing Establishments: A Longitudinal Examination.

Journal of Environmental Economics and Management, Vol. 40, pp. 56-75

Jakobsson, Ulf (2000), Makropolitik i Sverige, in Södersten, Bo (ed.), Marknad och politik.

Kristianstad

Millimet, Daniel A.; Roy, Santanu & Sengupta, Aditi (2009), Environmental Regulations and

Economic Activity: Influence on Market Structure. Annual Review of Resource

Economics, Vol. 1, pp. 99-118

Pashigian, Peter B. (1984), The effect of environmental regulation on optimal plant size and factor

shares. Journal of Law and Economics, Vol. 27, pp. 1-28

Perrault, William D. & Leigh, Laurence E. (1989), Reliability of Nominal Data based on Qualitative

Judgments. Journal of Marketing Research, Vol. 26, pp. 135-148

Pittman, Russell W. (1981) Issue in Pollution Control: Interplant Cost Differences and Economies of

Scale. Land Economics, Vol. 57, No. 1, pp. 1-17

Schön, Lennart (2007), En modern svensk ekonomisk historia – tillväxt och omvandling under två

sekel. Stockholm

Statens Pris och Konkurrensverk (1991), Branchbeskrivningar: Delrapport till Konkurrenskomittén.

Massa och pappersindustrin. Stockholm

Westerlund, Staffan (1975), Miljöfarlig verksamhet – Rättstekniska studier av de centrala

tillåtlighetsreglerna I miljöskyddslagen på grundval av teori och praxis. Stockholm

Yin, Haitao; Kunreuther, Howard & White, Matthew W. (2007), Do environmental regulations cause

firms to exit the market? Evidence from underground storage tank (UST) regulations.

Working Paper, Erb Institute for Global Sustainable Enterprises, University of

Michigan.

33

In the event that the projected investment plans reported by individual companies could in fact be carried out 34

SOU 1968:5

15