President Trump has asked the Environmental Protection Agency to take another look at the Clean Power Plan, which would oblige utilities to lower carbon dioxide emissions to two-thirds of 2005 levels by 2030. The review should highlight the flaws in EPA’s cost-benefit analysis—calculations agencies are required to make to show that the benefits of a rule are larger than the costs.
Everyone wants cleaner air, but people also want the security of employment that comes from economic activity. Most would agree on the need to strike the right balance between the economy and the environment. The question is what is that balance.
The air is getting cleaner every year, as old equipment is replaced by new. Greenhouse-gas emissions from power plants have declined by 15 percent from 2005 to 2013, according to the Energy Information Administration.
The EPA uses faulty methodology to justify the Clean Power Plan. Its analysis minimizes the costs and exaggerates the benefits. Here are ten problems with EPA’s cost-benefit calculations.
Problems with Benefits
1. Cost-Benefit Analysis Relies on Other Substances. Benefits listed for the Clean Power Plan in EPA’s Regulatory Impact Analysis are about $15 billion in 2025, but those benefits shrink to $3.6 billion if the health benefits of other substances are removed.
The carbon rule’s supposed benefits exceed its claimed costs not from reductions in carbon dioxide, but from reductions in other substances, such as particulate matter, sulfur oxides (SOx) and nitrogen oxides (NOx). Without the alleged positive health effects of these other substances, the rule would fail EPA’s cost-benefit test.
Most states comply with national standards for NOx, SOx and particulate matter. By claiming benefits from further reductions, EPA is lowering the established standard without going through the legal requirements of a rulemaking.
Further, by adopting a regulation for carbon that does not yield enough benefits to justify the cost, but instead uses supposed benefits from reduction in other substances, EPA is taxing localities that are already in compliance with the established air standards. It is forcing on these communities further reductions not justified by independent safety and health considerations.
If EPA believes that their levels of other substances should be reduced, it should issue rules to lower them, with their own comment periods and cost-benefit analysis.
2. EPA Double-Counts Health Benefits. If reductions in particulates can be counted as a health benefit of reducing mercury, the first of three major rules put in place by EPA, the agency cannot then count these same reductions as a benefit from reducing ozone and carbon dioxide. The benefits will already have happened. Yet EPA seems to be using the same set of benefits to justify multiple rules.
Excess particulate matter is present only in certain places and at certain times, and EPA has not established that the reductions they are counting as co-benefits correspond to the appropriate places and times. Reducing particulates somewhere that it already has low levels is not much of a benefit if excessive particulates elsewhere are unaffected.
3. All Particulates Are Not Equally Harmful. EPA assumes that all particulates are equally harmful. The Regulatory Impact Analysis states: “[W]e assume that all fine particles, regardless of their chemical composition, are equally potent in causing premature mortality.” That is because “the scientific evidence is not yet sufficient to allow differentiation of effect estimates by particle type.” If the scientific evidence is inconclusive on particulates, their removal should not be used to justify costly regulations.
4. Reductions in Particulates Do Not Have Equal Value. EPA assumes that reductions in particulates have the same effect in polluted areas as clean ones. EPA appears to say that the same health benefits are achieved by reducing particulates by a given percentage starting from a high level of emissions as starting from a low level of emissions. This leads to the conclusion than a reduction in particulates in upstate New York, which has few emissions, is equal to those in New York City, which has greater emissions. It stands to reason that picking the low-hanging fruit first—i.e. lowering emissions from the larger to the medium quantity—has greater health benefits.
When EPA claims health co-benefits for reductions in areas where the starting level of particulates was already low, it seems to be saying that the real standard should be zero – which is of course unattainable.
5. EPA Relies on Benefits from Reducing Asthma. The vast projected savings from asthma constitute the bulk of benefits from EPA’s new rules. But these projected benefits are "guesstimates," gains that are hard to specify given that other factors, such as obesity and lack of exercise, are in play.
Although the air has been improving since 1980, the number of children with asthma has risen. According to the Centers for Disease Control, 3.6 percent of children had asthma in 1980. In 2009, using a slightly different measure, asthma afflicted 10 percent. CDC acknowledges that "the causes of asthma remain unclear and the current research paints a complex picture." Yet EPA forecasts 48,000 fewer asthma cases from carbon reduction, mostly from fewer particulates.
Many studies suggest that obesity increases the prevalence of asthma. If recent trends in obesity and lack of exercise continue, then further improvements in air quality might not have an effect in reducing asthma.
Problems with Costs
6. EPA Does Not Account for Future Increases in Electricity Prices. A major economic cost of the rule is energy-price increases caused by shifting from cheaper forms of energy, such as coal and natural gas, to more expensive sources, such as wind and solar power. These costs are not accounted for in the cost-benefit analysis. Higher energy costs translate into a smaller American economy with lower economic growth and fewer American jobs. EPA does not discuss, much less calculate, the broader economic costs of higher energy prices.
This decline in economic activity is measurable, and is not uniform across states. According to the EPA’s own calculations, Midwestern states would be required to reduce emissions by up to 37 percent from 2005 levels from the carbon rule alone, while coastal states such as Washington and California will be allowed to increase emissions. Republican states have to reduce emissions the most, and Democratic states will have to reduce them the least.
7. EPA Neglects Effects on Small Business. Since EPA does not count the increase in electricity prices and the consequent lower economic growth and reduction in jobs as costs, EPA Administrator Gina McCarthy is free to state in the Clean Power Plan final rule that “I certify that this action will not have a significant economic impact on a substantial number of small entities under the RFA [Regulatory Flexibility Act]. This action will not impose any requirements on small entities.”
But small businesses will be affected by the rule not only because electricity prices rise, but also because companies dependent on energy might relocate offshore. Along with their formerly employed workers, they would use fewer services such as laundry, restaurants and entertainment.
8. Use of Maximum Achievable Control Technology. EPA is allowed to require the use of Maximum Achievable Control Technology, so that power plants and boilers have to use the most stringent methods possible to get the heavy metals out of the air. This is true even if these methods cost billions and the benefits are worth far less—as is the case with the new utility rule. MACT, as it is known, does not have to account for costs and benefits. That’s why many productive plants will have to close.
9. EPA Omits Costs of Energy-Intensive Industry Going Offshore. The object of the carbon rule is to counteract climate change. EPA’s benefit calculations assume that these emissions disappear from the globe and that the certain sources of energy for electricity production and manufacturing, such as coal, will be replaced by renewables such as solar and wind energy.
It is far more likely that manufacturing will shift offshore, to countries with fewer emissions controls, such as China, India, and Latin America. Some of these countries, such as China, have dirtier coal, with more lignite, so emissions would be worse per unit of manufacturing. Just as energy-intensive manufacturing came to America from high-cost Germany, this activity can easily move again. Capital is mobile in a global economy.
Should this occur, greenhouse gas emissions not only would not decline, but might actually increase. This should be included in EPA’s calculations.
10. EPA’s Discount Rate Problems. When investments are made over a multi-year period, investors evaluate the project by “discounting” the future costs and benefits to the present. This is because a dollar is not worth the same to an investor in the future as in the present.
Most businesses use a discount rate that primarily reflects their cost of capital. Although businesses have different costs of capital and different discount rates, those rates for most firms have been in the range of 10% real—subtracting out variable rates of inflation--to calculate whether they should undertake investments. Some firms use higher rates, and some use lower rates, but none would undertake long-term investments at artificially low discount rates based on dubious long-term projections.
EPA makes two changes to standard business procedures. First, it uses low nominal rates, 7 percent and 3 percent. Few firms would use such low rates. Second, EPA discounts its costs, but not its benefits. The result is not only wrong, but it makes the rules appear less damaging than they are.
Cost-benefit analysis performed by government agencies is especially important because the government is imposing regulations on the public, and the public has nowhere else to go. If a private company errs in its cost-benefit calculations, it may make an investment that turns out to be unprofitable, and go out of business. But if a government agency makes mistakes in cost-benefit analysis, the entire country pays.
The review of the Clean Power Plan is long overdue. At a minimum, the plan needs a solid cost-benefit analysis.
Diana Furchtgott-Roth is a senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter here.
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