An Exploration of EPA’s Cost-Benefit And Regulatory Impact Analyses

Environmental regulation has become pervasive over the last several decades. Great strides have been made, leading to visible and tangible reductions in emissions and discharges and ultimately cleaner air and water. In recent years, though, emission reductions have become more difficult to obtain and more costly on a per ton basis, leading many to believe that the installation of additional controls or the imposition of additional regulatory requirements will achieve only incremental reductions in emissions and discharges. As such, their costs cannot be justified when balanced against an ever decreasing amount of benefits.

For every major rule, EPA has provided a regulatory impact analysis (RIA) in which the costs and benefits of the rule are analyzed. Invariably, EPA concludes that the benefits outweigh the costs. It is instructive to review these RIAs to understand EPA’s methodologies and the conclusions it reaches. In doing so, the impacted industries, interested stakeholders, and the general public can form their own opinions as to whether EPA’s conclusions are valid.

The RIAs generally follow the same format in which certain types of costs, such as the costs of complying with the rule, are quantified. Then, the direct and ancillary benefits are identified, some are then quantified, and some of the quantified benefits are monetized to obtain a numeric measurement of the benefits. These benefits are primarily the health benefits of the estimated emission reductions, but, when appropriate, EPA estimates the monetized climate benefits of the rule.

EPA issued the Utility MATS Rule in 2012 [1], the proposed Ozone Rule in 2014 [2], and the Clean Power Plan in August, 2015. [3] Each has an RIA which details EPA’s consideration of costs and benefits. Together, these RIAs provide an overview of EPA’s methods and conclusions.

DISCUSSION

A. Executive Orders

The EPA is required to consider the costs and benefits of its rules pursuant to two Executive Orders.

The first was issued in 1993 by President Clinton and recognized that the American people deserve “a regulatory system that protects and improves their health, safety, environment, and well-being and improves the performance of the economy without imposing unacceptable or unreasonable costs on society.” [4] In order to achieve this goal, federal agencies, in deciding whether and how to regulate, “should assess all costs and benefits of available regulatory alternatives, including the alternative of not regulating.” [5] Costs and benefits include both quantifiable measures (to the fullest extent that these can be usefully estimated) and qualitative measures of costs and benefits that are difficult to quantify, but nevertheless essential to consider.

Each agency was directed to follow several ‘principles of regulation.’ One such principle was that each “shall assess both the costs and the benefits of the intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination.” [6]

The second was issued in 2011 by President Obama and emphasized that our regulatory system must “take into account benefits and costs, both quantitative and qualitative.” [7] It required that an agency must “propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs (recognizing that some benefits are difficult to quantify.” [8]

B.      Costs and Benefits

Pursuant to the Executive Orders, EPA has assessed costs and benefits for numerous proposed and final rules, issuing a regulatory impact analysis (RIA) with each. The RIAs for the Utility MATS Rule [9], the Proposed Ozone Rule [10], and the Clean Power Plan [11] for existing plants will be reviewed as they provide an illustrative example of EPA’s approach to complying with the Executive Orders.

1.         Costs

a.         Compliance Costs

EPA quantifies the ‘compliance costs’ of the rule. In general terms, these costs include expenditures necessary to achieve compliance with the rule. However, the actual components may vary slightly from rule to rule.

In the Utility MATS RIA, compliance costs are the “change in electric power generation costs between the base case and policy case in which the sector pursues pollution control approaches to meet the final HAP emission standards. In simple terms, these costs are the resource costs of what the power industry will directly expend to comply with EPA’s requirements.” [12] EPA estimated that the “annual incremental compliance cost of MATS is $9.4 billion in 2015” and included the projected additional cost of complying with the final rule, the amortized cost of capital investment, the ongoing costs of operating additional pollution controls, investments in new generating sources, shifts between or amongst various fuels, and other actions associated with compliance. [13] In addition, EPA estimated the annual monitoring, reporting, and record-keeping burden to be $158 million and the cost to oil-fired units to be around $56 million. [14] In all, the cost of the rule was stated to be $9.6 billion. [15]

The Ozone RIA was somewhat different. EPA looked at “engineering costs of attaining the alternative, more stringent levels for the ozone primary standards.” [16] The engineering costs “generally include the costs of purchasing, installing, operating, and maintaining the referenced technologies.” [17] However, the “costs associated with monitoring, testing, reporting, and record keeping for affected sources” were not included. [18]

To calculate total costs, EPA reviewed known controls and ‘unknown’ controls. The known controls included certain control technologies in existence and which EPA relied upon to estimate remission reductions. [19] Engineering costs of known controls generally refer to the equipment installation expense, the site preparation costs for the application, and annual operating and maintenance costs. [20]

EPA also reviewed ‘unknown’ controls, that is, “additional emissions reductions beyond known controls needed to reach attainment.” [21] Such a review was necessary as there “were several areas where known controls did not achieve enough emissions reductions to attain the alternative standards of 70, 65, and 60 ppb.” [22] Recognizing that projecting costs of unknown controls was “inherently a difficult task,” EPA nonetheless did so. [23] Essentially, EPA determined an “assumed national average cost per ton for unidentified controls needed for attainment,” which is “intended to capture what might be the total costs associated with the abatement of the emissions reductions from unknown controls.” [24]

Combining the costs of the known and unknown controls, EPA estimated that the total costs of the Ozone Rule ranged from $4.7 billion to $41.2 billion. [25]

In the CPP RIA, the compliance cost estimates are “the change in electric power generation costs between the base case and illustrative plan approach policy cases, including the cost of demand-side energy efficiency measures and costs associated with monitoring, reporting, and recordkeeping requirements (MR&R).” [26] These costs included the “the net change in the annualized cost of capital investment in new generating sources and heat rate improvements at coal-fired steam generating units, the change in the ongoing costs of operating pollution controls, shifts between or amongst various fuels, demand-side energy efficiency measures, and other actions associated with compliance.” [27] In all, the estimated costs ranged from $1 billion to $5.1 billion. [28]

b.         Other Costs or Impacts

In the Utility MATS Rule, EPA considered employment impacts to the regulated industry and “impacts (increase in labor demand) associated with the construction of needed pollution control equipment, and other activities, to comply with the regulation.” [29] EPA found a net employment increase. EPA also discussed the impacts of higher price of electricity, stating that firms may respond by “making changes to their processes, raising their prices, [and/or] reducing production,” but cautioned that “electricity expenditures are only a modest component of overall economic activity.” [30]

In the Ozone RIA, EPA reviewed “potential economic impacts of the illustrative control strategies for the potential alternative ozone standards.” [31] While admitting that the costs of goods would rise and that amounts sold will go down, EPA stated that “it is not possible to qualitatively conclude the direction of price and quantity changes for any single market.” [32]

In the CPP RIA, EPA reviewed the impacts of the rule on the power sector. As to coal-fired generation, EPA found that “total generation declines … by 5 percent in 2025 and 8 percent in 2030.” [33] Additionally, between 23 and 38 GW of additional coal-fired capacity is “projected to be uneconomic to maintain.” [34] Demand for coal and coal prices will decrease. [35] Finally, EPA found that retail electricity prices will increase. [36]

2.         Benefits

a.         Health

To determine health benefits, EPA generally evaluates the reductions in mortality and morbidity which are expected to occur as a result of implementation of the rule. Usually, health benefits are divided into direct benefits (those resulting from a reduction of the targeted pollutant) and co-benefits (those resulting from a reduction of other pollutants).

i.          Direct

In the Ozone RIA, EPA utilized the ‘damage-function’ approach to calculate benefits from changes in ambient ozone levels. [37] According to EPA, this approach “is the standard method for assessing costs and benefits of environmental quality programs.” [38] The approach estimates changes in individual health endpoints (specific effects that can be associated with changes in air quality) and assigns values to those changes. Total benefits are calculated as the sum of the values. [39] In other words, EPA quantifies the health impacts and then monetizes them.

The reductions in ambient ozone levels were translated into reductions in the incidence of specific health endpoints. [40] EPA relied on its Integrated Science Assessment for Ozone and Related Photochemical Oxidants to identify the human health effects associated with ozone. [41] These endpoints include a reduction in premature mortality and reductions in morbidity, such as hospital admissions for respiratory causes, incidences of asthma, cardiovascular issues, and other such health effects. [42] EPA then used published studies to estimate ‘benefits transfer,’ which it defines as “the science and art of adapting primary research from similar contexts to obtain the most accurate measure of benefits for the environmental quality change under analysis.”[43] Using these studies, EPA derived an effect estimate for each endpoint, applied it to known populations, and derived an estimated number of reduced incidents. [44]

In order to monetize the reductions, EPA primarily used a ‘willingness-to-pay’ measure in which an individual assign a dollar value to achieve a known reduction in risk and which is then multiplied across a known population. [45] For mortality, EPA used the value of a statistical life, which EPA estimates to be $4.8 million, in 1990 dollars, adjusted for inflation and income growth over time. [46]

In the Utility MATS RIA, EPA quantified the benefits of mercury reduction. EPA based its analysis on the IQ loss of prenatally exposed children associated with consumption of recreationally caught fish by pregnant women which contained mercury. In all, “average effect on individual avoided IQ loss in 2016 is 0.00209 IQ points, with total nationwide benefits estimated between $0.5 and $6.1 million.” [47]

ii.         Co-Benefits

The installation of the control technology chosen to reduce the targeted pollutants will generally create reductions in other pollutants. EPA calls these ancillary benefits ‘co-benefits’ and monetizes them in a manner similar to the direct benefits. In most cases, the monetized value of the co-benefits is far greater than the monetized value of the direct benefits.

The Utility MATS Rule provides an illustrative example. EPA expected that the implementation of controls for mercury would “have ancillary co-benefits, including lower overall ambient concentrations of SO2, NO2, PM2.5 and ozone across the U.S.” [48] EPA then quantified many of the health benefits of the resulting PM2.5 reduction and monetized some of those reductions. [49]

To quantify the co-benefits, EPA utilized an approach similar to the one outlined above for direct benefits. It used the ‘damage-function’ approach to estimate changes in health endpoints of reduced PM2.5, utilized published studies to derive an effect estimate, and applied that to a population. Once the number of reduced incidents of various health endpoints was established (i.e., the number of reduced premature mortalities and morbidity), it applied a benefit-per-ton to monetize the reductions. [50]

iii.        A Comparison

The difference between the costs and the monetized benefits can be quite large. Further, the difference between the monetized direct benefits and the co-benefits can also be significant. See Table 1. The Utility MATS Rule provides a glaring example of both.

Table 1

Rule Costs Direct Benefits Co-Benefits Source – Tables
Utility MATS $9.6B $500K – $6M $33B – $90B 3-16, ES-4, 5.1
Proposed Ozone $4.7B – 41.2B $2B – $20B $4.3B – $56B 5-23, 7-10, 7-11
Clean Power Plan $1B – $5.1B $6.4B – $29B $12B – $31B ES-5, 4-5, 4-18, 4-21

iv.        The So-called ‘Secret Science’

In virtually every RIA, the Harvard Six Cities Study follow-up by Laden, et al (Laden Study) [51], and the American Cancer Society (ACS) Study by Pope, et al (Pope Study) [52] have been used to estimate increased mortality as a result of exposure to particulate matter. These studies have become somewhat controversial and have been called ‘secret science’ as the underlying data has not been provided.

The Laden Study is an extended follow-up to the Harvard Six Cities Study. The original study population consisted of 8,096 white participants residing in six communities between 1979 and 1990. Laden extended the mortality follow-up from 1990 to 1998. The study concluded that there was an increase in overall mortality associated with increases in PM2.5.

The Pope Study is based on data collected by the American Cancer Society as part of the Cancer Prevention Study II, a mortality study involving 1.2 million adults. The study also found increases in ambient concentrations of PM2.5 associated with increases in mortality.

Because these studies have been used to justify numerous rules in which the co-benefits of PM2.5 reductions outweigh the direct benefits, various lawmakers in Congress have requested the underlying data in order to verify the conclusions. EPA has resisted, claiming that it does not have all of the underlying data, that releasing the data will impact the confidentiality of participants, and that the underlying data is not actually needed to make informed decisions.

The alleged ‘lack of transparency’ has led to the introduction of two bills. The Secret Science Reform Act of 2015 (H.R. 1030) passed the House on March 18, 2015. The Secret Science Reform Act of 2015 (S.544) passed the Senate committee on April 28, 2015 and awaits action by the full Senate.

b.         Welfare

EPA also considers welfare benefits. These include the environmental and societal benefits of reducing pollution, such as reductions in damage to ecosystems, improved visibility and improvements in recreational and commercial fishing, agricultural yields, and forest productivity. Usually, these types of benefits are not quantified or monetized.

c.         Climate

The purpose of the Clean Power Plan is to reduce emissions of CO2. To monetize the benefits of such reductions, EPA uses the Social Cost of Carbon (SSC), a “metric that estimates the monetary value of impacts associated with marginal changes in CO2 emission in a given year.” [53] EPA utilized the Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 (May, 2013, revised July 2015).

The SSC estimates are presented as a dollar amount in various years and at various discount rates. For example, the SCC in 2020 is $12, $40, and $60 per short ton at 5%, 3%, and 2.5%, respectively. [54] These dollar amounts per short ton were derived from three integrated assessment models. To calculate the dollar value for emission reductions, the SCC estimate for a given year would be applied to the change in CO2 emissions for that year.[55] For example, the benefit of a reduction of 100,000 short tons of CO2 in 2020 at a 5% discount rate is $1.2 million (100,000 short tons at $12 per short ton).

C.      Michigan v. EPA

The failure to consider costs in the Utility MATS Rule was recently addressed by the Supreme Court in the recent case of Michigan v. EPA. [56] The Supreme Court reviewed whether it was reasonable for the EPA to refuse to consider costs when deciding to regulate hazardous air pollutants emissions from power plants. Ultimately, it concluded that EPA should have considered the costs.

The Clean Air Act established a unique process to determine the applicability of the hazardous air pollutant program to power plants. Congress directed the EPA to “perform a study of the hazards to public health reasonably anticipated to occur as a result of emissions.” [57] If EPA found that “regulation is appropriate and necessary after considering the results of the study,” it must issue appropriate regulations. [58] After completing the study, EPA found that regulation was appropriate and necessary. However, in issuing the rule, EPA “concluded that ‘costs should not be considered’ when deciding whether power plants should be regulated.” [59] Indeed, EPA deemed them irrelevant. The Supreme Court, however, found that costs should have been considered in this context.

Although the Supreme Court did not directly address the Utility MATS RIA, it did mention it, noting that the rule would “force power plants to bear costs of $9.6 billion per year” in return for benefits “worth $4 to $6 million per year.” [60] It called the co-benefits ‘ancillary benefits’ and noted that EPA did not rely on the RIA in making the appropriate-and-necessary finding. Id.

Because it was not directly before the Court, they “need not and do not hold that the law unambiguously required the Agency, when making this preliminary estimate, to conduct a formal cost-benefit analysis in which each advantage and disadvantage is assigned a monetary value.” [61] It would seem, however, that the Executive Orders do require such a review, although the level of detail is left to the agency. In other words, identifying each advantage and disadvantage and assigning each a monetary value may not be required.

Further, although supporters of the rule argued that it should be upheld because “once the rule’s ancillary benefits are considered, benefits plainly outweigh costs.” [62] In rejecting that approach because the EPA did not consider costs or ancillary benefits it in its decision, the court stated: “Even if the Agency could have considered ancillary benefits when deciding whether regulation is appropriate and necessary —a point we need not address—it plainly did not do so here.” [63] By italicizing the ‘could’ in the actual opinion, the Court seems to expresses some degree of skepticism that ancillary benefits should ever be considered.

SUMMARY

EPA has issued RIAs for major rules for many years, providing a body of work that illustrates its methods and conclusions. The RIAs for the Utility MATS Rule, the proposed Ozone Rule, and the Clean Power Plan provide an overview of the process which is generally applicable to other RIAs.

EPA quantifies the costs of the rule. These costs can include compliance costs, employment impacts, and costs to the affected sector.

EPA then identifies health impacts from exposure to the pollutant being regulated and other pollutants which will be reduced as a result of that regulation. EPA then quantifies reductions in health impacts for each health endpoint, arriving at a specific number of reduced incidents across an entire population. EPA then monetizes those quantified benefits. EPA performs this analysis for direct benefits and co-benefits. Welfare benefits are discussed but usually not quantified or monetized. As appropriate, such as in the Clean Power Plan, climate benefits are quantified and monetized using the Social Cost of Carbon.

EPA’s methodology to compare costs to benefits has created some controversy. As the monetary amount of the co-benefits usually exceeds the amount of the direct benefits, many have sought to verify that the correct conclusions are being drawn. Legislation has been introduced to require EPA to divulge the information some say is necessary to verify the conclusions.

The recent Supreme Court decision in Michigan v. EPA did not directly address the use of co-benefits but clearly highlighted some degree of skepticism with the use of co-benefits to justify major rules. This skepticism may find its way into subsequent decisions when the issue presents itself to the court.

In the author’s opinion, it is beneficial to the public to have detailed cost-benefit analyses associated with major proposal and final rules. However, EPA’s use of the social cost of carbon, ancillary benefits, and its method for monetizing health effects tends to inflate benefits to such an extent that they are always well above costs. Further, although there is overlap in the various considerations in each RIA, EPA’s lack of a standard set of objective costs and benefits tends to prevent or impede rule by rule comparisons.


REFERENCES


[1] 77 Fed. Reg. 9304 (February 16, 2012).

[2] 79 Fed. Reg. 75234 (December 17, 2014).

[4] Executive Order (EO) No. 12866 of September 20, 1993.

[5] EO 12866, Section 1(a).

[6] EO 12866, Section 1(b)(6).

[7] Executive Order No. 13563 of January 18, 2011, Section 1(a).

[8] EO 13563, Section 1(b).

[9] U.S. EPA, Regulatory Impact Analysis for the Final Mercury and Air Toxics Standards, EPA-452/R-11-011, December, 2011 (the Utility MATS RIA).

[10] U.S. EPA, Regulatory Impact Analysis of the Proposed Revisions to the National Ambient Air Quality Standards for Ground-Level Ozone, EPA-452/P-14-006, November, 2014 (the Ozone RIA).

[11] U.S. EPA, Regulatory Impact Analysis for the Clean Power Plan Final Rule, EPA-452/R-15-003, August, 2015 (the CPP RIA).

[12] Utility MATS RIA, p. 3-13.

[13] Utility MATS RIA, p. 3-13.

[14] Utility MATS RIA, p. 3-30.

[15] Utility MATS RIA, Table 3-16.

[16] Ozone RIA, p. 7-1.

[17] Id.

[18] Id.

[19] Ozone RIA, p. 7-4.

[20] Id.

[21] Ozone RIA, p. 7-10.

[22] Id.

[23] Id.

[24] Ozone RIA, p. 7-27.

[25] Ozone RIA, Tables 7-10 and 7-11.

[26] CPP RIA, p. ES-8.

[27] CPP RIA, p. ES-9.

[28] CPP RIA, Table ES-5.

[29] Utility MATS RIA, p. 6-1.

[30] Utility MATS RIA, p. 6-12.

[31] Ozone RIA, p. 7-36.

[32] Ozone RIA, p. 7-38.

[33] CPP RIA, p. 3-25.

[34] CPP RIA, p. 3-30.

[35] CPP RIA, p. 3-34.

[36] CPP RIA, p. 3-35.

[37] Ozone RIA, p. ES-10.

[38] Id.

[39] Id.

[40] Ozone RIA, p. 5-11.

[41] Ozone RIA, p. 5-4.

[42] Ozone RIA, Table 5-3.

[43] Ozone RIA, p. 5-11.

[44] Ozone RIA, p. 5-31-32 and Table 5-7.

[45] Ozone RIA, p. 5-54.

[46] Ozone RIA, p. 5-56, 5-62.

[47] Utility MATS RIA, p. 4-3.

[48] Utility MATS RIA, p. 5-1.

[49] Utility MATS RIA, Table 5-2.

[50] See generally, Utility MATS RIA, Chapter 5.

[51] Laden, F., J. Schwartz, F.E. Speizer, and D.W. Dockery. 2006. “Reduction in Fine Particulate Air Pollution and Mortality.” American Journal of Respiratory and Critical Care Medicine 173:667-672. Estimating the Public Health Benefits of Proposed Air Pollution Regulations. Washington, DC: The National Academies Press.

[52] Pope, C.A., III, R.T. Burnett, M.J. Thun, E.E. Calle, D. Krewski, K. Ito, and G.D. Thurston. 2002. “Lung Cancer, Cardiopulmonary Mortality, and Long-term Exposure to Fine Particulate Air Pollution.” Journal of the American Medical Association 287:1132-1141.

[53] CPP RIA, p. 4-1.

[54] CPP RIA, p. 4-7 and Table 4-2.

[55] CPP RIA, p. 4-8.

[56] Michigan v. EPA, 576 U.S. —, 135 S.Ct. 2699 (2015).

[57] 42 USCA 7412(n)(1)(A).

[58] Id.

[59] Michigan, 135 S.Ct. at 2705.

[60] Michigan, 135 S.Ct. at 2706.

[61] Michigan, 135 S.Ct. at 2711.

[62] Id.

[63] Id.

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