EPA's Cost-Benefit Catch-22

Abstract

Small particulate matter pollution (PM 2.5) is an urgent public health concern, killing approximately 30,000 people in the US per year and reducing the lifespan of an average American by about 2 months. PM 2.5 reductions result from most Clean Air Act regulations, some directly intended to target PM 2.5, others not, and these reductions are powerful weights in favor of protective regulations, even after these benefits have been subjected to cost-benefit analysis methodologies that systematically deflate the value of reducing pollution. Thus, when EPA includes the benefits of incidental PM 2.5 reductions (often called “co-benefits”) in its cost-benefit analyses, this inclusion makes it more difficult to justify rolling back Obama-era CAA protections.

A leading argument for excluding PM 2.5 co-benefits from CBAs is that any PM 2.5 exposures at levels below EPA’s current NAAQS standards are presumptively “safe” and therefore shouldn’t be counted. But this argument contradicts the current CBA guidelines, one of the tenets of which is that both intentional and unintentional costs and benefits must be counted. These CBA methodological guidelines are systematically skewed to produce results that tend to discourage protective environmental regulation. Given that the current administration so often invokes these guidelines to justify deregulatory policies, it would seem to be bound to follow them and include “accidental” benefits in the same way it includes costs that are not a goal of the regulation. And deaths from PM 2.5 demonstrably do occur in areas in compliance with the NAAQS.

In addition, the Trump EPA has unavoidable statutory obligations to promulgate certain rules that aren’t completely deregulatory, and so it still needs to rely on co-benefits to justify its own regulations—at least sometimes. For example, Trump virtually eliminated the monetized value of averted climate damage when he eviscerated the Social Cost of Carbon (SCC). When it took these steps to make regulations directed at climate change less attractive by reducing the monetized value of greenhouse gas reductions, however, the Trump administration put itself in an awkward spot.

For its rollback of the Obama-era Clean Power Plan to have its best chance of surviving judicial scrutiny, the Trump EPA had to provide an alternative means of addressing the very serious climate change problem that EPA described in prior rulemakings. The combination of the already anti-regulatory methodologies being using in CBA and a dramatically lower SCC left the Trump administration with the prospect of having to report that its Affordable Clean Energy (ACE) rule may impose industry compliance costs that are not offset by benefits. No administration wants to report that its regulations will reduce social welfare. Hence, in its CBA of the (less protective) ACE rule, EPA included the benefits of incidental PM 2.5 reductions to make the rule cost-benefit justified, even though it had criticized the Obama EPA for including the value of PM 2.5 reductions in the CBA of its Clean Power Plan.

It is unlikely that the current, deregulatory EPA would want to abandon the existing set of methodologies being used in agency CBAs, a set of guidelines that produce reliably anti-regulatory effects. But with inclusion of PM 2.5 values being inconvenient in some CBAs (such as the CBA for EPA’s rollback of the Obama-era Mercury and Air Toxics Standards) but still necessary to justify other rules (such as the ACE rule), PM 2.5 is creating a major methodological dilemma for the Trump EPA.

Keywords: cost-benefit analysis, RIA, OIRA, PM 2.5, Circular A-4, EPA, Co-Benefits, ACE Rule, Rollback, SCC, Social Cost of Carbon, CBA, BCA, MATS, Air Toxics, 12866

JEL Classification: D6, D61, D62, D81, K23,