Thursday, November 10, 2011

What are the Social Costs and Benefits of EPA's Various Greenhouse Gas Regulations?

Just last week, the EPA sent for OMB regulatory review one of several proposed regulations on greenhouse gas (GHG) emissions (see here). This is another important step in a regulatory process that began on Dec. 7, 2009, when the EPA issued an "Endangerment Finding" for GHGs, which requires their regulation under the Clean Air Act. Among the regulatory proposals already completed or in the pipeline are: (1) a mandatory GHG reporting rule (see here); (2) a "tailpipe" rule to control motor vehicle emissions of GHGs (see here); (3) sequestration rules to govern carbon capture and storage projects (see here); (4) the GHG "Tailoring Rule," to limit the number of stationary sources of GHG emissions subject to regulation under the Clean Air Act (see here); and (5) a  "Scheduling Rule," adopted pursuant to a court settlement according to which EPA must issue final regulations imposing New Source Performance Standards on electric power plants and refineries by the middle of 2012.

Each of these regulations is controversial and entails significant economic costs. And the question OMB will be asking in regulatory review is whether the costs are justified by the benefits. As required by statute and by executive order of the president, EPA must prepare a "regulatory impact analysis" (RIA) for each major rule, and the central feature of the RIA is a cost-benefit analysis (CBA). EPA has not completed RIAs for its "Scheduling Rule" (which, after all, does not substantively regulate emissions) or its proposed "Sequestration Rule." It has, however, published RIAs for its "Tailpipe" and "Tailoring" rules (see here and here).

On the EPA's analysis, the "Tailpipe Rule" will provide around $188 billion in net social benefits over the course of its lifetime, and the "Tailoring Rule" is expected to provide around $193 billion (and perhaps double that, depending on what EPA ultimately decides for the third stage of the phase-in process) in net social benefits. However, the net social benefits of the "Tailoring Rule" have to be taken with several grains of salt because it is entirely about exempting (relatively) smaller emitters of GHGs from regulation. In this respect, the social benefits provided by the "Tailoring Rule" are not benefits stemming from regulation but gross benefits stemming from the lack of regulation that otherwise would be subject to regulation under the Clean Air Act. They are gross, rather than net, benefits because they are not offset against the social costs of the GHG emissions from the sources that the rule exempts. Moreover, one wonders how EPA determined just what the regulatory savings are, as it has yet to prepare an RIA estimating the costs of not-yet-determined regulations on plants that are not exempted by the "Tailoring Rule." As a CBA, the EPA's RIA for the "Tailoring Rule" is neither very informative nor persuasive.

Pending more information about the costs and benefits of the various GHG regulations, it is too early to say that they will, overall, be good or bad for social welfare in the US. So far, about all we can conclude is that, on EPA's own estimates, the "Tailpipe Rule" appears economically sensible; absent any major flaws in EPA's CBA for the rule, the positive outcome should make it difficult for political opponents to overturn it (pursuant to the political-economic analysis of CBA presented in my new working paper, here). The biggest hurdle for the "Tailoring Rule" will not be economic objections but legal ones (lawsuits already have been filed) because of the way EPA has had to de facto amend the Clean Air Act to regulate without over-regulating GHG emissions from power plants.

One development that should assist EPA in preparing future CBAs for its GHG regulations is the federal Inter-agency Working Group's schedule of valuations for the "social cost of carbon," published in 2010. The  central estimate for 2010 (using a 3% discount rate) is $21.40 per ton of CO2eq, rising to $23.80 by 2015, $26,30 by 2020, and $44.90 by 2050. Even though these valuations are on the low side (according to some more recent literature estimating the social cost of carbon), they should help EPA to justify economically its various proposed GHG regulations.

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