EPA’s Return to Rigorous Cost-Benefit Analysis Continues with Impending Methane-Rule Revision

EPA-LogoThe Environmental Protection Agency (EPA) is set to propose changes to the regulation of mercury emissions that can recalibrate the balance between the costs of such controls and the benefits they confer. This action would be consistent with other administrative agency moves, which we have discussed recently here, to elevate the level and quality of economic analysis that past and future regulations must undergo.

The proposal EPA recently sent to the White House’s Office of Management and Budget characterizes the Mercury and Air Toxics Standards Rule for Power Plants (“MATS rule”) as a needlessly expensive mandate and recommends that its costs and benefits should be recalculated. The MATS rule was aimed at reducing toxic power-plant emissions, but utilities have spent an estimated $9.6 billion a year to comply with the new standards, while the mercury emissions reductions have led to a comparatively small estimated annual benefit of $4 million to $6 million. When signing the Energy Independence Executive Order, the President singled out MATS, stating, “Perhaps no single regulation threatens our miners, energy workers, and companies more than this crushing attack on American industry.”

When the MATS rule was first enacted, EPA did not even bother conducting a cost-benefit analysis. This led to a Supreme Court case, Michigan v. EPA, which considered whether, under § 112 of the Clean Air Act’s “necessary and proper” provision, EPA must analyze costs before promulgating a regulation. EPA argued the law allowed it to consider costs at a later date and not when the regulatory process first begins. The Court held that EPA unreasonably failed to consider all relevant factors, including costs, when determining whether a regulation is “appropriate and necessary.” Justice Scalia explained the holding, saying, “One would not say that it is even rational, never mind ‘appropriate,’ to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits.” Michigan v. EPA, 135 S. Ct. 2699, 2707 (2015).

The Court did not strike down the MATS rule; rather, it required EPA to review and rewrite it in a manner that took costs into consideration at the outset. In order to justify the rule, EPA contended that the “co-benefits” of the rule amounted to $37 billion to $90 billion in savings. These co-benefits resulted from incidental reductions of secondary pollutants, such as particulate matter. EPA claimed the reduction of particulate matter led to savings in annual health costs and lost workdays due to less premature deaths, heart attacks, asthma, etc.

In fact, “more than 99%” of the co-benefits of the MATS rule were attributable to the particulate matter known as PM2.5, rather than direct benefits from a reduction in mercury. Chief Justice John Roberts, during oral argument in Michigan v. EPA, suggested that EPA was using its authority to regulate mercury “to get additional regulation of the [particulate] pollutants. And so it’s sort of an end run around the restrictions that would otherwise … give you less control over the regulation.”

The revised MATS rule will put an end to that type of circumvention and expose the glaring imbalance between compliance costs and actual methane-emission reduction. In the near term, the revision will reduce the burden on the development or use of domestic energy resources. In the longer term, the revision will encourage the creation of standards that can more effectively target methane emissions.

EPA’s manipulation of regulations’ financial benefits is not unique to the MATS rule. A 2011 study showed that, in six of twelve EPA analyses of major rules from 2009 to 2011, co-benefits accounted for all of the benefits. In two others, co-benefits accounted for greater that 99% of the benefits. See Anne E. Smith, Ph.D., An Evaluation of the PM2.5 Health Benefits Estimates in Regulatory Impact Analyses for Recent Air Regulations, NERA Economic Consulting 8 (Dec. 2011). Perhaps once EPA has finished its MATS rule revision, it will turn to those six rules and their improper use of co-benefits.

Regulators and the Americans that they serve should tune out the special-interest activists that have severely criticized the Administration’s renewal of rigorous cost-benefit analysis. Their vision of environmental, health, and safety protections at any cost does not reflect reality and poorly serves the public on whose behalf they claim to advocate.

Cost-effective regulation can be both an engine of economic growth and a means of preserving public health. Spending billions in return for a few dollars of health benefits, as Justice Scalia wrote in Michigan, diverts businesses’ attention and resources from not only the creation of jobs, but the development of new technologies that can lead to reductions in harmful waste.

Also published by Forbes.com on WLF’s contributor page.

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