Emissions Regulations are Divorced from Environmental Economics

Trump’s CEA showed, based on credit transactions among manufacturers, that vehicle standards to abate a ton of CO2 cost about $163 on the margin, while even Obama said the abatement was worth only $50.

Now Biden claims that new stricter standards pass a cost benefit test.  Although this will be cast as an environmental issue, the changes have nothing to do environmental economics:

(1) Consumer fuel savings get (almost) double counted because “behavioral economics.”  Specifically, 

“The agency’s analysis assumes that potential car and light truck buyers value only the savings in fuel costs from purchasing a higher-MPG model they expect to realize over the first 30 months they own it. Depending on the discount rate buyers are assumed to apply, this amounts to 25-30 percent of the expected savings in fuel costs over its entire lifetime.” (p. 420 of DOT’s final rule)

This double counting (100 – 27.5% = 72.5% of $98 billion in fuel savings) is more than quadruple the purported $16 billion net benefit reported in Table VI-11 of the final rule. 

(2) Biden says that some tightening comes for free because 5 manufacturers had already signed a pledge with California EPA to so tighten

But this ignores that California rules do not reduce the supply of federal credits, whereas changes in federal rules do even if the federal rules are not as strict as California’s.  The equilibrium credit price is built into the prices paid by purchasers of new cars.

(3) When the above are enough to tilt the scale, all costs and benefits are discounted 3%/yr.  When an extra push is needed, Biden discounts environmental benefits at 2.5% per year while everything else is discounted 3%/yr.

“the use of the social rate of return on capital … inappropriately underestimates the impacts of climate change for the purposes of estimating the SC-GHG. … the consumption rate of interest is the theoretically appropriate discount rate in an intergenerational context.” (p. 547 of the Technical Support Document.  See also p. 573 of the final rule.)