The U.S. EPA’s Regulatory Clean Air Benefit-Cost Estimates (30 free lunches for the price of 1?)

Last August, the the United States Environmental Protection Agency (EPA) graded itself on its enforcement of the Clean Air Act (CAA) in terms of economic benefit-cost analysis. Surprise not: EPA came up with an astounding $31 of clean air benefits for every dollar of cost. That, and Administrator Lisa Jackson can leap tall buildings in a single bound.

Deja Vu: EPA’s 1997 Study

Back in 1997, the EPA credited itself with providing $22.2 trillion in benefits at a cost of a half trillion dollars from enforcing the CAA from 1970 (when the EPA was established) through 1990 (when Congress amended the CAA in stricter form)—a B/C ratio of more than 40-to-1.

Of the EPA’s $22 trillion net benefit estimate (gross benefits less cost), economists Randall Lutter and Richard B. Belzer wrote: “We know of no professional economist independent of EPA who takes the EPA’s estimate seriously,” for—if actually true—the sum would equal “roughly the aggregate net worth of all U.S. households.”

Lutter and Belzer scoffed convincingly but not enough to change the EPA’s penchant for grandiosity. Hence, more yardsticks are needed to measure the absurdity of the EPA’s cost-benefit estimates, at both the “macro” and “micro” levels. Such a stock-taking points toward a do-over on the costs and benefits of clean air regulation by EPA.

Macro Level Issues

Regarding the 1997 study, Lutter and Belzer compare EPA’s finding to other major statistics for the entire economy. Here are some more “macro” yardsticks to measure the EPA’s astounding B/C claims:

Comparison to U.S. Defense Spending. The EPA’s August 2010 study’s estimate of the annual clean air benefits amount to nearly twice U.S. defense spending, including operations in Iraq and Afghanistan. Plausible?

Comparison to GDP. Incredibly, the EPA’s total net benefit estimate is far higher still. The EPA subdivides the clean air benefits into: (A) the benefits attributable to the amended CAA (as already noted, nearly twice annual defense spending); plus (B) the benefits attributable to the CAA of 1970 – 1990, the legislative foundation on which the amended CAA rests. Including the benefits from Part B would push the grand total to as much as 60% or 70% of annual U.S. GDP—a result so obviously absurd that EPA’s August 2010 study obscures it with a schematic diagram.

Composition of EPA’s claimed clean air benefits. Human health benefits account for nearly all of the estimated clean air benefits. Who knew that health care accounts for more than half of the country’s GDP with the EPA as chief health provider? The nation’s most skilled neurosurgeon is a piker compared to a run-of-the-mill EPA regulation writer.

Implausible “profits.” The EPA cranks out more pure profit than all U.S. private corporations combined–if one takes the EPA’s B/C estimates seriously. Clean air benefit dollars are the EPA’s analogue to a private company’s revenues—dollars that customers are (or would be) willing to spend to receive the EPA’s “product” of fewer emissions. Under a 31-to-1 B/C ratio, Americans would be willing to spend $31 (if necessary) to get the clean air benefits provided per dollar of cost—or $30 of pure profit out of every $31 of hypothetical consumer expenditure. For Exxon-Mobil to be as efficient, it would have to squeeze about $2.90 of pure profit from every $3.00 gallon of gasoline. Exxon’s CEO would have to wear tights and a cape plus possess profit superpowers to pull that off.

Brazen accounting gimmicks. For instance, the Agency’s 1997 study (scoffed at by Lutter and Belzer) estimated that in 1990 Americans spent $11.7 billion (in 1990$) on various kinds of capital equipment to meet the requirements of CAA regulations. The Agency treated all of those billions actually spent in 1990 as if spent instead in 1991—and, hence, one year “outside the scope” of its study entitled: The Benefits and Costs of the Clean Air Act, 1970 to 1990. (emphasis added)

Tossing billions of cost dollars overboard with time travel worthy of Captain James T. Kirk of the Federation Starship Enterprise helps goose the B/C ratio estimate but also detracts from the estimate’s gravitas.

Micro Level Issues

The EPA’s absurd macro estimates of clean air benefits and costs build up from the Agency’s benefit and costs estimates for individual regulations—the “micro” level. Consider, in particular, a regulation on heavy-duty (HD) trucks and buses proposed in 2000 under Carol Browner’s EPA, made final in early 2001 by the hapless Bush Administration, and effectively shredded by a regulation proposed in 2010 by Lisa Jackson’s EPA.

Implausible profits (again). In 2000, Carol Browner’s EPA estimated that the regulation limiting HD vehicles’ emissions of particulate matter (PM) and nitrous oxides (NO_x) would return $16 of clean air benefits for every dollar of cost, “once the program is fully implemented.” The 16-to-1 B/C ratio is more modest than 31-to-1 but still implausible. To match a 16-to-1 performance, Exxon-Mobil would have to provide its shareholders $2.80 in pure profit out of every $3.00 gallon of gasoline sold to motorists—a feat beyond the powers of corporate CEOs and other mere mortals.

Accounting gimmicks (again). The phrase “once the program is fully implemented” is the most important phrase in EPA’s December 2000 press release touting Browner’s HD vehicle regulation. Those new to EPA-speak might interpret the phrase to mean “2010” when 100% of all new HD vehicles sold would have to meet the standard. [The regulation first started to bite in 2007 when 25% of all new heavy-duty vehicles sold had to meet the standard.] Instead, the phrase means “2030” (never mentioned explicitly in the press release).

Why so far into the future? Two reasons. First, the country’s HD vehicle fleets would not fully “turn over” until 2030. A new, compliant vehicle provides $0 of clean air benefits for the B/C ratio’s numerator until it actually replaces an existing, dirtier vehicle. Hence, the selection of 2030 provided the first year of maximum annual clean air benefits to put in that numerator. Contrast that with, say, 2011 which would provide negligible benefits for the B/C numerator.

Second, the selection of 2030 to base its B/C ratio facilitated an accounting gimmick that reduced to $0 what is probably the single largest category that directly-affected manufacturers face in preparing themselves to meet regulated deadlines: the up-front capital expenditures for research and development (R&D), product testing, and factory retooling. By basing its B/C ratio on 2030, the EPA pretended that none of the up-front costs remained to plug into the B/C denominator. Vehicle manufacturers would have long since “recovered” all of those costs via higher prices as the regulatory costs got passed through. This “cost recovery” is a neat accounting trick but an economic fiction. Reshuffling costs between manufacturers and their customers does not recover even a dime for society as a whole.

Implausible profits (yet again). Any private company would court face financial ruin from a new product that would: (1) be a cost drain for the first six years; (2) begin a trickle of revenue in year 7; and, then (3) need another 23 years to fully overcome customers’ preference for their existing stock. Yet, the EPA turned such thin economic gruel into a profit feast. Only the likes of the Sierra Club could swallow that.

Back to the Future

In late 2010, Jackson’s EPA proposed a regulation that would impose mileage standards on new heavy-duty vehicles to restrict CO₂ emissions—and trashing Browner’s 16-to-1 B/C ratio in the process.

Browner’s NO_x and PM standards turned out to worsen mileage as reported in a Wall Street Journal article noted in April 2007. So, Jackson’s proposed mileage standards makes illegal the very vehicles that Browner was counting on to provide $16 of benefit per dollar of cost when 2030 finally rolls around.

How seriously can the latest EPA B/C estimate be taken when the very same EPA may blow it to smithereens in a few years?

Final Note

Actions speak louder than words. The Obama Administration’s actual behavior (distinct from its rhetoric) “dissed” the EPA’s B/C estimates. Otherwise it would never have risked the Democratic majorities in Congress in the 2010 mid-term elections by pushing for carbon taxes (“cap-and-trade”) as a means far superior to direct regulation for restricting CO₂ emissions. Why take many dollars out of voters’ pockets with a heavy new tax when, instead, the EPA could literally keep many dollars in voters’ pockets by preventing all manner of adverse health effects? The Administration’s support of cap-and-trade provides strong—albeit indirect—evidence that the EPA’s astounding B/C estimates are bogus.

EPA, The Benefits and Costs of the Clean Air Act, 1970 to 1990, October 1997, Table 18, p. 56.

Randall Lutter and Richard B. Belzer, “EPA Pats Itself on the Back,” Regulation 23, no. 3 (1999), p. 23.

Garrett A. Vaughn, “Clearing the Air on EPA’s False Regulatory Cost-Benefit Estimates and it’

Vaughn (2011).

EPA (2010), Figure 1-1, Chapter 1, p. 3.

EPA, 1997, Appendix A, p. 16.

[8] EPA, “EPA Dramatically Reduces Pollution from Heavy-Duty Trucks and Buses; Cuts Sulfur Levels in Diesel Fuels,” December 21, 2000.

Robert Guy Matthews, “Trucking Firms Bemoan Stricter Emissions Rules,” The Wall Street Journal, April 24, 2007, p. A6. “Some loss of fuel economy was inevitable for engines to comply with the new standards. Certain parts of the engine must run at a higher temperature to burn off the [PM and NO_x] pollutants, and that requires more fuel.”

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Garrett Vaughn (Ph.D. Economics, Duke University) has held a variety of positions in his forty year career.  In addition to teaching economics on the faculty of University of Tennessee, Knoxville, he has been Industry Economist at the Federal Communications Commission; Manager, Tax & Economics at the American Petroleum Institute; and Economist and Council Director at the Manufacturers Alliance/MAPI.

Dr. Vaughn is currently and independent economic consultant specializing in energy and the environment.

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