- The Washington Times - Wednesday, June 28, 2006

Among the many contributing causes to gasoline prices north of $3 per gallon is the Environmental Protection Agency’s insistence on special blends of fuel in different parts of the country, and constant changes in the standards. The reality of high pump prices is a stark reminder that we need to carefully calibrate the incremental benefits and costs of new clean air regulations.

Unfortunately, instead of a careful calibration, the EPA routinely justifies new regulations with massively distorted benefit-cost (B-C) calculations. The EPA already counts several trillion dollars in benefits from restricting the emissions of a single pollutant: particulate matter (PM). As EPA contemplates yet another reduction in the PM standard this summer, we ought to reflect on the credibility of its past analyses, lest we jump once again into economically-suspect new programs. Such care is especially important to our manufacturing sector, challenged as never before by global competition and required to foot 80 percent of the bill for pollution abatement in the United States.

The value to Americans of additional restrictions on PM will largely depend on that of the restrictions they already “buy.” In an extensive 1997 study, the EPA estimated that by 1990 the net present value of its 1970-1990 clean air enforcement had reached $22 trillion, primarily through reducing PM emissions. Economists Randall Lutter and Richard B. Belzer wrote of the $22 trillion, “No professional economist independent of EPA takes that estimate seriously” for (if true) it would rival “roughly the aggregate net worth of all U.S. households in 1990.”

Reduced PM emissions would have continued past 1990 under the regulations then in place. Assuming that the reductions’ value to Americans has tracked economic growth, the $1.86 trillion net benefits estimated by the EPA for 1990 would now flow annually at about $2.90 trillion (both sums in 2005 dollars) — or about six times what Americans now spend per year buying 17 million new cars and light trucks.

However, according to the EPA, emission reductions attributable to regulations written after 1990 will add to the annual $2.90 trillion. They assert, for instance, that a regulation on heavy-duty diesel trucks and buses (proposed in 2000 and taking effect with the 2007 model year) will return nearly $17 of benefits (almost entirely from reducing PM) for every dollar of cost. In May 2004, the EPA announced $40 of (mostly PM-related) benefits for every dollar of cost from a similar rule on non-road diesel engines.

But, is a 40-to-1 B-C ratio credible? Consider, for instance, the likely incredulous reaction to a hypothetical forecast by ExxonMobil — the nation’s most profitable oil company last year — that it will soon refine every $1 of crude oil into gasoline, heating oil and other products worth $40 to customers — a profit margin of more than 97 cents. Moreover, is it conceivable, as the EPA asserts, that the new diesel regulations (both highway and non-road) will augment the current trillions of annual PM-related health benefits with yet another $148 billion?

And, is it conceivable that the additional $148 billion of annual health benefits can be obtained for an investment of only $6.3 billion? Through complex amortization and flawed economic reasoning, the EPA’s B-C ratios routinely exclude monies spent by manufacturers preparing to meet regulatory deadlines. For instance, manufacturers are now spending large sums on research and development, redesign, retooling and certification to meet the 2007 model-year deadline under the highway heavy-duty diesel regulation. The EPA’s 17-to-1 B-C ratio excludes each and every up-front dollar. Citing staff and budget constraints, the EPA only estimated a B-C ratio for a single year, 2030, by which time they assume all amortized capital outlays will have been “recovered” via higher prices. So by the distant year in which a B-C ratio is calculated, they assert $0 in capital costs.

The EPA’s B-C studies also routinely mistreat the basic economic “law of demand.” For instance, in the B-C study of 2000 on the heavy-duty highway diesel regulations, the EPA assumes that the higher prices for trucks and buses (caused by the pass-through of regulatory costs) will not affect vehicle sales. By ignoring any impact of price on the quantities demanded, the EPA evades two consequences that would reduce B-C ratios.

First, “second-round” or “adjustment” costs disappear. For instance, economists expect that making trucks more expensive would slow truck sales as freight transportation companies adjust to (what is for them) a costlier input. Portraying truck sales as independent of price infers that second-round adjustments and associated costs never actually occur, contrary to what economists expect.

Second, if higher prices would slow the sales of compliant new trucks and buses, the effective delivery of clean air benefits would slow, too. Until and unless a new truck or bus replaces an existing vehicle, no clean air benefit occurs — dampening the B-C ratio.

In the real world, manufacturers know that market conditions prevent them from passing on all EPA’s regulatory costs to their customers. Even partial cost recovery harms manufacturers’ ability to compete in world markets and create well-paying jobs for their employees — consequences that make it important for society to insist upon clean air regulations that will provide benefits commensurate with their costs. Unfortunately, the accounting sleights of hand used by the EPA deny Americans an accurate portrayal of benefits and costs while promoting more regulation. Society deserves better.

Thomas J. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, and Garrett A. Vaughn is the organization’s economist.

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