In a world of finite resources, rigorous cost-benefit analysis is essential to deciding what federal regulations are worthwhile. Thus, in a 2011 executive order, President Obama mandated that federal agencies “propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs.”
In conducting this cost-benefit analysis, agencies must employ “the best available techniques to quantify anticipated present and future benefits and costs as accurately as possible,” Mr. Obama said. Unfortunately executive orders are not judicially enforceable, and the rules this administration has actually promulgated — including the Environmental Protection Agency’s recently proposed greenhouse gas rule — fall far short of the president’s standard.
Perhaps the most basic principle of cost-benefit analysis is that it should compare apples to apples. This is common sense. But the EPA justifies its costly proposed regulation of domestic power plants by reference to the global benefits of carbon reduction. The interagency working group responsible for the administration’s “social cost of carbon” explicitly departed from guidance of the Office of Management and Budget, which requires a regulatory impact analysis to “focus on benefits and costs that accrue to citizens and residents of the United States.”
Instead, the working group’s analysis (recently updated without benefit of public notice and comment) touts the global benefits of cutting carbon emissions, even though all of the costs of federal rules will be borne by domestic industry. This is exactly the imbalance that led the Senate to oppose the Kyoto Protocol in 1997 by a vote of 95-0. Imposing the costs of greenhouse gas regulation on industrialized nations while letting developing countries ride free “could result in serious harm to the United States economy.”
The domestic-foreign mismatch is not the only disparity in the proposed carbon rule’s cost-benefit analysis. This rule is one in a long line of EPA regulations that justify the cost of restrictions on one pollutant by reference to “co-benefits” from incidental reductions of other pollutants. Most of the alleged benefits of the carbon rule come not from greenhouse gas reductions, but from ancillary effects on emissions of fine particulate matter, known as PM2.5, which can be regulated more efficiently by other means.
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Indeed, the carbon rule’s authorizing statute, section 111(d) of the Clean Air Act, unambiguously excludes regulation of the particulate matter, because it is comprehensively controlled as a “criteria pollutant” under sections 108 to 110. Under that authority, EPA has already set a nationwide limit on PM2.5. But now EPA officials claim co-benefits from incidental reductions of PM2.5 below that standard — even though the agency recently characterized the health effect of such reductions as “highly uncertain.”
Finally, far from employing “the best available techniques” of cost-benefit analysis, EPA’s proposed carbon rule fails to consider entire categories of substantial resulting costs. Economists have understood from time immemorial that when regulation raises the cost of production in one jurisdiction, production (and associated revenues) will tend to relocate to unregulated jurisdictions. In the present context, this phenomenon is known as “carbon leakage,” and it has been thoroughly studied by economists, think tanks and government agencies. As the Congressional Research Service noted in 2008:
“[C]oncerns have been raised that if the United States adopts a carbon control policy, industries … that find their … energy bills rising because of costs passed-through by suppliers may be less competitive and may lose global market share (and jobs) to competitors in countries lacking comparable carbon policies. In addition, this potential shift in production could result in some of the U.S. carbon reductions being diluted by increased production in more carbon intensive countries.”
The EPA must not have received the memo. The agency’s only reference to carbon leakage is a statement that the agency “does not anticipate significant leakage in the [electricity generating] sector to occur from this regulation because the nature of electricity transmission does not lend itself to significant imports or exports of electricity.”
This reasoning is absurd. Whether U.S. power plants are in direct competition with foreign plants is irrelevant.
The proposed rule would raise the cost of power and pressure energy-intensive trade-exposed industries to set up shop abroad, where costs are lower. EPA’s cost-benefit analysis does not even attempt to quantify this effect — apparently because the agency failed to grasp the basic economics of carbon leakage.
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• C. Boyden Gray has served as White House counsel, U.S. ambassador to the European Union, special envoy for Eurasian energy and special envoy for European Union affairs. “Arbitrary and Capricious” runs monthly.