Final Mercury Standards for Power Plants

As promised the other day (see here), EPA has finalized new regulations on mercury emissions from fossil fuel-fired power plants. The final rule in its entirety is here, and the regulatory impact statement, which includes the highly favorable cost-benefit analysis is here. For those who don't want to work so hard, a brief summary of the the rule is here.

Ron Paul Wants to Abolish the EPA

No surprise there. And he offers a conventional libertarian bromide as a substitute for the regulatory agency: "Polluters should answer directly to property owners in court for the damages they create...." For years, small minorities of economists and libertarians calling themselves "free-market environmentalists" (see, e.g., here and here) have argued that common-law property protections, by themselves, can and would supply efficient, even optimal, levels of environmental protection. They would certainly be right, if we lived in the mythical world of the "Coase theorem," in which information is complete and transacting is costless (see here). Indeed, if we lived in that world, we wouldn't even need property law or courts to resolve environmental disputes as parties in the free market would costlessly bargain to optimal allocations of pollution. But, as Coase himself acknowledged many times (see id.), the world we live in is not at all like the world of the "Coase theorem." In the real world, theories of free-market environmentalism are dangerously misguided because of transaction costs and the real limitations of common-law solutions to environmental problems.

Here's what Coase had to write about environmental protection in his 1959 article on "The Federal Communications Commission" (see here, p. 29):

[I]f many people are harmed and there are several sources of pollution, it is more difficult to reach a satisfactory solution through the market. When the transfer of rights has to come about as a result of market transactions carried out between large numbers of people or organizations acting jointly, the process of negotiation may be so difficult and time-consuming as to make such transfers a practical impossibility. Even the enforcement of rights through the courts may not be easy. It may be costly to discover who it is that is causing the trouble. And, when it is not in the interest of any single person or organization to bring suit, the problems involved in arranging joint actions represent a further obstacle. As a practical matter, the market may become too costly to operate.

In these circumstances, it may be preferable to impose special regulations (whether embodied in a statute or brought about as a result of the rulings of an administrative agency).

 Peter Grossman and I build on Coase's arguments in Chapter 15 of our book, Principles of Law and Economics (Aspen 2011), pp. 397-8:

The causation-proof problems Coase recognizes are especially important. Many pollutants travel long distances, and pollution-related diseases can have long latency periods. To prevail in court, plaintiffs must be able to trace their harm to a particular pollution source that might be located hundreds of miles away, and prove that their harm was proximately caused by exposure to a certain pollutant that may have occurred several decades ago. This evidentiary burden is often unbearable, and always very expensive. Moreover, common-law courts have traditionally restricted nuisance remedies to cases involving visible air pollution, such as smoke and dust; bad odors were usually not enough to state a claim. But, of course, many harmful pollutants - including some of the most toxic - are invisible. 

In addition to causation-proof problems, common-law remedies only protect environmental resources subject to property rights; they do not protect unowned, common-pool resources, regardless of social value.

The problems raised, respectively, by Coase and Cole and Grossman bear on Paul's belief that common-law causes of action provide sufficient remedies for environmental harms, but ultimately they are inapposite to his opposition to EPA and large-scale environmental regulation because Paul is not a welfare-consequentialist. As true-believing libertarian, Paul is more interested in maximizing individual liberty than overall social welfare (although he might believe that maximizing the former would maximize the later). Paul's strict libertarianism distinguishes him from his rivals for the Republican presidential nomination. While they mostly pander to anti-environmental interest groups, Paul's environmental position is principled. But, if implemented as policy, it would be disastrous for the health and welfare of the American people.

What are the Social Costs and Benefits of EPA's Various Greenhouse Gas Regulations?

Just last week, the EPA sent for OMB regulatory review one of several proposed regulations on greenhouse gas (GHG) emissions (see here). This is another important step in a regulatory process that began on Dec. 7, 2009, when the EPA issued an "Endangerment Finding" for GHGs, which requires their regulation under the Clean Air Act. Among the regulatory proposals already completed or in the pipeline are: (1) a mandatory GHG reporting rule (see here); (2) a "tailpipe" rule to control motor vehicle emissions of GHGs (see here); (3) sequestration rules to govern carbon capture and storage projects (see here); (4) the GHG "Tailoring Rule," to limit the number of stationary sources of GHG emissions subject to regulation under the Clean Air Act (see here); and (5) a  "Scheduling Rule," adopted pursuant to a court settlement according to which EPA must issue final regulations imposing New Source Performance Standards on electric power plants and refineries by the middle of 2012.

Each of these regulations is controversial and entails significant economic costs. And the question OMB will be asking in regulatory review is whether the costs are justified by the benefits. As required by statute and by executive order of the president, EPA must prepare a "regulatory impact analysis" (RIA) for each major rule, and the central feature of the RIA is a cost-benefit analysis (CBA). EPA has not completed RIAs for its "Scheduling Rule" (which, after all, does not substantively regulate emissions) or its proposed "Sequestration Rule." It has, however, published RIAs for its "Tailpipe" and "Tailoring" rules (see here and here).

On the EPA's analysis, the "Tailpipe Rule" will provide around $188 billion in net social benefits over the course of its lifetime, and the "Tailoring Rule" is expected to provide around $193 billion (and perhaps double that, depending on what EPA ultimately decides for the third stage of the phase-in process) in net social benefits. However, the net social benefits of the "Tailoring Rule" have to be taken with several grains of salt because it is entirely about exempting (relatively) smaller emitters of GHGs from regulation. In this respect, the social benefits provided by the "Tailoring Rule" are not benefits stemming from regulation but gross benefits stemming from the lack of regulation that otherwise would be subject to regulation under the Clean Air Act. They are gross, rather than net, benefits because they are not offset against the social costs of the GHG emissions from the sources that the rule exempts. Moreover, one wonders how EPA determined just what the regulatory savings are, as it has yet to prepare an RIA estimating the costs of not-yet-determined regulations on plants that are not exempted by the "Tailoring Rule." As a CBA, the EPA's RIA for the "Tailoring Rule" is neither very informative nor persuasive.

Pending more information about the costs and benefits of the various GHG regulations, it is too early to say that they will, overall, be good or bad for social welfare in the US. So far, about all we can conclude is that, on EPA's own estimates, the "Tailpipe Rule" appears economically sensible; absent any major flaws in EPA's CBA for the rule, the positive outcome should make it difficult for political opponents to overturn it (pursuant to the political-economic analysis of CBA presented in my new working paper, here). The biggest hurdle for the "Tailoring Rule" will not be economic objections but legal ones (lawsuits already have been filed) because of the way EPA has had to de facto amend the Clean Air Act to regulate without over-regulating GHG emissions from power plants.

One development that should assist EPA in preparing future CBAs for its GHG regulations is the federal Inter-agency Working Group's schedule of valuations for the "social cost of carbon," published in 2010. The  central estimate for 2010 (using a 3% discount rate) is $21.40 per ton of CO2eq, rising to $23.80 by 2015, $26,30 by 2020, and $44.90 by 2050. Even though these valuations are on the low side (according to some more recent literature estimating the social cost of carbon), they should help EPA to justify economically its various proposed GHG regulations.

Regulatory Cost-Benefit Analysis and Collective Action

A new, expanded, and improved draft of my paper of that title can be downloaded from SSRN. Here is the abstract:

This updated draft paper explores the significant role Regulatory Cost-Benefit Analysis (RCBA) plays in facilitating or impeding collective action. Through case studies, the paper shows that well-constructed RCBAs have (1) facilitated collective action (including in cases where explicit consideration of costs is legally prohibited) by muting political opposition; and (2) helped to obstruct welfare-reducing rules from being promulgated. RCBAs can of course be manipulated to obstruct social welfare-improving collective action or to promote inefficient policies. However, the fact that RCBAs require transparency makes those efforts liable to discovery and disclosure, as in the case of the Bush Administration's failed "Clear Skies" initiative. The paper concludes with an assessment of implications of the case studies for our understanding of the role of RCBA in the regulatory process, and with a call for more qualitative and quantitative empirical research on the use and abuse of RCBA as a political tool in legislative and regulatory processes.

The Fallacious Republican Attacks on the EPA

Dan Farber has an excellent post at Legal Planet (here) explaining (a) why the current House of Representatives is the most anti-environmental-protection ever and (b) how the anti-EPA views of many House Republicans are faith-based, rather than fact-based. The fact of the matter is that environmental regulation in general has very little impact either on overall levels of economic growth or jobs. The only saving grace is that none of the House bills Dan mentions seems likely to become law any time soon.

American Electric Power Co. v. Connecticut et al.

Yesterday, the US Supreme Court ruled 8-0 that the Clean Air Act displaces the federal common law of nuisance with respect to climate change and its mitigation. (You can read the opinion here). Justice Sotomayor did not take part in the decision; she had sat on the appellate panel below, but was not a party to that court's ruling.

Most scholars expected this result. In fact, I doubt whether more than a few were surprised that it was a unanimous decision. Many environmentalists will not be pleased that  state and private plaintiffs cannot sue power plants and other large carbon emitters for nuisance. It certainly reduces the incentive large emitters have to seek a federal solution as a means of reducing common-law exposure. However, the prospect of controlling greenhouse gas emissions through nuisance law has always struck me as both  haphazard and too costly, relative to a well-designed regulatory scheme (which still isn't in place).

Perhaps more important than the Court's ruling on the merits, going forward, is the Court's strong reaffirmation of Massachusetts v. EPA. As Dan Farber explains (here), Justice Sotomayor, voting in subsequent cases, would make a clear 5-vote majority on issues of standing and the political question doctrine.

EPA Publishes Proposed Rule on Mercury Emissions from Coal-Fired Power Plants

EPA has finally gotten around to seriously regulating toxic mercury emissions (as well as other toxins) from coal-fired power plants. The announcement is here. A fact sheet on the proposed rule is here. The full proposed rule is here.

Mercury is of special concern because exposure (mainly through consumption of contaminated fish) can cause damage to nervous system development in fetuses, infants, and young children. Other toxins to be regulated under the rule include arsenic, nickel and chromium, all of which are known carcinogens. The rule will impose emissions standards (under section 112 of the Clean Air Act), which will effect 1,350  power plants nationwide. It aims to reduce their mercury emissions by 91%.

The rule, which will take effect (unless withdrawn or amended) after a 60-day public-comment period, is expected to avoid (by 2016) between 6,800 and 17,000 premature deaths, 4,500 cases of chronic bronchitis, 11,000 nonfatal heart attacks, 12,200 hospital visits, 11,000 cases of acute bronchitis, 850,000 missed work days, and 120,000 cases of aggravated asthma.

Industry is already complaining about the gross costs of the rule, which could amount to $10 billion per year (see here). But, according to the proposed rule's Regulatory Impact Analysis (RIA) (here), it will yield annualized net benefits (in 2007 dollars) ranging from $42 billion to $120 billion (using a 7% discount rate), or $48 billion to $130 billion (using a 3% discount rate), not including several difficult-to-quantify benefits. The benefits of the rule outweigh the costs, according to EPA's estimates, by a factor of 13-to-1 (using a 3% discount rate) or 5-to-1 (using the 7% discount rate).

If the RIA is anywhere close to accurate, this rule is a no-brainer. Of course, that won't stop the anti-brainers in Congress from trying to stop it.

House of Representatives v. EPA, Round I

The Republican-controlled House of Representatives attack on the EPA has officially begun. Today, the House Appropriations Committee released a partial list of spending cuts that includes a massive $1.6 billion reduction in the budget of the Environmental Protection Agency (compared to the President's fiscal year 2011 request).  That amounts to 16-17% reduction.

At the same time, the House Energy and Commerce Committee was taking its first shots at EPA Administrator Lisa Jackson, at a hearing on a bill sponsored by Committee Chair Fred Upton (R-Mich.) that would reverse the EPA's finding, based exclusively on scientific evidence, that carbon dioxide endangers public health and the environment, as defined in the Clean Air Act. I have not yet been able to find a link to the hearings, but the opening statements of Committee members, Administrator Jackson and other witnesses, are available here.

As Administrator Jackson observes in her opening remarks (here), the threatened legislative reversal of EPA's endangerment finding would mark a dangerous step in the ongoing politicization of science. It would be the first time Congress has ever overturned a federal agency's scientific finding. However, the chance of enactment seems remote, as the Democrat-dominated Senate is unlikely to go along; and even if it did, President Obama would certainly veto the measure, and the Republicans don't have enough votes to override it. The same political calculus applies to the budget cuts proposed today by the House Appropriations Committee. Meanwhile, the New York Times is reporting (here) that House Republican leaders already are facing internal party dissent over their failure to make even deeper cuts.

I'll leave it to others to debate whether today's events were significant or mere theater. Either way, we should be prepared for many repeat performances over the next two years (at least). The House Republicans seem to believe that the EPA is an easy target in the current climate of slow economic recovery and conservative resurgence. Only time - and ultimately the 2012 elections -  will tell whether they are right.

EPA to Issue New Regulations to Regulate Toxins in Drinking Water

While it faces Republican attempts not just to prevent it from regulating greenhouse gases under the Clean Air Act (see here), but to shut it down entirely (see here), the EPA, to its credit, pressing ahead with plans to issue much-needed regulations to reduce and prevent contamination of drinking water supplies by carcinogenic and toxic substances that are commonly found in drinking water supplies. The New York Times has the story here. The EPA's official announcement is here.

Unfortunately, Republicans are playing politics with a very important federal agency that has contributed greatly to improving public health and welfare since its creation in 1970. Not all EPA regulations are well-founded, efficient or effective (and those specific regulations should be amended or eliminated), but many EPA regulations and programs are both effective and efficient. Indeed, the Clean Air Act is, overall, among the most effective and efficient government social-welfare programs ever implemented.

Well, That Didn't Take Long

From The New York Times (here):

On the first full day of legislative business, House Republicans introduced measures on Wednesday to block the environmental agency’s proposed regulation of greenhouse gases and new rules limiting toxic air emissions from cement factories.

The Republicans will tell you, supported by absolutely no evidence, that "job-killing" EPA regulations are a significant cause of unemployment. Don't you believe it.  

Final Rule on Monitoring and Reporting on CCS

The Environmental Protection Agency (EPA) has published a final rule (here) requiring facilities that engage in geologic sequestration of carbon emissions as a method to mitigate climate change. This new rule is important for three reasons, two of which are substantive and one of which is political. The two substantive reasons are: (1) carbon capture and sequestration is a necessary and integral part of any reasonable near-term plan to mitigate carbon emissions; and (2) monitoring and reporting requirements are critical to ensure that sequestered carbon does not escape sequestration and does not contaminate groundwater supplies. The new rule is politically important because it reminds Congress that EPA is moving forward on climate change, pursuant to the Supreme Court's determination of its statutory mandate under the Clean Air Act, regardless of all the climate deniers coming into Congress next month.

This rule does not solve all of the problems of carbon capture and sequestration. Among others, important issues of property rights in underground storage areas remain to be resolved.