A cost-benefit review

May 29, 2019
Review by the US Environmental Protection Agency of procedures for estimating costs and benefits of proposed regulations deserves a warm welcome from the oil and gas industry.

Review by the US Environmental Protection Agency of procedures for estimating costs and benefits of proposed regulations deserves a warm welcome from the oil and gas industry. Under former President Barack Obama, EPA distorted cost-benefit analysis to justify egregious regulation. The review represents an important new step in President Donald Trump’s campaign to bring EPA back under control.

Pressure groups will warn of weakened environmental regulation. In fact, the review will address overreach that made regulations legally evanescent.

Exaggerating benefits

Under Obama, the EPA exaggerated benefits and understated costs to support proposals consistently hostile to hydrocarbon energy. In the 2014 proposal for its Clean Power Plan, which would have federalized energy decision-making in favor of renewable sources, for example, EPA extrapolated benefits to global values for analysis against local costs. In that and other proposals it further boosted benefit estimates by accounting for reduced emissions of substances other than the regulatory target, even when “co-benefit” substances were subject to their own regulations and in attainment with national standards.

EPA’s cost estimates usually fell below those of regulated industries. Regulators and the regulated can be expected to diverge in this area, of course. But EPA’s estimates were sometimes orders of magnitude below those of industries affected by its proposals.

EPA set a pattern for lopsidedness with its December 2009 “endangerment finding” on carbon dioxide. Declaring CO2 harmful to human health and welfare because of its contribution to climate change, it claimed authority to regulate the gas under the Clean Air Act. Legally, CO2 thus became a dangerous pollutant with no accounting for its role in plant growth or for the advantages of affordability and accessibility associated with energy sources that yield it when burned.

A May 13 memorandum from EPA Administrator Andrew Wheeler calls for a new approach. It asks assistant administrators of the offices of Air and Radiation, Chemical Safety and Pollution Prevention, Land and Emergency Management, and Water “to develop reforms, including notice-and-comment rulemakings, that outline how benefit-cost considerations will be applied in areas that are in need of greater clarity, transparency, and consistency.” And it lists these principles to guide the work:

• Ensuring the agency balances benefits and costs in regulatory decision-making.

• Increasing consistency in the interpretation of statutory terminology.

• Providing transparency in the weight assigned to various factors in regulatory decisions.

• Promoting adherence to best practices in conducting the technical analysis used to inform decisions.

“Benefits and costs have historically been treated differently depending on the media office and the underlying authority,” Wheeler’s memo says. “This has resulted in various concepts of benefits, costs, and other factors that may be considered.” In public comments solicited in April 2017, “A large cross-section of stakeholders identified instances when the agency underestimated costs, overestimated benefits, or evaluated benefits and costs inconsistently.” Those stakeholders must have been targets of Obama-era regulation.

An element of transparency meriting attention in EPA’s review is public assertion about “premature deaths” to be prevented by regulatory proposals. Press-release writers in Obama’s EPA used the phrase lavishly—and misleadingly. Premature mortality is a postulated value essential to risk analysis. Without explanation and context, though, it’s just propaganda.

Too complicated?

Against what baseline age is the prematurity of death measured? What’s the difference between the baseline age and the average age at which death is thought to occur as a result of the targeted pollution? How does EPA isolate pollution from other possible causes of premature death? Public consideration of costs in relation to benefits of a regulatory proposal requires answers to questions such as these. Maybe, of course, the subject is too complicated for such straightforward parsing. If so, transparency would be served if EPA reserved “premature death” for internal analytics.

Enhancement of the clarity, transparency, and consistency of cost-benefit analysis promises to improve not only oil and gas regulation but EPA’s credibility as well. For his next project, Wheeler might consider examining the CO2 endangerment finding.