Clean Power Plan: Carbon Rule’s Claimed Benefits Leave Out Key Costs

Mark Febrizio |Institute for Energy Research

Earlier this month, the Environmental Protection Agency (EPA) finalized its regulations on carbon dioxide emissions for existing electricity generating units, which the agency calls the “Clean Power Plan.” EPA claims the alleged benefits of the rule significantly outweigh the costs, and is requesting that states submit plans to implement the rule. Nevertheless, this rule—supposedly a “historic” step in the Obama Administration’s fight against climate change—will have no tangible impact on global warming. Furthermore, although at first glance the cost-benefit analysis by the agency appears favorable, the purported “benefits” are inflated and misleading. Thus, before saddling their constituents with large costs and minimal benefits, states should reject EPA’s call for implementation plans and avoid prematurely executing the rule before legal challenges are resolved.

“Climate Benefits” Without Temperature Reductions

The primary document EPA uses to justify its benefit calculations is the rule’s Regulatory Impact Analysis (RIA), a document that commonly accompanies agency rule-making. In the RIA, EPA calculated both the direct merits of the rule (i.e. the climate benefits) and the ancillary results (i.e. the health benefits) and used them to justify restrictions on carbon dioxide emissions.

Based on EPA’s analysis, this regulation would produce “climate benefits” of $20 billion a year in 2030. These benefits are considered the direct impacts of regulating carbon dioxide emissions. In particular, the estimates of climate benefits were calculated by using the Social Cost of Carbon (SCC), which determines the “marginal climate impacts” of every ton of carbon emitted.[i]

Noticeably absent from the RIA’s analysis of climate benefits is any substantial reduction in temperature or sea level rise. This is a critical omission, considering those were the impacts the Supreme Court cited in Massachusetts v.EPA, which gave EPA the ability to regulate carbon dioxide emissions. To be sure, the RIA explains that avoided global climate damages—such as sea level rise—work themselves into the (alleged) benefits of the new rule through the computer-generated SCC estimate.[ii] So, while the SCC attempts to monetize the damages that each unit of carbon dioxide causes, taking into account “a wide range of anticipated climate impacts,”[iii] the rule doesn’t tangibly change global temperatures or prevent a rise in sea levels.[iv]

According to climate experts from the Cato Institute, the avoided temperature increase that is expected to be accomplished by the climate rule is a negligible —essentially undetectable.[v] Due to this paltry improvement, it’s unsurprising that EPA does not highlight any discernible prevention of climate change in its “efforts to address climate change.” It also raises the question: how can a regulation that doesn’t affect global temperature or sea levels produce more than $20 billion annually in climate benefits?

Another significant problem with EPA’s calculation of climate benefits is the accuracy and reliability of SCC estimates. As IER has consistently explained, the SCC is not a useful tool to assess costs and benefits of agency actions, due to its arbitrary nature as well as a number of theoretical and practical issues.[vi]

For example, the “damage functions” and “discount rates” that are critical assumptions in SCC computer models are not objective, and the models yield widely varying results depending on which one is used. In fact, one model actually shows net benefits during the initial stages of global warming.[vii] In other words, one of the models EPA uses to assess the climate benefits of its carbon regulation shows that increasing carbon dioxide emissions may be good for society. If this model is correct, then it is not possible for EPA’s rule to produce the $20 billion in climate benefits the agency claims.

Furthermore, researchers from The Heritage Foundation evaluated a wide variety of inputs for two of the computer models and concluded that the models were unreliable and “extremely sensitive to assumptions,” making the process “susceptible to political gaming.” In addition, Robert Pindyck, a professor of economics at MIT, has criticized the models as “close to useless” and unfit for policymaking.

Dubious Health Benefits Contradict Data Trends

Besides the claimed climate benefits, EPA estimated that there would be $14 to $34 billion in 2030 in ancillary “co-benefits” that represent the avoided health impacts from ambient concentrations of particulate matter (PM2.5) and ozone (smog).[viii] While the climate benefits look at global impacts, the health benefits are only estimated and monetized for the contiguous United States.[ix]

There are notable issues with using these health benefits to justify this regulation. As explained previously, EPA has frequently overestimated and double counted benefits, cherry-picked data, misrepresented studies, and ignored the negative health impacts associated with poverty.

While EPA claims that the rule will prevent a projected 3,600 premature deaths annually in 2030 and 90,000 asthma attacks in children, EPA’s health claims ignore the relationship between wealth and health. Specifically, when people become poorer, they also tend to become sicker. This is well established in health and economics literature. In the past, EPA has recognized the connection between “people’s wealth and health status”, and even found that “if the costs are large enough, these increased risks might be greater than the direct risk-reduction benefits of the regulation.”[x]

However, EPA doesn’t consider the health-wealth link when justifying this regulation. In order to calculate its estimates of mortality benefits, EPA uses the value of statistical life (VSL) approach, which assesses that every income loss of $10.1 million ($US 2011) leads to one premature death.[xi] Using the VSL approach and a study from NERA Economic Consulting, which estimated there would be total compliance costs of $366 billion from EPA’s rule,[xii] IER estimates that EPA’s regulation could cause nearly 35,000 premature deaths by the year 2030.[xiii] By contrast, EPA estimated that the final rule would result in 200 avoided premature deaths annually in 2020, 1,900 deaths avoided in 2025, and 3,600 in 2030.[xiv] Assuming a linear trend, IER estimates that EPA’s carbon rule could prevent about 21,000 total premature deaths through the year 2030. Yet after factoring in the health-wealth connection, as shown below, EPA’s carbon dioxide regulation on power plants could cause 14,000 more premature deaths than it would prevent.[xv]

Premature Deaths Caused by EPA Power Plant Plan

Source: Based on IER calculations of Environmental Protection Agency and NERA Economic Consulting data

Government data comparing pollution trends and asthma rates shows that while particulate matter has fallen in the last 15 years, child asthma rates have stayed constant.[xvi] Because incidents of asthma have consistently expanded as air quality has improved, EPA’s arguments about health co-benefits are suspect.

EPA’s “Net Benefits” Ignore Full Economic Burden

In total, EPA claims that there will be yearly net benefits 2030—assuming a 3 percent discount rate—because of the carbon rule.[xvii] These net benefits are calculated by combining the SCC estimates and alleged health benefits and then subtracting EPA’s estimate of compliance costs. It is this net benefits estimate that EPA uses to validate its carbon rule, which purportedly has benefits that “are substantial and far outweigh the costs.”[xviii] Problematically, however, EPA only compared these claimed benefits to the direct compliance costs of the rule, thus leaving out broader, crucial economic factors when calculating the net benefits.

The compliance cost estimates that EPA used are calculated by combining the change in electric power generation costs, the costs of implementing demand-side energy efficiency measures (including both program costs paid by electric utilities and participant costs paid by consumers), and the costs associated with monitoring, reporting, and record-keeping requirements.[xix] As EPA explained later on in the RIA, it uses these estimated “compliance costs as a proxy for social costs.”[xx] Yet, according to EPA’s guidelines, compliance costs are just one element of the total economic burden of a regulation:

“…social costs are the total economic burden of a regulatory action. This burden is the sum of all opportunity costs incurred due to the regulatory action, where an opportunity cost is the value lost to society of any goods and services that will not be produced and consumed as a result of reallocating some resources towards pollution mitigation.”[xxi] [emphasis added]

By only factoring in the compliance costs of the rule, EPA ignored a whole host of other economic opportunity costs that are not included in the report. EPA even explicitly admitted that the “social costs of a regulatory action will not necessarily be equivalent to the expenditures associated with compliance.”[xxii] Basically, the net benefits that EPA estimated in the RIA were calculated without consideration of the broader economic burden that the carbon rule will impose. This seems to be a trend in EPA rule-making. For example, in the Supreme Court’s June decision on EPA’s mercury rule, Justice Antonin Scalia wrote that the agency should have considered the costs of regulation before drafting its Mercury and Air Toxic Standards rule.

Including Critical Economic Costs Tips the Balance

While EPA eschewed weighing the full economic costs of the carbon rule against the purported benefits, other organizations and researchers have conducted their own assessments to gain a better understanding of the true costs of the regulation. An analysis done by the Heritage Foundation’s Dr. Kevin Dayaratna indicated that EPA regulations, including the rule on carbon dioxide emissions from existing power plants, would have a “detrimental economic impact,” particularly in areas such as manufacturing employment, overall employment, gross domestic product (GDP), annual household incomes, and household electricity prices.[xxiii] Another Heritage Foundation report assessed that the impact of these regulations on GDP would be $205 billion in 2030. [xxiv]

Another study, conducted by NERA Economic Consulting, estimated that the carbon rule alone would cost at least $366 billion and cause double-digit percentage electricity price increases in 43 states. Confirming the disastrous effects of higher electricity prices, a report by the National Rural Electric Cooperative Association (NRECA) evaluated scenarios of 10 percent and 25 percent electricity price spikes and concluded that they triggered severe economic ramifications, particularly for rural communities.

One of the largest impacts of the regulation will be to cripple the coal industry in the U.S. Based on Building Blocks 2 and 3, states will be compelled to substitute “new zero-emitting renewable energy sources” and “lower emitting” natural gas plants for existing coal-fired power plants. Unfortunately, existing generation sources produce electricity far more affordably than new sources do, even when considering reliable combined-cycle natural gas units. According to a recent IER study, existing coal plants generate electricity at about one-third of the cost of new wind sources and about half the cost of new natural gas plants. In any event, wind and solar can only replace coal on paper, not in the real world, since their output depends on the weather. As a result, forcing coal plants to prematurely close before the end of their economic lives will increase the cost of electricity generation and threaten the reliability of the electric grid.

Conclusion

EPA argues that its regulation of carbon dioxide from existing power plants will generate net benefits. A closer look reveals that the regulation will unambiguously increase the cost of generating electricity without any measurable impact on global temperatures. Because the regulation doesn’t produce any discernible impact on temperature, this “climate rule” fails to achieve its purported aim—avoiding global warming. In addition, the cost-benefit analysis that the agency conducts is fundamentally flawed, as its benefits are overstated and misleading, and it doesn’t sufficiently assess the economic costs. To avert serious harm, states should not go along with EPA’s plan, and instead wait for the expected legal challenges to be resolved.

SOURCE: IER


[i] U.S. Environmental Protection Agency, Regulatory Impact Analysis for the Clean Power Plan Final Rule, EPA-452/R-15-003, August 2015, p. ES-10,http://www.epa.gov/airquality/cpp/cpp-final-rule-ria.pdf.

[ii] See EPA, Regulatory Impact Analysis, note 1 from Table ES-6 on p. ES-14, and note 1 from Table 4-1 on p. 4-2.

[iii] EPA, Regulatory Impact Analysis, p. 4-3.

[iv] American Coalition for Clean Coal Electricity, “‘Climate Effects’ of EPA’s Final Clean Power Plan,” August 6, 2015,http://www.smartpowerplan.org/site/uploads/2015/08/Climate-Effects-Paper-August-6-2015.pdf.

[v] Patrick J. Michaels and Paul C. Knappenberger, “Spin Cycle: EPA’s Clean Power Plan,” Cato Institute, August 5, 2015, http://www.cato.org/blog/spin-cycle-epas-clean-power-plan.

[vi] IER, “Comment on Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order No. 12866,” February 24, 2014, http://instituteforenergyresearch.org/wp-content/uploads/2014/02/IER-Comment-on-SCC.pdf.

[vii] Robert P. Murphy, “IER Comment on the Dubious Social Cost of Carbon, Part I,”Institute for Energy Research, March 10, 2014,http://instituteforenergyresearch.org/analysis/ier-comment-on-the-dubious-social-cost-of-carbon-part-i/.

[viii] EPA, Regulatory Impact Analysis, p. ES-10.

[ix] EPA, Regulatory Impact Analysis, p. ES-17.

[x] Frank S. Arnold, “On the Relevance of Risk-Risk Analysis to Policy Evaluation,” provided by Economic Analysis and Innovations Division, U.S. Environmental Protection Agency, August 16, 1995, p. 1,http://yosemite.epa.gov/ee/epa/eerm.nsf/vwAN/EE-0311-1.pdf/$file/EE-0311-1.pdf.

[xi] See EPA’s discussion on pp. 4-18–4-20 in the Regulatory Impact Analysis. For a broader analysis of EPA’s estimates on premature deaths, see The Energy & Environment Legal Institute, “Comments on Proposed Rule: National Ambient Air Quality Standards for Ozone,” March 16, 2014, pp. 5–7,http://instituteforenergyresearch.org/wp-content/uploads/2015/08/EE-Legal-Comment-on-Ozone-Proposal.pdf.

[xii] See NERA Economic Consulting, “Potential Energy Impacts of the EPA Proposed Clean Power Plan,” October 2014,http://americaspower.org/sites/default/files/NERA_CPP%20Report_Final_Oct%202014.pdf. Note that NERA examined the proposed rule, not the final rule. However, since the final rule is stricter than the proposed rule, the actual costs are likely even higher than NERA estimated.

[xiii] The number of premature deaths caused by the plan by 2030 was calculated by dividing NERA’s cost estimate through 2031 ($366 billion) by EPA’s valuation of $10.1 million (2011$) for every one premature death in 2030. The $366 billion was adjusted to 2011$ and the resulting number ($353.4 billion) was divided by $10.1 million to get an estimate of 34,990 premature deaths caused by the plan. This estimate is a conservative one, because EPA’s valuation of a human life is lower in earlier years (e.g. 2020), so that when we divide the cumulative compliance figure by $10.1 million, we are dividing by a bigger number than is completely accurate for the estimate.

[xiv] See pp. 4-29–4-31 of the Regulatory Impact Analysis. IER added the highest avoided premature mortality numbers related to PM2.5 and ozone and rounded up to the nearest hundred. The result was a prevention of 20,900 cumulative premature deaths through the year 2030.

[xv] Since the number of premature deaths is considered from the 2020–2030 time period and NERA’s estimates cover the period from 2017 to 2031, there is some uncertainty involved in IER’s calculations. Nevertheless, IER’s estimates demonstrate large economic compliance costs that implicate the health of individuals and contribute to premature mortality.

[xvi] Caroline Bruff, “Five Charts That Blow Apart EPA’s Asthma Claims,” Institute for Energy Research, July 22, 2015,http://instituteforenergyresearch.org/analysis/five-charts-that-blow-apart-epas-asthma-claims/.

[xvii] EPA, Regulatory Impact Analysis, p. ES-22.

[xviii] EPA, Regulatory Impact Analysis, p. ES-21.

[xix] EPA, Regulatory Impact Analysis, pp. ES-8–ES-10. For the year 2030, EPA explained that under the rate-based approach: (1) incremental electric utility generating costs declined by $18 billion, (2) monitoring, reporting, and recording costs were estimated at $16 million, and (3) demand-side energy efficiency costs were estimated at $26.3 billion. Combining these costs resulted in a total incremental compliance cost of $8.316 billion in 2030, rounded up to $8.4 billion.

[xx] EPA, Regulatory Impact Analysis, p. 3-45.

[xxi] EPA, Regulatory Impact Analysis, p. 3-45.

[xxii] EPA, Regulatory Impact Analysis, p. 3-45.

[xxiii] Kevin D. Dayaratna, “The Economic Impact of the Clean Power Plan,” testimony before the Committee on Science, Space, and Technology, U.S. House of Representatives, June 24, 2015,http://www.heritage.org/research/testimony/2015/the-economic-impact-of-the-clean-power-plan

[xxiv] Kevin D. Dayaratna, Nicolas Loris, and David W. Kreutzer, “The Obama Administration’s Climate Agenda: Underestimated Costs and Exaggerated Benefits,” Heritage Foundation Backgrounder 2975, November 13, 2014,http://www.heritage.org/research/reports/2014/11/the-obama-administrations-climate-agenda-underestimated-costs-and-exaggerated-benefits. See Appendix Table 1. GDP is calculated in 2014 dollars