Market Forces

(This post was first published on EDF Voices.)

The Office of Management and Budget is nerd heaven: a bunch of people getting their professional kicks from analyzing federal regulation. This bean counting may sound painfully lacking in glamour, but it’s incredibly important. OMB’s annual report to Congress on the benefits and costs of all major rules adopted by most federal agencies over the past 10 years shows how efficiently, or inefficiently, those agencies are functioning.  And the conclusion is clear: the Environmental Protection Agency comes out on top.

 

Source: OMB’s “Draft 2013 Report to Congress on the Benefits and Costs of Federal Regulations”

These numbers are based on the 2013 draft report, so they could still change. But the pattern is the same as in any of theirreports from the past few years, including the final 2012 report that came out last week.

None of this is to diminish the contributions of the other government agencies, but if you are a do-gooder trying to achieve the greatest good for the greatest number of people, EPA is the place to be.

One of the driving forces behind this rule is the Mercury and Air Toxics Standards, an extraordinary achievement for clean air and public health. Because of these standards, all coal fired power plants will for the first time be required to control their emissions of toxic air pollutants — including mercury, arsenic and acid gases. Forty years after the Clean Air Act signed by Richard Nixon, twenty after the landmark Amendments signed by George H.W. Bush, we are finally getting around to regulating mercury from burning coal.

The analysis of the benefits of reducing mercury pollution demonstrates just how much we underestimate the benefits of environmental protections. For example, when it comes to reducing mercury pollution, the benefits are based on EPA’s estimates of increased wages of (higher IQ) children born to families that catch freshwater fish for their own consumption.

Think about that one for a second. Mercury is a potent neurotoxin in all its forms, but the EPA estimates do not include mercury that is inhaled or that enters our bodies through other means. And there is nothing in the estimates about the fact that mercury harms the brains of our kids, regardless of whether it influences their future earning potential.

In a sense, this analysis is the moral equivalent of arguing that we should have child labor laws because keeping kids in school makes for more productive workers later on. This kind of reasoning, alas, is  why economists are often called names unfit for a family-friendly blog. It’s the most reductionist argument you can find in favor of reducing mercury. (In fact, the bulk of the benefits that were quantified by EPA are due to inextricably connected benefits in reducing deleterious particulate pollution.)

Costs, by the way, are relatively well estimated, since businesses are all-too willing to share them. So yes, there are costs—but they are small relative to benefits. And costs, as opposed to benefits, are typically overestimates. They are largely based on current available control technologies. They don’t consider that industry may invent an entirely new and unexpected way of complying with regulations at lower cost. This happens over and over again, and it comes with a name: entrepreneurial ingenuity. Works every time.

These omissions and shortcomings on either side of the equation only stand to bolster the most important claim: benefits outweigh costs more than 10 to 1 for all major EPA regulations adopted in the past decade.

For every dollar invested, Americans get $10 worth of benefits. I’ll take that ratio any day.

Trying to put the rebound effect for energy efficiency in its rightful place is like playing a game of wack-a-mole. Predictably every couple of years, someone new discovers the counter-intuitive appeal of showing how more efficient energy policies may lead to more energy use. Wham! Told you there’s something wrong with those clean-car standards. Well, not so fast.

Yes, the rebound effect is real. But it’s also small. And what’s there is actually positive! Why shouldn’t people who can now afford to due to more efficient energy technologies be able to improve their lives?

Together with three co-authors (Ken Gillingham at Yale, Dave Rapson at University of California, Davis, and Matt Kotchen, currently on leave from Yale to serve as Deputy Assistant Secretary for Environment and Energy at the U.S. Treasury), I surveyed a bajillion+1 energy efficiency rebound studies. Nature then made us cut down those references to 6. We settled at 9.

We couldn’t find a single study that has the rebound be above 100% or anything close to it, what’s necessary to nix energy efficiency savings. The maximum number you can get is 60%, and that’s already quite a stretch. Think 30% as the upper bound for actual behavioral responses. Yes, we are more efficient today than we were a hundred years ago, and we also use more energy today. But that’s far from talking about the rebound effect. It’s simply economic growth.

Establishing a causal link between efficiency and energy use isn’t quite as simple. In the end, the rebound effect comes in four forms. Buy a more fuel-efficient car, and driving that next mile just became cheaper. The result: a bit more driving, to the tune of 5 to a maximum of 30%, although most likely much closer to 5-10% of the initial fuel savings. Then there’s the indirect effect: Drivers may now use some of the savings to buy other products that consume energy.

You can already see that we can’t just add these two effects. If you spend some of the gas money on driving more, you have less to spend on that plane ticket, and vice versa.

Then there are two macroeconomic effects: one via the price and one via technological advances. They are the trickiest to pin down and could, in theory, be the largest. But theory lends a helping hand in getting an upper bound: the basic demand-and-supply relationship tells us that the macroeconomic price effect can’t be more than 100%.

And once again, all these effects aren’t anywhere near that threshold. 60% is as high as it gets for the combined effect, and only in rare circumstances. For the most part, it’s much closer to 5 to perhaps 30%.

So where does that leave us?

When designing energy efficiency policies like clean-car standards, consider the rebound effect, much like the government already does. The Department of Energy’s model uses a highly appropriate 10% rebound figure for the car standards. And that’s about it. Not much else to see here.

If you did want to take it a step further — full disclosure: a step I couldn’t convince my three co-authors to take in the Nature piece itself — everything else equal, the existence of the rebound effect may prompt us to use even stricter energy efficiency standards. If you have an overall target in mind, and the rebound effect shaves off a bit, you ought to consider using a slightly stricter target to get back to where you wanted to be.

For more, check out the full Nature piece. Well worth the $32 to put the rebound effect in its rightful place once and for all.

This blog was originally posted on EDF’s Climate 411 blog.

Yet another study is confirming what we’ve known for quite some time — the benefits of EPA’s clean air rules vastly outweigh the costs.

An analysis from the Economic Policy Institute (EPI) reinforces what other studies have told us time and time again: clean air is a great economic investment.

Unfortunately, that fact is often lost in the unfounded attacks on EPA that have gotten so much attention lately, in the media and even in Congress.

EPI’s analysis examines the combined effect of EPA rules that have already been finalized under the Obama Administration, as well as those currently in the proposal stage. It finds that:

The dollar value of the benefits of the major rules finalized or proposed by the EPA so far during the Obama administration exceeds the rules’ costs by an exceptionally wide margin. Health benefits in terms of lives saved and illnesses avoided will be enormous.

Of course, the most important benefits of clean air are those related to human health. Just three of these rules (Cross-State Air Pollution (CSAPR), Mercury and Air Toxics, and Boiler MACT) are estimated to save up to 57,500 lives a year.

Those lives saved, plus illnesses avoided and other environmental improvements translate to enormous economic benefits:

• Setting aside CSAPR, the combined annual benefits from all final major rules exceed their costs by $10 billion to $95 billion a year. The estimated benefit-to-cost ratios for those final rules range from 2-to-1 to 20-to-1.
• The net benefits from CSAPR range from $112 billion to $289 billion a year.
• The combined annual benefits from three major proposed rules exceed their costs by $62 billion to $188 billion a year. The estimated benefit-to-cost ratios for those proposed rules range from 6-to-1 to 15-to-1

The results are even more striking in chart form:

(For more details on EPI’s analysis, see our new fact sheet.)

EPI has also shown, in a previous analysis, that EPA clean air rules can also have a positive impact on overall employment – including 28,000 to 158,000 jobs from the Mercury and Air Toxics rule for power plants alone.

In fact, Josh Bivens of EPI recently testified before the U.S. House of Representatives on the Mercury and Air Toxics rule for power plants. He said:

Calls to delay implementation of the rule based on vague appeals to wider economic weakness have the case entirely backward – there is no better time than now, from a job-creation perspective, to move forward with these rules.

It’s time for everyone – and especially Congress — to recognize that EPA rules are not only good for our health, but also our economy.

For more on how cleaner air can save lives, improve health, and help our economy, see the following previous EDF blog posts:  “Thank You, EPA,” “The Clean Air Act Amendments: Good for Our Health AND Our Economy,” and “Newsflash: Clean Air Act saves lives, boosts GDP.”