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Capitol Comment 167 – EPA Ups Expected Cost of Air Quality Standards to $46 Billion

In April, the Environmental Protection Agency (EPA) admitted that it overestimated the benefits from the new air quality standard for fine particulate matter, lowering its estimates of annual reduced premature mortality from 20,000 to 15,000. Now the EPA says implementing the standards will cost more than its original estimate of $8.5 billion annually; its final Regulatory Impact Analysis (RIA) for the new standards contains an annual cost estimate of $46 billion.1

Cost-benefit analysis. Although the Clean Air Act does not require that new standards be subjected to a cost-benefit analysis, President Clinton appropriately issued an executive order requiring agencies to perform such an analysis for major rules. The agency’s preliminary analysis, which was widely reported in the press, showed that the new standards were cost-effective. The standards’ most significant benefits were to come from the 20,000 fewer premature deaths that it claimed from the new PM2.5 standard. However, based on the new RIA, the new standards may no longer be worth the expense.

The whole story. The first cost estimate of $8.5 billion for ozone and particulate matter was extremely misleading, since it did not actually estimate the cost of full compliance with both standards. The agency originally calculated costs of only partial compliance, because the new standards were so stringent that attainment of the standards was impossible in counties classified as “residual non-attainment areas” (RNAs). The agency now finds that there are 47 such RNAs for ozone and PM2.5 combined. These areas will be unable to achieve the current standards by 2010. Currently, there is no available technology to decrease pollution to allowable levels in those areas. The EPA’s final RIA estimates the cost for full-attainment, assuming all counties will comply with the new standards as required under the law. Even these estimates, however, are likely still too low.

In attempting to calculate the cost of attainment in the 47 RNAs, the EPA had to estimate the cost of new, undeveloped technologies that would enable them to comply with the standards. As the agency itself states in the final RIA, “It is important to recognize that EPA has much less confidence in these cost estimates because of the inherent uncertainties in attributing costs to new technologies.” Instead of admitting that the costs of such future technologies are unknown, the EPA unexplainably capped potential costs at $10,000 per ton for new ozone and fine particle reduction technologies. These figures are low compared to other cost estimates for reductions in RNAs, which range from up to $90,000 per ton for ozone.2 Thus, the EPA is likely underestimating the true costs of these technologies. The Reason Public Policy Institute, using more realistic cost estimates of new technologies, found that the standards could cost $150 billion annually, taking $1,600 from each family of four after taxes and putting 200,000 to 400,000 jobs at risk.3

PM2.5. The EPA now estimates even fewer benefits from the new PM2.5 standard than before. The latest estimates of annual, full-attainment benefits of the new PM2.5 standard, $20 $110 billion, are now actually less than the EPA’s original estimate for full-attainment of $69 to $144 billion. Worse yet, even if all counties meet the new standard, full-compliance is estimated to cost $37 billion annually — that’s $29 billion more than previously claimed for partial-attainment of the PM2.5 standard. Thus, the net benefits of the PM2.5 standard could range from negative $18 billion to a positive $67 billion.

Why the difference? Part of the reason is that the EPA believes that fewer lives may be saved under the new PM2.5 standard than previously estimated. The EPA’s range of estimates of annual, premature deaths avoided has increased from the original 5,000 to 15,000, to the new full-attainment estimate of 3,300 to 15,600. The larger difference between the low and high estimates of mortality is indicative of increased recognition of the true uncertainties.

Ozone. As the EPA admitted in its earlier analysis, the costs of the ozone standard are expected to outweigh the benefits. The previous annual benefit estimates of full-attainment for the ozone standard ranged from less than $50 million to $2.8 billion annually, while the partial-attainment costs ranged from $600 million to $2.5 billion. Benefits, now estimated to be $1.5 to $8.5 billion for full-attainment, are overwhelmed by the new annual full-attainment cost estimate of $9.6 billion. Thus, the ozone standard clearly fails the cost-benefit analysis, producing a range of net negative benefits of $1.1 to negative $8.1 billion annually.

Conclusion. The president himself acknowledged the importance of cost-benefit analysis by requiring that the EPA perform such an analysis for major rules. The EPA has now weighed the costs and the benefits, and found that the new standards may actually result in harm to the public, potentially producing net negative benefits of $26 billion. Total costs could be some $46 billion ($36 billion from the PM2.5 rule plus $9.6 billion from the ozone rule). In light of these new figures, Congress must carefully address the social consequences of maintaining the new standards.

1 The Environmental Protection Agency, Regulatory Impact Analyses for the Particulate Matter and Ozone National Ambient Air Quality Standards and Proposed Regional Haze Rule, July 16, 1997, p. ES-12, 13.

2 Costs, Economic Impacts, and Benefits of EPA’s Ozone and Particulate Standards, Reason Public Policy Institute and Decision Focus Inc., June 1997, p. 21; Comments on the proposed rule by the Regulatory Analysis Program, George Mason University, prepared by Thomas D. Hopkins of the Rochester Institute of Technology, May 1997.

3 Ibid., p. 35.