Economics

Advancing public and private policymakers’ understanding of the complex interactions between climate change and the economy is critical to taking the most cost-effective action to reduce greenhouse gas emissions. Read More
 

About Those "Missing" Cost-Benefit Analyses ...

While Environmental Protection Agency (EPA) regulations on greenhouse gases (GHGs) and other air pollutants are on firm political and legal footing, attacks on them continue. Claims have been made that the costs of regulation are extreme or, contradictorily, that the government has not conducted any cost analysis of these regulations.

On the side that the costs are too high, one figure bandied about recently is that all government regulations are costing the economy $1.75 trillion annually, and $280 billion of that stems from compliance with existing environmental regulations. Those figures came from a study by two Lafayette College professors done for the Small Business Administration (SBA). Yet, as widely reported, the Congressional Research Service, and even the professors themselves have disputed the methodology of the study and its use in the current frenzy of political shots at environmental regulations. In a Congressional Research Service (CRS) report, the methodology of the SBA report was faulted for, among other things, allowing for double counting of costs. The Lafayette College study simply adds together other previous studies on individual regulations, regardless of the approaches and methodologies of those calculations. The CRS report quotes the Office of Management and Budget (OMB) as having written that such a methodology is an “inherently flawed approach.”

More distressingly for those who care about making informed decisions about the economic impacts of regulation, that large figure is not balanced against any benefits those regulations might have. According to the CRS report, the authors of the Lafayette College stated that they were never asked to include benefits in their analysis. The authors were quoted as saying the report was “not meant to be a decision-making tool for lawmakers or federal regulatory agencies to use in choosing the ‘right’ level of regulation. In no place in any of the reports do we imply that our reports should be used for this purpose. (How could we recommend this use when we make no attempt to estimate the benefits?)” On the contrary, as we have explained before, the benefits of Clean Air Act regulations have far outstripped the costs in major studies.

As for those who say no economic analyses were ever done of these regulations, all federally promulgated regulations undergo a cost-benefit analysis before implementation. This requirement stretches back many presidential administrations, with each administration offering adjustments to the process. The basis for current analysis is found in Executive Order 12866, signed in 1993 by President Clinton, which provided a significant overhaul to the review process and, among other things, requires

Each agency [to] assess both the costs and the benefits of the intended
regulation and, recognizing that some costs and benefits are difficult to
quantify, propose or adopt a regulation only upon a reasoned determination
that the benefits of the intended regulation justify its costs.

President Obama reaffirmed the inclusion of cost-benefit analysis in the regulatory process in Executive Order 13563 at the beginning of 2011.

Turning specifically to the GHG regulations implemented by the Administration, where regulatory requirements have been imposed the analyses required by OMB have been conducted and are readily available. Some critics have complained that there was not a cost-benefit analysis done of the EPA’s 2009 Endangerment Finding for GHGs. Such claims miss the fact that the Endangerment Finding was a scientific ruling that GHGs cause climate change, posing a threat to public health and welfare, and motor vehicles emit GHGs contributing to those risks. Since there were no regulatory requirements to reduce GHG emissions in this rulemaking, a cost-benefit analysis was inappropriate.

When it comes to actually reducing GHGs from emitting sources, such analyses would be appropriate, and federal agencies are required to include them as part of the rulemaking process. EPA has done so. The first rule on GHGs , the light-duty vehicle GHG emission standards promulgated jointly with Department of Transportation’s Corporate Average Fuel Efficiency standards, was issued with a Regulatory Impact Assessment that offered almost five hundred pages of detailed qualitative and quantitative analysis of the costs and benefits of the rules. The findings were that the GHG standard for light duty vehicles has an estimated cost of $52 billion and benefits of $240 billion: benefits outweighing costs by better than 4 to 1.

Upon the implementation of the light duty vehicle standards, the New Source Review program for stationary sources of GHGs was automatically triggered – without any regulatory action taken by EPA – therefore no separate cost-benefit analysis was legally required of this step. However, when EPA went through the regulatory process to create the tailoring rule to lower the compliance requirements for stationary sources, it was required to undertake an analysis. The Regulatory Impact Assessment of EPA’s tailoring rule is available on its website and includes an in-depth qualitative and quantitative analysis of the reduced permitting costs from the tailoring rule regulation now in effect for stationary sources. As EPA continues its rulemaking for New Source Performance Standards for utilities and refineries, fully documented regulatory impact analyses will be conducted and made available for comment with the proposed rule.

Thus, despite the claims to the contrary, EPA has in the past and will continue in the future to analyze the costs and benefits of GHG regulations. It is also clear that, to date, GHG regulations imposed by the EPA under the Clean Air Act have vastly greater benefits than costs.

Michael Tubman is the Congressional Affairs Fellow

Background Reading for Climate Change Economics

Experience with Market-Based Environmental Policy Instruments, by Robert Stavins: An excellent review of the different types of market-based mechanisms available to policy-makers for dealing with environmental problems - with lots of examples of real policies in action.

Pricing Pollution, by Ted Gayer: Down to the basics on why pollution is an example of a market failure and an explanation of why using policy to create a price for emissions leads to a better societal outcome. 

Meaningful and Cost Effective Climate Policy:  The Case for Cap and Trade, by Janet Peace and Robert Stavins: A Center report in which we hope to leave the reader with a better understanding of the issues, the rhetoric, and the fundamental reasons why cap and trade is the most promising approach to address the threat of climate change.

Tragedy of the Commons, by Garrett Hardin: A classic paper in resource economics. Notable for describing how the free-market can lead to a less than optimal long-term outcome when a public good (like the atmosphere) is not properly managed or regulated. 

Problem of the Commons: Still Unsettled After 100 Years, by Robert Stavins: A paper written for the 100-year anniversary issue of the American Economic Review. Section 1 is technical, and Section 2 gives an excellent overview of the concept of cost-effectiveness in environmental policy-making, as well as Pigovian taxes and Coasian bargaining (the intellectual foundations for carbon taxes and cap-and-trade policies, respectively).  

An Introduction to the Economics of Climate Change Policy, by John Weyant: Written for us more than 10 years ago, this is still a relevant introduction to how economists use models to forecast the costs and benefits of proposed climate change policies. 

A Green Employment Tax Swap:  Using a Carbon Tax to Finance Payroll Tax Relief, by Gilbert Metcalf: A policy proposal from WRI and the Brookings Institution for using a tax on carbon dioxides emissions to pay for a reduction in payroll taxes. An excellent example of the use of revenue recycling and Pigovian tax principles.

 

The Federal Deficit and Climate Change

It’s an issue that will affect the prosperity of our children and our children’s children. It’s an issue that requires we make cuts today in order to avoid far greater burdens on future generations. It’s an issue that is steeped in complexities and arcane detail that is difficult to communicate to the public, and often requires advanced training in order to understand fully. And it’s an issue that requires bold public leadership today in order to avert consequences that will affect future well-being and quality of life. 


Readers of this blog can be forgiven for immediately assuming that these statements are meant to describe the political challenges of climate change; but the political issue du jour in Washington these days is the federal budget deficit and mounting national debt, and these statements apply for that issue equally as well. We, here at Climate Compass, are not the first to note the similarities in the discourse – but for those of us working in the climate field, or who care deeply about the issue, the parallels are hard to ignore. There is an important difference, however, that seems to affect the public debate. 


While both are complex issues that are at times inherently difficult to understand, the budget provides a much simpler scoring system of dollars and cents; in comparison to the climate debt that we are accruing in the form of greenhouse gases in the atmosphere. We can see on a chart or graph the totals that budget projections show – and we know from our daily household experiences that increasing debts imply increasing interest payments and costs. 


The climate deficit that continues to accumulate, on the other hand, shows no clear balance of payments or future due dates. But make no mistake; the charges we are putting against our climate credit card will eventually create even greater costs over time as changes accelerate. Greenhouse gases, once emitted, stay in the atmosphere for centuries.  Any emissions made today, tomorrow, and over the next several years commit the planet to warming over the lifetime of those gases. 


Even though it is not as easy to track the mounting costs of our climate deficit, we know the debt will have to be paid in the form of increasingly severe weather events, changes in agricultural productivity, mass migrations, and sea level rise – just to name a few. This means that the unchecked emissions we continue to create are racking up a greenhouse gas debt that will force increasingly expensive costs on current and future generations. 


So as the debate continues inside the beltway on how to address the federal deficit – remember that in the case of both the budget deficit and climate change, it will be far less expensive to pay a little today and avoid paying far more later.


Sources:

Historical National Debt (to 2009):  Congressional Budget Office - http://www.cbo.gov/ftpdocs/120xx/doc12039/historicalTables[1].xls

Projections of National Debt (from 2010):  Congressional Budget Office - http://www.cbo.gov/ftpdocs/120xx/doc12039/BudgetTables[1].xls

Historical GHG Emissions (to 2009): EIA IES - http://www.eia.doe.gov/cfapps/ipdbproject/IEDIndex3.cfm

Projected GHG Emissions (from 2010): EIA AEO, Table A18 - http://www.eia.doe.gov/analysis/projection-data.cfm#annualproj

 

Russell Meyer is the Senior Fellow for Economics and Policy

Regulatory Reality vs. Rhetoric

First there was the warning about a construction moratorium – all new major stationary sources would come to an immediate halt because of EPA’s new source review requirements for greenhouse gas emissions (GHGs). Soon after the alarm went out about the approaching regulatory “train wreck” that would result from a series of EPA rules impacting electric utilities. A large number of power plants would shut down, the reliability of our energy supply would be sacrificed, and consumers would face skyrocketing costs.

There was only one problem with these warnings – they were made before anybody knew what the actual regulations would require. Now that EPA has issued several of these rules, it is useful to revisit these doomsday scenarios and see if the reality of the proposals matches the rhetoric before the fact.

All Energy Sources Entail Risk, Efficiency a No-Brainer

At the moment, our attention is riveted by the events unfolding at a nuclear power plant in Japan. Over the past year or so, major accidents have befallen just about all of our major sources of energy: from the Gulf oil spill, to the natural gas explosion in California, to the accidents in coal mines in Chile and West Virginia, and now to the partial meltdown of the Fukushima Dai-ichi nuclear reactor. We have been reminded that harnessing energy to meet human needs is essential, but that it entails risks. The risks of different energy sources differ in size and kind, but none of them are risk-free.

Updated Climate Change 101 Series Released

Kicking off the new year, we released an update of its Climate Change 101 series. Climate Change 101: Understanding and Responding to Global Climate Change is made up of brief reports on climate science and impacts; adaptation measures; technological and business solutions; and international, U.S Federal, State, and local action. Last released in January of 2009, the updated reports highlight the significance of the global negotiations, climate-related national security risks, local efforts to address climate change, the most recent predictions on global temperature changes, and more.

Updated Website, Climate Change 101 Series Deliver Credible Information to Advance Climate Action

Press Release
March 3, 2011

Contact: Rebecca Matulka, 703-516-4146

 

WEBSITE, SERIES DELIVER CREDIBLE INFORMATION TO ADVANCE CLIMATE ACTION
Pew Center Updates Website and Climate Change 101 Series

WASHINGTON, DC – Public opinion continues to be divided on climate change and its causes, and as a result, public access to credible, digestible information about climate change is more critical than ever. To help advance a constructive dialogue that leads to climate action, the Pew Center on Global Climate Change refreshed its website and updated its landmark Climate Change 101 report series.

“Now more than ever, the public needs straight answers about climate change,” said Eileen Claussen, President of the Pew Center on Global Climate Change. “The Pew Center is continuing its work to demystify the issue, and our updated website and report series present straightforward and useful climate change information.”

With a fresh new design and easy-to-navigate organization, the Pew Center’s website provides access to the center’s first-rate analyses and publications of key climate issues. One new website feature is the publications library, which allows users to search for and order free copies of Pew Center reports. The website puts the Center’s Climate Compass blog front and center, and presents timely ideas and insights from science and policy experts on topics critical to the climate debate.

The fast-reading Climate Change 101: Understanding and Responding to Global Climate Change includes nine brief reports and helps inform the climate dialogue by providing a reliable and understandable introduction to global climate change. The updated reports highlight the significance of the global negotiations, climate-related national security risks, local efforts to address climate change, the most recent predictions on global temperature changes, and more.

For more information about global climate change and the activities of the Pew Center, visit www.c2es.org.

# # #

The Pew Center on Global Climate Change was established in May 1998 as a non-profit, non-partisan, and independent organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.

An Excellent Return on Investment: Protecting Human Health through the Clean Air Act

Congress is debating whether or not to limit EPA’s authority under the Clean Air Act (CAA), and many are wondering if these environmental regulations are creating a burden to our economy. EPA has released a report that answers that concern head-on, and the results are nothing short of astonishing. 

This report takes a hard look at the actual costs and benefits of the regulations implemented under the Clean Air Act Amendments of 1990 (CAAA), from 1990 through 2020. The report finds that while CAAA regulations have indeed imposed costs on society, estimated to be $65 billion in 2020, the benefits from cleaner air in 2020 will total $2 trillion – 30 times higher than the estimated costs.

Barack Obama's EPA hit for what George W. Bush's EPA wanted

February 15, 2011

By Eileen Claussen

This op-ed first appeared in Politico

 

A vocal contingent in the House is now attacking the current Environmental Protection Agency administrator for the very thing her predecessor in the Bush administration wanted to do.

EPA Administrator Stephen Johnson wrote a letter to President George W. Bush laying out the legal and scientific rationale for regulating greenhouse gases under the Clean Air Act. Johnson explained steps that the EPA would take to begin to do so.

Johnson’s letter surfaced last week at the House Energy and Power subcommittee hearing on proposed legislation to strip EPA’s authority to regulate greenhouse gas emissions.

Remarkably, it proved that Bush’s EPA administrator had reached the same conclusions and planned almost identical actions to what the current EPA administrator, Lisa Jackson, has begun implementing.

What exactly does Johnson tell Bush? He insists that the EPA must respond to the Supreme Court’s 2007 decision in Massachusetts v. EPA with a finding that greenhouse gases represent a risk to public health or welfare. This is EPA’s “endangerment finding,” which would be overturned by legislation now being proposed in the House.

Johnson also noted, “the latest climate change science does not permit a negative finding, nor does it permit a credible finding that we need to wait for more research.”

What is most telling is that Johnson states that a positive endangerment finding was “agreed to at the Cabinet-level meeting.” Apparently senior Bush administration officials agreed that climate change poses a risk to our nation’s public health and welfare.

Johnson describes his plan as “prudent and cautious yet forward thinking,” and says it “creates a framework for responsible, cost-effective and practical actions.” Sound familiar?

Jackson, in her statement at the hearing last week, called EPA’s actions a “reasonable approach,” one that “will reflect careful consideration of costs and will incorporate compliance flexibility.”

Indeed, the step-by-step plan of action spelled out by Johnson could be a checklist for the EPA’s recent actions — largely the same actions being aggressively attacked today by some in Congress.

These actions include the endangerment finding; a joint rule-making with the Transportation Department to require more fuel-efficient cars; rules to modify the agency’s requirements for new sources to reduce the number of facilities that would be covered (EPA’s tailoring rule), and proposals to respond to specific petitions (EPA has acted on ones for the utility and oil refinery sectors).

Given these striking similarities, attacks on current EPA actions — that the agency is “an instrument of job destruction” and would “put the American economy in a straitjacket” — now resonate as particularly empty political rhetoric.

How could the right thing to do in the Bush administration suddenly become the wrong thing to do in the Obama administration?

Eileen Claussen served as assistant secretary of state for Oceans and International Environmental and Scientific Affairs. She is now president of the Pew Center on Global Climate Change.

by Eileen Claussen, President -- Published in Politico

Saving Oil and Reducing Greenhouse Gas Emissions through U.S. Federal Transportation Policy

This white paper is a follow up to the report Reducing Greenhouse Gas Emissions from U.S. Transportation

 

Saving Oil and Reducing Greenhouse Gas Emissions through U.S. Federal Transportation Policy

February 2011

Authored by: Cynthia J. Burbank and Nick Nigro

Executive Summary:

The United States consumes over 10 million barrels of oil per day moving people and goods on roads and rail throughout the country. Surface transportation generates over 23 percent of U.S. anthropogenic greenhouse gas (GHG) emissions. Transportation is the primary cause of U.S. oil dependence with its attendant risks to U.S. energy security. Contributions from this sector will be necessary in any effort to maintain a sustainable and secure economy in the future. There are many opportunities to save oil and reduce GHG emissions under existing federal law and possibly in the next surface transportation reauthorization legislation in the U.S. Congress, while increasing the mobility of people and goods in the
U.S. economy.

This paper identifies opportunities possible in transportation reauthorization legislation and using existing legislative authority that will save oil and reduce GHG emissions. The strategy focuses on five key elements: vehicles; fuels; vehicle miles traveled (VMT); system efficiency; and construction, maintenance, and other activities of transportation agency operations.

Download the full white paper (pdf)

 

About the Authors:

Cynthia Burbank is Vice President of Parson Brinckerhoff (PB). She joined PB in 2007 as National Environment and Planning Practice Leader. She provides strategic and tactical advice to PB’s clients on planning and environmental issues, including the National Environmental Policy Act (NEPA), air quality, and global climate change (GCC).This includes advising transportation clients on climate change strategies, analyzing greenhouse gas (GHG)-reduction potential of alternative transportation strategies, reviewing state climate action plans, and developing GHG reduction scenarios for transportation.

Cindy joined PB after a 32-year span with the U.S. Department of Transportation (U.S. DOT) that encompassed key roles in highway, transit, aviation, and national transportation policy and legislation. Cindy served as Associate Administrator for Planning, Environment, and Realty for the Federal Highway Administration (FHWA). She also served as FHWA’s senior executive with responsibility for FHWA’s implementation of the Clean Air Act (CAA) for transportation, NEPA policy, environmental streamlining, metropolitan transportation planning, statewide transportation planning, and international transportation planning. Prior to joining the FHWA in 1991, Cindy held positions in the Federal Aviation Administration, Federal Transit Administration, the Office of the Secretary of Transportation, and the U.S. Navy.  A member of the FHWA Senior Executive Service since 1991, she was designated in October 1998 as one of five core business unit leaders for FHWA.

 

Nick Nigro is a Solutions Fellow at the Pew Center.

Cynthia J. Burbank
Nick Nigro
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