Does environmental regulation impede economic productivity? Is it worth the cost?
Political forces are debating this controversial question right now in the U.S. According to one narrative, environmental regulations and that extremist organization, the Environmental Protection Agency (EPA), are killing jobs and economic growth. According to the opposing narrative, big businesses are trying to throttle environmental regulations so they can make a pile of money while pouring pollution into the water and the atmosphere. (Photo: Coal power plant in Kentucky. Credit: Daniel Boyd, CC BY 2.0.)
The Clean Air Act After 40 Years
In March 2011, the EPA released its report, “The Benefits and Costs of the Clean Air Act From 1990 to 2020.” According to a March 1, 2011, announcement from the agency, the report estimates that
[T]he benefits of reducing fine particle and ground level ozone pollution under the 1990 Clean Air Act amendments will reach approximately $2 trillion in 2020 while saving 230,000 people from early death in that year alone.
… the benefits of avoiding early death, preventing heart attacks and asthma attacks, and reducing the number of sick days for employees far exceed costs of implementing clean air protections.
The Clean Air Act (CAA) was signed into law by President Richard M. Nixon in 1970, then amended in 1977 and 1990. At the time of the signing, Nixon said,
I think that 1970 will be known as the year of the beginning, in which we really began to move on the problems of clean air and clean water and open spaces for the future generations of America.
In reality, the U.S. had already enacted air pollution legislation as early as the Air Pollution Control Act of 1955; the country enacted further legislation in 1963 and 1967. According to the EPA’s history of the Clean Air Act, the 1970 act “resulted in a major shift in the federal government’s role in air pollution control,” authorizing “the development of comprehensive federal and state regulations to limit emissions from both stationary (industrial) sources and mobile sources.”
The EPA itself was created by further legislation in 1971 in order to implement the Clean Air Act requirements.
Costs of the CAAA
The cost-benefit analysis in the March 2011 report evaluates the effects of the 1990 amendments to the Clean Air Act. In 2006 dollars, the report says the costs of public and private efforts to meet the amendments should reach $65 billion by 2020. But the benefits are expected to reach $2 trillion for that year as a result of the saving of life and health, improved environmental conditions, and increased economic welfare of Americans.
The report’s claims about economic benefits of the act are that
[C]leaner air leads to better health and productivity for American workers as well as savings on medical expenses for air pollution-related health problems. The beneficial economic effects of these two improvements more than offset the costly effects across the economy of expenditures for pollution control.
The March report describes the results of what’s called the Second Prospective Study. This was preceded by cost-benefit studies in 1997 (“Retrospective”) and 1999 (“First Prospective”). The current study is meant to analyze the costs and benefits of the Clean Air Act Amendments (CAAA) through 2020.
The study models two scenarios:
- A baseline “business-as-usual” scenario depicting a world in which the 1990 changes had never been carried out (“Without-CAAA”)
- A “real-world” scenario modeling the results under the actual implementation of the 1990 amendments (“With-CAAA”)
Under the baseline scenario, obviously the country would have experienced neither the costs nor the benefits of the Clean Air Act Amendments provisions.
Under the real-world, With-CAAA, scenario, the researchers grouped all significant air-pollution emissions sources according to five categories:
- Electricity-generating units, such as power plants
- Non-utility industrial sources, such as industrial boilers or cement kilns
- On-road vehicles and fuel, such as cars or trucks
- Non-road vehicles and fuel, such as aircraft or construction equipment
- Area sources, such as wildfires or dry-cleaning establishments
The estimated direct costs of compliance in the year 2020 for each of those source categories appear in the chart shown here; those costs total $65 billion. Nearly half of those costs are for on-road vehicles and their fuels and include costs such as meeting fuel composition requirements, tailpipe standards, and vehicle maintenance and inspection programs. Across the five categories, much of the cost is incurred under control programs to meet national fine-particle and ozone standards.
Those $2 Trillion in Benefits
On the benefits side, the report projects dramatic reductions would be achieved for the year 2020 in four pollutants targeted by the 1990 Amendments — directly emitted fine particles, gaseous sulfur dioxide, volatile organic compounds (VOCs), and nitrogen oxides.
Particularly interesting is the report’s estimate of health improvements resulting from the CAAA controls. The chart here shows the health-problem incidents avoided in years 2010 and 2020 by reductions in two key pollutants, ozone and particulate matter (PM). For example, the chart shows 230,000 adults saved from early death due to particulate-matter pollution.
The report’s authors assert that
This study’s estimates for these incidence reductions are based on a strong and extensive foundation of peer-reviewed epidemiological literature. The methodologies used to apply these epidemiological studies to the estimation of reduction in population risks from fine particle and ozone exposure have also been extensively peer-reviewed.
Finally, the report assigns dollar values for 2020 to the benefits reaped from the CAAA, totaling almost $2 trillion. By far the highest dollar-value benefits show up under reductions in mortality, as seen from the corresponding chart — $1.8 trillion. The researchers’ method for calculating that amount is complex. What would be the right way to calculate the value of 230,000 human beings’ living longer? The methods used are explained starting on page 109 of the full report, but it’s based on the concept of “willingness-to-pay” (WTP). In other words, what would a person be willing to pay to avoid some adverse outcome, such as dying 20 years too soon?
EPA Report “Preposterous”?
Diane Katz, research fellow in regulatory policy at The Heritage Foundation, a conservative think tank, laid out some key criticisms of the EPA cost-benefit report — see her March 2011 article, “Coming Clean on Regulatory Costs and Benefits.” For example, she argued against the validity of the Without-CAAA scenario as follows:
[I]t is simply preposterous to assume that air quality would worsen unabated over the course of 30 years in the absence of a particular statute. History has proven otherwise, of course. Long before the original CAA was enacted in 1963, industrial emissions were declining as a result of technological advances and efficiency improvements. And both factors, as well as others, will continue to drive environmental improvements regardless of regulation.
She pointed out the high level of uncertainty around the report’s calculations of costs and benefits, uncertainties that the authors themselves admit to — for example, she wrote:
The largest proportion of economic benefit is based on the value of avoiding premature mortality. Yet the valuation of this benefit ranks among the most significant uncertainties in the study, according to the researchers. Alternative estimates they cite would lower the benefit calculation by up to 22 percent.
Margo Thorning, senior VP and chief economist for the American Council for Capital Formation, criticized the EPA report for its failure to demonstrate real economic benefits of the Clean Air Act Amendments — see her op-ed in The Hill, “The High Price of EPA Regulations,” Oct. 24, 2011. She particularly targeted the dollar-values for lives saved according to the WTP concept:
The academic surveys of WTP used by EPA have no link to overall economic activity and do not address how (or if) WTP affects the components of GDP (consumption, investment, government spending and net exports). “Willingness to Pay” responses by survey participants or the wage differential between occupations with different levels of risk do not create any new jobs, cause any investment or increase levels of spending in the U.S. economy.
However, in another op-ed the next day (“EPA Thorough on Clean Air”), Laurie Johnson, chief economist in the Climate Center at the Natural Resources Defense Council, fired back at Thorning’s focus on GDP:
Imagine a world in which polluting industries had to pay breathers to endure their pollution. How much would members of the public insist on? … [P]olluting wouldn’t be so profitable and companies would either clean up their act, or find something safer to make.
To say that EPA’s analysis is invalid because some of the health benefits have no market price is thus wrong and misleading. It assumes that GDP accurately measures well being, that risks to life caused by pollution shouldn’t be counted as a cost of production, that polluters have every right to harm people’s health without having to compensate them, and that the market is using resources in a way that maximizes returns to society.